This third issue of the India Policy Forum, edited by Suman Bery, Barry Bosworth and Arvind Panagariya, covers India’s economic growth performance over the past quarter century and the impact of trade liberalization on the distribution of income and poverty; the distressingly poor performance of India’s elementary schools; the role of economic factors on the decline of the Indian birth rate; and the link between economic growth and environmental change by assessing the interaction between local living standards and forest degradation in the Indian mid-Himalayas. The editors' summary appears below, and you can download a PDF version of the volume, purchase a printed copy, or access individual articles by clicking on the following links: 

Download the 2006 India Policy Forum conference agenda (PDF) »
Download India Policy Forum 2006-07 - Volume 3 (PDF) »
Purchase a printed copy of India Policy Forum 2006-07 - Volume 3 »

Download individual articles:

• Sources of Growth in the Indian Economy, by Barry Bosworth, Susan M. Collins, and Arvind Virmani
• Trade Liberalization, Labor-Market Institutions, and Poverty Reduction: Evidence from Indian States, by Rana Hasan, Devashish Mitra, and Beyza P. Ural
• Teacher Compensation: Can Decentralization to Local Bodies Take India from the Perfect Storm Through Troubled Waters to Clear Sailing?, by Lant Pritchett and Rinku Murgai
• Does Economic Growth Reduce Fertility? Rural India 1971–99, by Andrew D. Foster and Mark R. Rosenzweig
• Managing the Environmental Consequences of Growth: Forest Degradation in the Indian mid-Himalayas, by Jean-Marie Baland, Pranab Bardhan, Sanghamitra Das, Dilip Mookherjee, and Rinki Sarkar

 

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EDITORS' SUMMARY

This is the third volume of the India Policy Forum. The journal is jointly promoted by the National Council for Applied Economic Research (NCAER) in New Delhi and the Brookings Institution in Washington, D.C., with the objective of presenting high-quality empirical research on the major economic policy issues that confront contemporary India. The forum is supported by a distinguished advisory panel and a group of active researchers who participate in the review and discussion process and offer suggestions to the editors and the authors. Our objective is to make the policy discussion accessible to a broad nonspecialist audience inside and outside India. We also hope that it will assist in the development of a global network of scholars interested in India’s economic transformation.

The five individual papers included in this volume were selected by the editors and presented at a conference in Delhi on July 31 and August 1, 2006. In addition to the working sessions, Pranab Bardhan, a member of the advisory panel, gave a public address on the topic of “Governance Matters in Economic Reform.” The papers cover a diverse set of macro and microeconomic topics of relevance to policymakers. The first two papers focus on India’s economic growth performance over the past quarter century and the impact of trade liberalization on the distribution of income and poverty. The third paper highlights the distressingly poor performance of India’s elementary schools. The fourth paper examines the role of economic factors on the decline of the Indian birth rate. The last paper explores the link between economic growth and environmental change by assessing the interaction between local living standards and forest degradation in the Indian mid-Himalayas.

Sources of Growth in the Indian Economy, by Barry Bosworth, Susan M. Collins, and Arvind Virmani

During the first three decades of its development, the Indian economy grew at the so-called Hindu rate of growth of 3 to 4 percent. But India has now turned a corner, growing at a much higher rate of 6 to 7 percent during the last two decades. How has this transition been achieved and what implications does it have for the future transformation from a primarily rural and agricultural economy to a more modern one? These are the key questions Bosworth, Collins, and Virmani address in their paper.

Bosworth et al. observe that answering these questions requires analyses of both the evolution of productivity in the three key sectors—agriculture, industry and services—and the implications for aggregate productivity growth of the reallocation of resources out of agriculture to more productive activities in industry and services. Consequently, they use a growth accounting framework to examine empirically the acceleration in economic growth that India has achieved over the past two decades. The analysis focuses on two dimensions in which India’s experience differs from that of China and other parts of Asia. First, instead of strong growth in the manufacturing sector and in exports, India’s success reflects rapid expansion of service-producing industries. Second, it has been associated with relatively modest levels of human and physical capital accumulation.

The authors construct accounts at the sectoral level, and identify the residual gains from resource reallocation across sectors. They then undertake further analysis of the role of capital accumulation—providing estimates of the returns to schooling for human capital, and reporting on trends in sectoral saving and investment in physical capital. The paper concludes with a discussion of some of the important issues for India’s growth experience and prospects for the future.

Throughout the analysis, the authors focus on the quality of the available data. The updated growth accounts incorporate recent data revisions, some of which are quite large. Extensive examination of the relevant underlying data series helps to clarify a number of issues related to how the data are constructed. In particular, the discussion highlights challenges faced by the Indian statistical agencies in preparing measures of output and employment, primarily because much of the non-agricultural workforce operates outside of standard reporting programs. Thus, India’s national accounts depend on quinquennial surveys (conducted in 1973, 1983, 1987, 1993, 1999, and 2004) for information on households and small enterprises. Researchers should have a reasonable degree of confidence in the GDP estimates for benchmark years that incorporate results from the surveys. However, for non-benchmark years, annual output data are based on interpolation and extrapolation of the labor input data required to construct output measures for India’s large unorganized sector. The lack of reliable annual series makes it impossible to pin down the precise timing of India’s growth acceleration.

A key finding of the paper is that services have shown very substantial productivity growth since the early 1980s—a result in sharp contrast to that obtained for other countries at a similar stage of development. Productivity gains in agriculture and industry have been modest, which is consistent with both the findings of prior studies of India and those for other comparable countries such as Korea and Taiwan in the 1960s and 1970s. What distinguishes the Indian case is the relatively small output growth in industry: the sector has not played a major role in reallocating workers out of agriculture where they are underutilized.

Considerable attention has been focused on the role of services— especially high-tech services—as the source of India’s growth. The growth accounts attribute 1.3 percentage points of the 3.8 percent per annum growth in GDP per worker during 1980–2004 to growth in total services productivity (versus 0.7 percentage points each to agriculture and industry and 1 percent to reallocation).

However, the authors argue that the frequent emphasis on business services as the driving force behind India’s economic expansion may be overblown. Despite its extraordinary growth, the industry comprises only a small share of India’s GDP and employment. Business services provide jobs primarily for the relatively small proportion of the workforce that is highly educated, and recent increases in the returns to higher education suggest that high-skill services industries are encountering labor shortages. Furthermore, the strong gains in service sector TFP are puzzling. One might expect this in sub-sectors such as finance and business services, but these sectors remain small—just 17 percent of total services output in 2004. In fact, the growth acceleration is quite widely dispersed across service sub-sectors and rapid productivity growth seems unlikely in the biggest, which are trade, transportation and community services. Though difficult to verify, the authors express concern that an underestimate of services price inflation, particularly in the more traditional sectors, may imply an overestimate of output growth. The available measures of employment suggest a less dramatic acceleration of overall growth and a somewhat smaller focus on services.

In any case, India’s growth expansion is not creating adequate job growth for the bulk of the population that is not particularly well-educated. Thus, it is important that India broaden the base of the current expansion by promoting programs that would increase India’s attractiveness as a source of manufactured goods for the world market. Growth of the manufacturing sector would also provide a strong match for the skills of India’s workforce.

The paper also offers additional discussion of education and physical investment, both of which have an important bearing on growth and productivity. The accounting decomposition finds that the growth contribution from increases in education has been quite modest. The paper also examines the evolution of India’s saving behavior. The authors conclude that saving is not constraining India’s growth. However, there is room for increased public and foreign savings.

Pulling together the findings of their analysis, the authors draw a number of implications for India’s growth in the coming decade. A key message is that India needs to broaden the base of its economic growth through the expansion of the industrial sector—especially manufacturing. In this context, China provides a useful model, in its emphasis on exports of manufactured goods as a primary driver of growth.

To accomplish this, India needs to create a more attractive economic environment for doing business—a location able to compete effectively with China. This will require strengthening its infrastructure—including a weak and unreliable power system, and poor land transportation in many states. However, India already enjoys relatively good institutions and is strong in the areas of finance and business services.

The liberalization of the international trade regime is believed to reduce poverty through its impact on both efficiency and distribution. Expansion of trade lowers the cost of goods and services consumed by the poor and freer trade should lead to an increased demand for and higher returns to unskilled labor in poor countries. However, those gains may not emerge if workers are not able to move to the sectors and areas of expanding demand. Thus, the ultimate effect of trade expansion on poverty is ambiguous and must be determined empirically.

Trade Liberalization, Labor-Market Institutions, and Poverty Reduction: Evidence from Indian States, by Rana Hasan, Devashish Mitra, and Beyza P. Ural

In their paper, Hasan, Mitra, and Ural examine the impact of India’s trade liberalization on poverty reduction using state and regional level data from the National Sample Survey (NSS) of households. Their measure of trade policy includes changes in both tariffs and non-tariff barriers (NTBs). They weight tariffs (and alternatively NTBs) by sectoral employment to arrive at a state-level measure of the trade exposure of the labor force, and they construct a second version that is based on a principal-components aggregation of the two policy instruments. They then allow the impact of trade policy on poverty to differ across states according to the flexibility of labor-market institutions. The classification of states with flexible and inflexible labor markets is based largely on a prior study by Besley and Burgess. To obtain a clearer picture of the effects on poverty, they also investigate the impact of another important, complementary component of economic reforms, namely product market deregulation, and look also at its interaction with labor-market institutions.

The measures of poverty are drawn from the NSS surveys of 1987–88, 1993–94, and 1999–2000, and are largely based on a methodology developed by Deaton and Drèze and their approach for adjusting the poverty estimates for a change in the design of the household survey in 1999–2000. However, Hasan et al. also check the robustness of their results with two alternative measures: one based on the official Government of India (GOI) estimates of poverty, and a longer time series of state-level poverty rates created by Ozler, Datt, and Ravallion. Another innovation in the paper is that they allow the transmission of changes in protection rates to domestic prices to vary across states since distance and the quality of the transportation system should influence the extent of change in local prices.

Their principal finding is that states whose workers are more exposed to foreign competition tend to have lower rural, urban and overall poverty rates (and poverty gaps), and this beneficial effect of greater trade openness is more pronounced in states that have more flexible labor market institutions. Trade liberalization has led to poverty reduction to a greater degree in states that are more exposed to foreign competition by virtue of their industrial composition. The results hold, at varying strengths and significance, for overall, urban and rural poverty.

For example, controlling for state as well as time fixed effects, they conclude that the reduction in tariff rates over the 1990s was associated with a reduction in poverty rates ranging from 16 percent to 40 percent. Reductions in tariff rates also were associated with a decline of about 15 percent in urban poverty in states with flexible labor market institutions relative to other states. They find some evidence that industrial delicensing has had a more beneficial impact on poverty reduction in states with flexible labor institutions.

Hasan et al. contrast their evidence on the linkages between trade and poverty with a prior study by Petia Topalova, whose investigation utilized district-level data. Topalova concluded that trade liberalization slowed the pace of poverty reduction in rural districts, with the strength of this effect being inversely related to the flexibility of labor-market institutions. She found that the linkage between trade liberalization and poverty reduction was also negative in urban areas, but that result was not statistically significant. The authors provide some reasons for the differences. First, Topalova restricted her analysis to one measure of employment-weighted tariffs. The current paper includes NTBs and a principal-components aggregate of tariffs and NTBs. Second, there are significant differences between the two studies in the methods used to construct the overall employment-weighted indexes of average tariffs. Topalova included nontradable goods industries, which are explicitly excluded from the measures used in the current study. Third, the Topalova paper did not allow for the effects of changes in trade protection on domestic prices to vary across districts. Finally, the authors explored the robustness of their own results by incorporating a greater variety of poverty measures and by extending the analysis to the regional level.

India’s public elementary education system faces enormous problems. Although enrollments have increased, a recent survey of rural areas found shockingly low levels of learning achievement, confirming the cumulating evidence of a dysfunctional system. There are many other indicators of distress—high levels of dissatisfaction of parents and students with teachers, the massive and on-going shift into private schooling, and the unhappiness of the public sector teachers themselves.

Teacher Compensation: Can Decentralization to Local Bodies Take India from the Perfect Storm Through Troubled Waters to Clear Sailing?, by Lant Pritchett and Rinku Murgai

In their paper, Pritchett and Murgai argue that the current system of teacher compensation in the public sector is at the heart of many of these problems. They argue that the system of compensation within any high performance organization should be designed to attract, retain and motivate workers who, on a day-to-day basis, pursue the goals of the organization. All four elements of a system of compensation (durability of the employment relationship, structure of pay across states of the world, assignment of workers to tasks, and cash versus benefits) should work together towards this goal.

Their paper highlights the extraordinary extent to which India’s system of teacher compensation departs from this norm. While there are many variations across states, the current system can aptly be described as a combination of high pay and zero accountability. The paper documents four facts about the system of teacher compensation: (1) there is little or no ability to terminate the employment of teachers—for any cause; (2) the average pay of public sector teachers is very high relative to alternatives (both private teaching and other private sector jobs); (3) the degree of overpayment is higher for public sector teachers at the early stages of a career; and (4) the pay of public sector teachers has very little variance even potentially related to performance—much less than either private sector teachers or other private sector salaried workers.

Each of these elements of the system of compensation reinforces the lack of accountability. There is nothing in the present system to attract people well matched to teaching, to retain the best and most committed teachers, or to motivate performance of good teachers (for that matter, prevent good teachers from becoming disillusioned, cynical, and embittered and yet stay until they are 60 years old). Moreover, the institutional context of basic schooling—all the other relationships of accountability—is also weak.

Pritchett and Murgai argue that this system of compensation plays a large role in producing the current “perfect storm” in public schooling: (a) the learning achievement of students is low, (b) absenteeism of teachers is very high, (c) the treatment by teachers of students is often abysmal, (d) parents and students are dissatisfied with government schools, and (e) families are voting with their feet and pocketbooks to move their children into private schools. Perhaps worst of all, the potentially good teachers within the public system are disenchanted, overburdened, and feel disrespected by parents and managements. The authors argue that any reform of teacher compensation needs to be pro-teacher in contrast with the current system which is dramatically anti-teacher.

In one study of schools in New Delhi, teachers in government schools were compensated at a rate seven times of that of teachers in unregistered schools, they were present less than half the time, and their students consistently scored far below those of students in the unregistered schools in all subject areas. Parents and students expressed higher levels of displeasure with teacher performance in the public schools. Even so, government teachers were dissatisfied with nearly every element of their jobs.

While accepting the common view that there is no possibility of significant reform of the compensation system under the present circumstances, Pritchett and Murgai argue that the devolution of education to Panchayati Raj Institutions (PRIs) provides a unique opportunity to restructure the system to be consistent with an accountable and performance-oriented public sector. Decentralization to PRIs, if done well, has the potential to break the political impetus behind business as usual by combining a reallocation of functions across tiers of government (states and PRIs) with allowing PRIs to develop systems of compensation that are aligned with the realities of public employment and the particularities of the practice of teaching.

Pritchett and Murgai suggest that the development of a future cadre of teachers should take place within a new system under district control. They propose a system with three phases for teachers’ careers, ranging from an initial apprentice phase up to a masters level, with each stage corresponding to increased pay and prestige. Promotion from one phase to another would be based on performance reviews with input from the local school, peers, and technical reviews. The objective is to develop a professional teacher cadre at the district level, but to leave control of school administration and the actual hiring of teachers from the eligible pool with the local authorities.

Fast growth of the population has been a central concern of policy makers in the developing countries with large populations such as India and China. Reductions in fertility have been seen as an important means to achieve rapid and sustained economic growth. And, many countries have adopted policies ranging from offering incentives for fertility reduction to outright restrictions on the size of the families. The advocates of such direct measures to reduce fertility are skeptical that economic growth alone can deliver the necessary reduction in fertility without at least a major expansion of education among women.

At one level, the controversy over the positive role of economic growth in driving down fertility would seem surprising. After all, richer, more developed economies have uniformly lower fertility rates than do poorer, less developed ones. Over time many formerly poor countries have become richer and simultaneously achieved sustained fertility declines.

But there also exist examples and patterns supporting the view that fertility responds to declining mortality and a transition in cultural perspective that need not be related to growth. For example, we have countries such as Cuba, Costa Rica, and Sri Lanka with traditionally high levels of education and health and correspondingly low levels of fertility. Likewise, China has lowered fertility through direct intervention at a relatively low level of income. There also exists evidence that the timing of a first sustained decline in fertility is not connected to a particular threshold level of economic development.

Does Economic Growth Reduce Fertility? Rural India 1971–99, by Andrew D. Foster and Mark R. Rosenzweig

In their paper, Andrew Foster and Mark Rosenzweig employ a newly available panel data set to assess the impact of economic factors on fertility. The data set offers a representative sample of rural India over the period 1971–99, and it allows an examination of the main factors responsible for the rural fertility decline that occurred in India in the 1980s and 1990s. The authors first construct a simple dynamic model of fertility choice that incorporates the opportunity cost of time, the trade-off between investments in the human capital of children and family size (the so-called qualityquantity trade-off), and increased access to health and family planning services as determinants of fertility. The model yields testable hypotheses relating the fertility decision to its various determinants.

The authors then go on to use the data set to test the hypotheses so derived. A key feature of the data is that it links the households across different rounds of the survey. This permits the elimination of the influence of time-persistent cultural and preference differences across Indian states and households that may be correlated with economic change. When these cultural and preference differences are ignored, the empirical results lead to the conclusion that neither agricultural productivity growth nor changes in the value of time matter for fertility change. Cross-sectional variations in fertility decisions depend only on the spatial differences in maternal education. This analysis supports the advocates of direct intervention to influence fertility decisions.

But once the authors take the cultural and preference differences into account, the results change dramatically. The corrected results show that increases in the opportunity cost of women’s time, as reflected in female wages and increased investments in child schooling, explain the lion’s share of the fertility decline. The results leave very little role for parental schooling, male or female.

The results show that the areas of high agricultural productivity growth not only experience declines in fertility but also increases in the schooling of children and in the time devoted by married women to non-household work. The quantitative estimates suggest that aggregate wage changes, dominated by increases in the value of female wages, explain 15 percent of the decline in fertility over the 1982–99 period. In combination, changes in agricultural productivity and agricultural wage rates explain fully 61 percent of the fertility decline. Health centers are found to have had a significant effect on fertility as well, but the aggregate increases in the diffusion of health centers in villages only explains 3.4 percent of the fall because during the period there was little change in the distribution of such centers. The results thus suggest that the process of economic growth has had a major impact on fertility in India over the last two decades. The authors conclude that given sustained economic growth that continues to raise wages and increase returns to human capital, the fall in fertility in India will continue for the foreseeable future.

Managing the Environmental Consequences of Growth: Forest Degradation in the Indian mid-Himalayas, by Jean-Marie Baland, Pranab Bardhan, Sanghamitra Das, Dilip Mookherjee, and Rinki Sarkar

Given their enormous populations, the rapid, sustained growth of India and China has heightened concerns on the environmental consequences of such growth. Yet there is no accepted professional consensus on the nature and intensity of these links. For some economists, growth is seen as continuing to raise the demand for the earth’s energy resources. For others poverty is seen as the root cause, implying that growth is itself at least part of the solution. The so-called ‘environmental Kuznets curve’ hypothesis represents an intermediate view: economic development may initially aggravate environmental problems, but beyond a threshold of economic development environmental conditions improve. Yet another viewpoint stresses the importance of local institutions such as monitoring systems and community property rights. Particularly where deforestation is concerned it is argued that assigning local communities effective control of forest resources would substantially reduce environmental pressures, leaving little need for external policy interventions.

Despite these different perspectives, there is remarkably little systematic micro-empirical evidence on their relative validity. Efforts to test these hypotheses have been cast mainly on the basis of macro cross-country regressions, with only a few recent efforts to use micro evidence concerning behavior of households and local institutions governing use of environmental resources. The paper by Baland and others attempts to fill this gap through a careful analysis of the determinants of firewood and fodder collection, the chief causes of forest degradation in the mid-Himalayan region of India. The study seeks to predict the deforestation implications of future growth in the region, assess the likely impact on future livelihoods of local residents, and evaluate some specific policies to arrest forest degradation.

The analysis is based on a stratified random sample of 3,291 households in 165 mid-Himalayan villages in the Indian states of Uttaranchal (recently renamed Uttarakhand) and Himachal Pradesh, complemented by detailed measurement of forest conditions in surrounding areas used for collection of firewood and for livestock grazing. Prior accounts of the state of these forests suggest significant externality problems at both local and transnational levels. The local externality problem arises from the dependence of the livelihood of local inhabitants on neighbouring forests. The forests are important for the collection of firewood (the principal source of household energy), fodder for livestock rearing, leaf-litter for generation of organic manure, timber for house construction, and collection of herbs and vegetables. Sustainability of the Himalayan forest stock also has significant implications for the overall ecological balance of the South Asian region. The Himalayan range is amongst the most unstable of the world’s mountains and therefore inherently susceptible to natural calamities. There is evidence that deforestation aggravates the ravaging effects of regular earthquakes, and induces more landslides and floods. This affects the Ganges and Brahmaputra river basins, contributing to siltation and floods as far away as Bangladesh.

On the basis of contemporary recall the paper finds considerable evidence of forest degradation (though not deforestation) over the last quarter century in forest areas accessed by villagers. Such degradation is evident in the presence of over-lopped trees and low rates of forest regeneration, and a 60 percent increase in the average time needed to collect a bundle of firewood—approximately six additional hours per week per household. Against this background, the first part of the paper assesses the likely impact of growth in household incomes and assets on firewood collection. Such growth both gives rise to wealth effects (which raise collections by increasing household energy demand) and substitution effects (which lower collections by raising the value of time of households; almost all firewood is directly collected by consuming households with negligible amounts purchased in markets). The econometric analysis shows that the substitution and wealth effects offset each other, so that firewood and fodder collection is inelastic with respect to improvements in living standards. The paper finds no evidence for any effects of poverty or growth on forest pressure, nor any Kuznets-curve patterns.

In contrast, the effects of growth in population are likely to be adverse: rising population will cause a proportional rise in collections at the level of the village, while leaving per capita collections almost unchanged. To the extent that household fragmentation induces a shift to smaller household sizes, the resulting loss of economies of scale within households will raise per capita collections even further. Hence anthropogenic pressures on forests are likely to be aggravated by demographic changes, rather than economic growth. Unless there is substantial migration out of the Himalayan villages, the pressure on forests is likely to continue to grow in the future.

The paper next estimates the effect of such further projected forest degradation on the future livelihoods of affected villagers, mainly via a further increase in collection times for firewood. This is done by estimating the effects of increased collection times by one hour, which is a plausible estimate for the next decade or two. The welfare impact of this externality turns out to be surprisingly low: the effect is less than 1 percent loss in household income across the entire spectrum of households. Moreover, there are no significant effects on child labor, nor on the total labor hours worked by adults. This indicates that the magnitude of the local externality involved in use of the forests is negligible, providing a possible explanation for lack of effort among local communities to conserve neighboring forests. The argument for external policy interventions then rests on the larger ecological effects of forest degradation, which are beyond the scope of the paper.

Should the ecological effects demand corrective action, the paper surveys the available policy options. The authors find that the principal fuel alternative to firewood, somewhat surprisingly, is LPG (liquefied petroleum gas); kerosene and electricity are still secondary (despite the region’s enormous abundance of hydropower reserves). Household firewood use exhibited considerable substitution with respect to the price and accessibility of LPG cylinders, suggesting the scope for LPG subsidies as a policy which could be used to induce households to reduce their dependence on forests for firewood. The authors estimate the effectiveness and cost of a Rs 100 and a Rs 200 subsidy for each gas cylinder. The latter is expected to induce a rise in households using LPG from 7 percent to 78 percent, reduce firewood use by 44 percent, and cost Rs 120,000 per village annually (about 4 percent of annual consumption expenditure). A Rs 100 subsidy per cylinder would be half as effective in reducing wood consumption, but would have a substantially lower fiscal cost (Rs 17,000 per village annually, approximately 0.5 percent of annual consumption).

The econometric estimates also show that firewood use was moderated when local forests were managed by the local community (van panchayats) in Uttaranchal. However, this effect is limited to those community-managed forests that were judged by local villagers to be moderately or fairly effectively administered, which constituted only half of all (van panchayat) forests. It is not clear how the government can induce local communities to take the initiative to organize themselves to manage the neighboring forests effectively, when they have not done so in the past. Moreover, the authors conclude that, even if all state-protected forests could be converted to van panchayat forests, firewood use would fall by only 20 percent, which is comparable to the effect of a Rs 100 subsidy per LPG cylinder.

       

The fourth volume of the India Policy Forum features papers on schooling inequality, the duration of microfinance groups, sub-national fiscal flows, and reform of the power sector, land policies, and higher education. Suman Bery, Barry Bosworth, and Arvind Panagariya edited the volume. The editors' summary appears below, and you can download a PDF version of the volume: 

Download India Policy Forum 2007-2008 - Volume 4 (PDF) »
Download the 2007-2008 India Policy Forum conference agenda » 

Download individual articles:

• The Political Economy of the Indian Fiscal Federation
• Can Schooling Policies Affect Schooling Inequality? An Empirical Evaluation of School Location Policies in India
• Mortgaging the Future? Indian Higher Education
• Microfinance Lifespans: A Study of Attrition and Exclusion in Self-Help Groups in India

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EDITORS' SUMMARY

The India Policy Forum held its fourth conference on July 17 and 18 of 2007 in New Delhi. This issue of the journal contains the papers and the discussions presented at the conference. The first paper examines the fiscal relationship between the Central Government and the states of India. The next two papers focus on the Indian educational system, specifically the social implications of government policies governing access to primary and secondary schools, and the challenges facing the country’s system of higher education. The fourth paper evaluates the performance of an important component of India’s microfinance system. Finally, the fifth paper provides an assessment of recent efforts to reform the distribution segment of the electric power industry. In addition to the working sessions of the conference, T.N. Srinivasan of Yale University, a member of the advisory panel, delivered a public lecture on the topic of: “Economic Reforms, External Opening and Growth: China and India.”

The Political Economy of the Indian Fiscal Federation

Despite massive unfulfilled need and repeated rhetorical commitment to increase public spending, public expenditure in India on education and health has never exceeded more than 3.3 and 1.3 percent of GDP, respectively. Implementing such spending, and to a large degree paying for it, is the responsibility of India’s states. In her paper, Indira Rajaraman argues that an important explanation for this persistently low level of spending lies in the nature of fiscal transfer arrangements in India’s federal structure, particularly the unpredictable and discretionary nature of significant components of these transfers.

The assignment of expenditure responsibilities and revenue rights in India gives rise to a vertical fiscal gap at the sub-national (state) level. The closure of this gap is provided for by the appointment, every five years, of a constitutional body called the Finance Commission. The report of each Commission, once accepted by the government, prospectively defines the formula for statutory flows from the national government (the “Center”) for the succeeding quinquennium. Such statutory flows from the Center to the states are predictable in relation to the underlying tax base, are pre-defined both in aggregate and in their distribution between states, and are unconditional. In Rajaraman’s view, these are all desirable properties to permit states to make multi-year expenditure commitments of the kind needed for provision of primary education and health.

However, such statutory flows represent only part of the story. In the years before 2005, statutory flows never exceeded 60 percent of the total flow. The remaining Center–state transfers took place under a range of nonstatutory mechanisms, largely under the control of an extra-constitutional body called the Planning Commission, and were unpredictable in aggregate from year to year.

While initially entirely discretionary, in 1969–70 the inter-state allocation of a portion of these “Plan” transfers was in turn subjected to a periodically revised formula (commonly referred to as the “Gadgil Formula”). However, this formulaic distribution was accompanied by a shift from a full grant basis to one comprising 70 percent loans and 30 percent grant. This shift to borrowed funds rather than grants implicitly altered incentives away from health and education state-level spending, which were unable to bear the ensuing interest burden. This disincentive, associated with the loan component, led to a gradual reduction in the share of this formulaic component in overall non-statutory flows.

Against this policy and institutional background, the paper performs three empirical exercises to determine the year-to-year changes in the share in grants from the Center received by states in aggregate that was not subject to formula and therefore open to bargaining by the states. The first empirical exercise quantifies the non-formulaic bargaining margin within aggregate flows for each year of the period 1951–2007, and estimates it to have varied inversely with an index of political fractionalization in the federation. As fractionalization increased, the formulaic share rose. The system thus fluctuated in response to changes in the political situation. This instability is inappropriate for funding requirements of basic developmental services.

The second exercise tests whether the control over aggregate state borrowing from the financial markets (constitutionally vested at the national level, and an important force for macroeconomic stability) represents opportunistic behavior influenced by the national electoral cycle. The difference between the consolidated fiscal imbalance, or deficit (aggregated across national and state levels), and the imbalance for the Central Government alone, provides a proxy measure for measuring the extent of sub-national borrowing from financial markets.

The consolidated fiscal imbalance is shown to have risen in years preceding Parliamentary elections. This is in contrast to the fiscal imbalance at the Center, which was not dictated by the electoral cycle. Taken together, the two sets of specifications strongly suggest that aggregate Central limits on state borrowing from financial markets were raised in pre-election years.

This inter-temporal variability, together with the spatial distortions implicit in the opaque system for allocating borrowing entitlements across the states in all years, further adds to the fiscal uncertainty faced by states, and inhibits orderly and sustained planning.

The third empirical exercise deals with a major initiative that commenced in 2005 to reduce the accumulated debt burden of the states. The proposal to reduce this debt originated from the Finance Commission, and addressed debt owed by the states to the Center arising from the loan component of Plan transfers mentioned earlier. The debt relief was to be granted in exchange for promises of fiscal adjustment.

The Finance Commission took the view, later endorsed by Parliament, that the differences in initial conditions across states should be taken into account in setting such conditionality. However the conditionality actually imposed by executive action at the Center envisaged a common terminal year deficit level for all states, implying a difference in the magnitude of adjustment that varies by as much as 10 percent of state GDP, with presumed adverse consequences, once again, for the stable provision of essential state level developmental services.

Starting in 2005–06, there has been a regime change with the replacement of direct Central lending to states for Plan expenditure, with a more inflexible system of caps on state borrowing as part of the conditionality for the above-mentioned debt concessions. Thus, the kinds of uncertainties and patterns in aggregate borrowing limits on states will not be visible for a while longer.

Rajaraman further notes that there has been a fall over the last ten years in the share of state expenditure in overall public spending on health and education because of the huge new Central expenditures on primary education and mid-day meals in schools, which are not routed through states. Thus, the policy response has been to alter the pattern of functional responsibility, rather than restoration to the states of their constitutionally assigned functions, with correction of the adverse incentives that became embedded in the de facto structure of sub-national funding.

Finally, Rajaraman also uses the empirical exercises to draw implications for the nature of dialogue between the Center and the states regarding fiscal matters. She notes the absence of a dispute-resolution forum where the de facto functioning of fiscal arrangements can be subjected to continual examination and monitoring by all partners to the federation. Within such a forum, major issues spanning Central transfers, revenue rights, expenditure externalities, and unfunded mandates, could be resolved in a participatory framework. Its need is likely to become even more urgent as India moves to an integrated nation-wide goods and services tax (GST), where the direct role of the states in revenue collection would be even more restricted, and the need for a broad review of fiscal federal arrangements even more urgent.

Can Schooling Policies Affect Schooling Inequality? An Empirical Evaluation of School Location Policies in India

Over the past several decades, a primary tool used by the Government of India to improve school enrollments, particularly those of the Scheduled Castes (SCs), has been the expansion of access to schools. To this end, the government has long embraced the objective of providing a school within easy walking distance from each rural household. In her paper, Anjini Kochar argues that in implementing this policy, scant attention was paid to the fact that targeting access to schools as a primary objective may constrain the government in addressing other critical aspects of schools, particularly those related to school quality. This is because decisions regarding the location of schools determine more than just access to schools; they combine with the residential structure of a society to define the school community, and hence school characteristics known to affect schooling attainment.

According to Kochar, it is the nature of residential communities in rural India that makes this trade-off between access and quality likely. Rural India resides in habitations—distinct residential settlements within a village— which vary in size but are, on average, fairly small. Because habitations are generally organized along caste lines, the rural economy is thus characterized by a considerable degree of caste-based segregation. The stated policy objective of providing a school within easy walking distance of each household, in conjunction with the geographic distance across habitations, requires the government to adopt a policy that provides schools to relatively small habitations and frequently results in multiple schools within a village.

Therefore, the paper argues that the current school location policy does not permit an optimal allocation of schools based upon enrollment or size. Because school enrollment determines the availability of inputs such as the number of teachers, there is a corresponding variation in the number of teachers per school. To the extent that this attribute of schools affects schooling attainment, Kochar argues that the policy generates schooling inequality across regions, with schools in smaller habitations being of generally lower quality than those in larger habitations.

School location policies also affect the caste composition of the student population. When schools are provided in SC habitations as well as in the other habitations of a village, the residential segregation that characterizes the village gets translated into a corresponding system of de facto schooling segregation. The corresponding difference in the caste composition of students across village schools is also likely to affect schooling attainment. 

The paper explores these hypotheses empirically, examining the relationship between school enrollments and availability of schools within habitations, as well as the effect of the number of teachers and the prevalence of schooling segregation. To identify the effect of these school attributes, Kochar uses the policy rules that determine whether a school can be placed in a habitation and the number of teachers assigned to a school. These rules are specified at the district level, and are implemented by the government based on district level data on habitations collected in the All India Education Surveys (AIES). The paper uses this same data that guides policy decisions, and relates it to household data from the Government of India’s National Sample Surveys. The use of policy rules specific to the attributes in question, and the availability of the data that guides current policy decisions, provides a compelling source of identification. To assess the effects of school segregation, Kochar uses the insight that schooling segregation exists only when schools are provided in the SCs/STs (Scheduled Castes/Scheduled Tribes) habitations. Because the AIES data also provide information on the size distribution of SC/ST habitations, it is possible to identify the probability of schools being located in SC/ST habitations (a proxy for schooling segregation) separately from the overall effect of school availability.

The paper has two principal findings. First, based on the size distribution of habitations within a district, the author finds that the current policy rules do affect access, but they also affect teacher numbers and schooling segregation. The regression analysis shows that schools with two or fewer teachers experience reduced enrollments. The results on teacher availability suggest that the decision to provide schools even to relatively small habitations generates a source of schooling inequality: children who reside in small habitations with schools attend schools of poorer quality than those who reside in larger habitations.

Second, the author finds that school location policies also perpetuate caste-based inequalities. Since the SC habitations are generally smaller than others, this means that SC schools are of lower quality, as measured in terms of the availability of teachers. The empirical results show an asymmetric effect of schooling segregation by caste: children of upper castes benefit significantly while segregation has little effect on the SCs. The benefits of living in districts with widespread access to schools therefore vary by caste.

The results of the paper suggest that improvements in school quality cannot be affected without re-considering the government’s school location policies. Kochar admits, however, that improving school quality along the dimensions considered in the paper is no easy task. She suggests an alternative policy that consolidates habitation schools to provide one school in each village, which would enable an optimal number of teachers in each school and thereby improve schooling attainment. While the greater distance to school implied by such a consolidation, particularly for children from the SC/ST habitations, may reduce access, the paper argues that the savings generated by the consolidation could be used to implement a system of cash transfers to children from the SC and the ST conditional on their school attendance records. The positive effects from increased teachers and economies of scale are enough to provide cause for a reconsideration of school location policy in India.

Mortgaging the Future? Indian Higher Education

The higher education system in India also faces troubling distortions and suboptimal outcomes. In their paper, Kapur and Mehta argue that the vast majority of institutions of higher learning are incapable of producing students with skills and knowledge. Attendance does not serve as a screening system for the vast bulk of students, nor does it prepare students to be productive and responsible citizens. The current system is highly centralized, politicized, and militates against the production of general intellectual virtues. It may come as no surprise then, that the last few years have witnessed a rapid rise in skill premiums in India despite the country’s huge population.
 
Kapur and Mehta maintain that the poor state of the sector and the recent rise in skill premiums can be largely explained by the regulatory bottlenecks facing Indian higher education. Despite impressive reforms elsewhere, Indian higher education remains one the last bastions of the “license control raj”—with troubling implications for India’s future. The paper argues that the result is a state of crisis in Indian higher education notwithstanding the success of a few professional schools. The fact that the system produces a noticeable number of high-quality students is largely the result of Darwinian selection mechanisms and very little because of pedagogic achievements.

According to the authors, the most acute weakness plaguing India’s higher education system is a crisis of governance, both of system and of individual institutions. Because the prevailing political ideological climate views elite institutions as anti-democratic, there is a natural response in political circles to influence admissions policies, internal organization, and the structure of courses and funding. The paper provides data to show that there has been a massive increase in both private higher education and the flight of elites to foreign educational institutions. However, the private sector also suffers from regulatory obstacles and governance weaknesses, raising doubts as to its ability to address the huge latent demand for quality higher education in the country.
 
From the perspective of the three key suppliers of Indian higher education—markets, the state, and civil society (philanthropy)—the authors elaborate on six significant distortions. First, the process of regulatory approvals diminishes the capacity of private investment to respond to market needs. Second, the regulatory process produces an adverse selection in the kind of entrepreneurs that invest since the success of a project depends less upon the pedagogic design of the project and more on the ability to manipulate the regulatory system. Third, there are significant market failures in acquiring physical assets that are necessary for educational institutions, especially land. Fourth, regulatory approvals are extremely rigid with regard to infrastructure requirements (irrespective of costs or location) and academic conformity to centrally mandated course outlines, degree structures, and admissions policies. Fifth, a key element of a well-functioning market — competition—is distorted by restricting foreign universities from setting up campuses in India, which limits benchmarking to global standards. Sixth, another central element of a well-functioning market, informational transparency, is woefully inadequate.

The university system in India is the collateral damage of Indian politics. As the paper demonstrates, the dismal educational outcomes are not the result of limited resources. For politicians, the benefits of the license-control raj extend beyond old-fashioned rent seeking by manipulating contracts, appointments, admissions, and grades in government-run colleges and universities to the use of higher education for vote-banks, partisan politics, and as a source of new entrepreneurial activities.

The authors identify three key variables that help to clarify the political economy of India’s higher education: the structure of inequality in India, the principal cleavages in Indian politics, and the nature of the Indian state. India is an outlier in the extreme degree of educational inequality, which has led to a populist redistributive backlash. However, the specific redistributive mechanisms are conditioned by the principal cleavages in Indian politics and the nature of the Indian state. The growth of identity politics has sharply enhanced political mobilization around two key cleavages in Indian society: caste and religion. Consequently, redistributive measures follow these two cleavages rather than other possibilities such as income, region (urban–rural), or gender. Thus, the focus on redistribution helps explain why Indian politicians have obsessed over reservations (that is, quota-based affirmative action) in elite institutions of higher education rather than improvements in the quality of primary and secondary schooling, and the thousands of colleges of abysmal quality.

The consequences of the preceding political economy are onerous. One, a diminished signaling effect of higher education; two, an ideological entrapment between what the authors call half-baked socialism and halfbaked capitalism, with the benefits of neither; and three, a pathology of statism wherein higher education policy is being driven foremost by the state’s own interest (or perhaps its own ideological whims). Much of what goes in the name of education policy is a product of the one overriding commitment of the education bureaucracy—namely state control in as many ways as possible.

The paper also highlights the role of the Indian judiciary in higher education reforms, arguing that it has done as much to confuse as to clarify the existing regulatory framework. Although there has been a distinct shift in the Supreme Court’s stance in the past decade, its primary response does not always center on what will enable the education system to adequately respond to demands. Rather, it has uneasily and often confusingly attempted to reconcile disparate principles, be it the dichotomy between education being a charitable or commercial enterprise, or the inherent tension between institutional autonomy and equitable access in higher education.

Kapur and Mehta conclude with a few options for change moving forward. Market failure in higher education means that substantial public investment will continue to be critical in this sector. However, since there are few clear analytical criteria to address the central question of what is “good” higher education, the paper argues that a regulatory system that emphasizes diversity, flexibility, and experimentation is in the long run most likely to succeed. Such a system will also need a different conception of accountability than the one currently prevailing in the Indian system, where resource allocation decisions are centralized to an extreme degree in the Planning Commission, the Ministry of Human Resource Development, and the University Grants Commission. Its quality depends entirely upon the informational resources of a very small group of decision makers and presumes an omniscience that few decision makers can have. Instead India needs to move to a regulatory system with increased horizontal accountability that empowers students to make better informed decisions. Finally, Indian policy makers need to recognize that the competition for talent is now global and that only a combination of a flexible and supple state system that enlists the energies of the market as well as a committed non-profit sector will be able to meet the challenges and the vast scale of demand for higher education in India.

The expansion of rural credit through the “formal” financial system has been a major goal of Indian policy since independence. While a number of initiatives (including nationalization of the country’s major commercial banks) have been taken over the years, success of these initiatives has been only partial.

In 1992, the Reserve Bank of India (RBI), India’s central bank and banking regulator, issued guidelines to the public sector commercial banks (which still dominate Indian banking) encouraging them to lend to small preformed groups called “self-help groups” (SHGs). These groups are almost always composed of rural women, and are often assisted by non-governmental organizations (NGOs) in their formation and their subsequent growth and development.

While the scheme, sometimes called the “commercial bank–SHG linkage scheme”, was in part inspired by the success of Bangladesh’s Grameen Bank in sustainably widening access to financial services in that country, the Indian SHG scheme differs in several respects from the Bangladesh model, and therefore needs to be assessed in its own right. One such difference is the provision of subsidized refinancing to the commercial bank by the National Bank for Agriculture and Rural Development (NABARD) (a publicly-owned affiliate of the RBI). The RBI reports that over 2.5 million of such groups have borrowed from commercial banks since 1992, and loan disbursements by commercial banks to SHGs were 29 percent of all direct bank credit to small farmers in 2004–05.

Microfinance Lifespans: A Study of Attrition and Exclusion in Self-Help Groups in India

However, in spite of the growing importance of SHGs as a source of credit to the poor, there is little systematic evidence on their internal functioning. The paper by Baland and Somanathan attempts to fill this informational gap by using survey data on SHGs created during the period 1998–2006. It does so by describing the survival of groups and members within groups, documenting group activities, and estimating the determinants of group and member duration using an econometric survival model.

The data comes from a survey of 1,102 rural SHGs and the 16,800 women who were members of these groups at some point during the period 1998– 2006. It considers all groups formed by PRADAN (an NGO that has actively promoted SHGs since the start of the NABARD program) in the districts of Keonjhar and Mayurbhanj in northern Orissa, and the Raigarh district in the newly formed state of Chhattisgarh in central India. Although the group members are engaged in a variety of collective activities, saving and credit do seem the most important. Almost all groups surveyed had made small loans to their members and 68 percent of them had received at least one loan from a commercial bank.

For those members who do borrow from the group the average size of the loan, provided from internal group funds, is Rs. 2,200 per year. For groups with at least one bank linkage, 83 percent of members in the group received some part of this loan, and the average amount received by these members is Rs. 2,189 per year. Although loan sizes provided by some specialized microfinance institutions are often larger, these SHG loans are sizable as a fraction of local earnings and, for women who received both group loans and bank loans, it corresponds to roughly two months of labor earnings at the minimum wage in these areas.

The group members in many SHGs appear to be collectively involved in activities not directly related to credit. About 10 percent of the surveyed groups are involved in the preparation of school meals, 3 percent administer state programs that distribute subsidized foodgrains, and about half of them get involved in family or village conflicts or help members during periods of personal distress. These groups therefore seem to play a role in promoting solidarity networks in the community.
 
The paper then estimates models of both group and member duration. It finds that factors behind group survival are quite different from those affecting member longevity. With respect to group survival, the highest attained level of education in the group is important for its survival, perhaps because some educated members are needed to facilitate transactions and ensure that group accounts are accurate. The presence of other SHGs in the area also has a positive effect on group duration. It may be that a dense cluster of groups allows for the sharing of costs, provides each group with ideas for successful activities, or simply instills in members the desire to survive, compete, and be part of a larger network.

Drawing upon on a large literature pointing to the importance of social heterogeneity in collective action, the paper then explores whether such heterogeneity matters for the average duration of groups and the members within groups. For each member surveyed, the paper records both their individual caste group (or jati) and the “official” caste category to which they belong—ST, SC, Other Backward Castes (OBC), and a residual category often termed General Castes that we refer to as Forward Castes (FC).

The particular question explored is whether heterogeneity matters for group functioning when members belong to different jatis in the same official caste category. The paper finds that commonly used measures of fractionalization and social heterogeneity based on these classifications do not have systematic effects on group survival, but that they do help explain the departure of individuals from groups. Even within broad caste categories, heterogeneity matters. This suggests that the “official” classifications fail fully to capture the relevant social hierarchy.

The members from traditionally disadvantaged groups, especially from the ST, are more vulnerable to group heterogeneity. In addition to group heterogeneity, lower levels of education, lower landholdings, and fewer relatives within the SHG are also associated with higher rates of member exit.

The paper also finds that the bulk of the difference in the duration of membership in a SHG observed between Chhattisgarh and Orissa can be attributed to characteristics of groups in these areas; the authors find that state-level variations in performance are negligible once these characteristics are incorporated in their model.

The results suggest that it is problematic to evaluate the success of microfinance interventions based on conventionally reported coverage figures because they do not account for attrition. The authors’ concern is not with overall attrition rates but with the selectivity they exhibit. It is predominantly the poorer and socially marginalized communities that leave the SHG network and this makes it unlikely that women moving out of SHGs enter individual contracts with lending institutions. It also means that some of those in desperate need of credit cannot obtain it from within this sector. To arrive at concrete policy prescriptions for this sector, more information is needed about the financial opportunities available to members once they leave this sector and the extent to which SHG lending crowds out other types of lending to the poor. Although the duration of membership is only one, admittedly crude, measure of the performance of the microfinance sector, the study suggests that survey data which follows members and groups in this sector is critical to an assessment of Indian microfinance.

The Power Sector in India: An Inquiry into the Efficacy of the Reform Process

Electricity supply constitutes the most important infrastructure constraint on overall economic growth in India. While the telecommunications sector has gone through a revolution of increased service and lower prices, and signs of progress are visible in virtually all areas of transportation, progress in improving the performance of the electricity sector has been painfully slow. The paper by Saugata Bhattacharya and Urjit R. Patel examines the sources of the inefficiencies and undertakes an evaluation of the efforts to reform the industry’s distribution segment, which is dominated by state governments.

The electricity sector can be divided into three segments: the generation of electricity using a variety of fuels; the transmission of electricity from generating plants over high voltage towers and lines to the major distribution points; and the distribution of electricity from distribution points to consumers whether industrial or residential. While both the Central Government and the states have the constitutional right to legislate in areas of generation and transmission, distribution is entirely under the jurisdiction of the states. Reform in the electricity sector is made far more difficult than in the telecommunications sector because it requires active participation from the states, which often lack the necessary technical, legal, and administrative talent as well as motivation.

By the early 1960s, the electricity sector had become a vertically integrated monopoly in each state with generation, transmission, and distribution coming under a single umbrella known as the State Electricity Boards (SEBs). Recent reforms have resulted in the unbundling of these segments in many but not all states, and distribution has been delegated to autonomous distribution companies (discoms). With rare exceptions, the latter remain in the public sector.

A key problem facing the electricity sector is the large magnitude of aggregate technical and commercial (ATC) losses. In effect, ATC losses reflect that fraction of power generation for which there is no remuneration. Nationally, they amounted to 37.2 percent of electricity generated in 2001–02. Electricity shortages could be considerably alleviated if these losses could be brought down to normal international levels. Bhattacharya and Patel analyze the success achieved in this area through a variety of reform efforts beginning in the early 2000s. They emphasize the state-by-state variation in performance as a means of identifying the most successful reform measures. The authors identify three specific reforms. First, SEBs, which buy electricity from central public sector generation companies, have traditionally accumulated large arrears with the latter. The Central Government offered them a one-time settlement (OTS) scheme provided they undertook a set of efficiency-enhancing steps. Second, the Central Government followed up the OTS with the Accelerated Power Development and Reform Program (APDRP) under which incentives were offered to undertake a variety of reforms. Finally, the government introduced the landmark Electricity Act of 2003 to bring about nation-wide systemic reforms in the sector.
 
The authors study revenues and cash flows of discoms and SEBs to explain the connection between the reform initiatives and financial performance across states. They also devise a composite index of commercial orientation, which they call the Index of Revenue Orientation (IRO), and rank utilities according to it. The authors explore data over several years from a consistent group of SEBs/discoms on outcomes, and the concomitant key economic and financial parameters that indicate the effect of reform steps associated with SEBs/discoms.

The analysis yields a number of provisional findings. First, at an aggregate level, the deterioration in the power sector has been arrested. The financial situation of the sector has eased and state government subsidies as a ratio to GDP have declined. The sector, nevertheless, is still far from financial viability. The key performance indicators, after having improved significantly in the immediate aftermath of the reform measures, seem to have stagnated after 2003–04. The ATC losses, while having dipped slightly from the 2000–01 crisis levels, remain very high. The basic problem is that although the sector is expected to have made a small cash profit at an all- India level in 2005–06, there are simply not enough resources in the state government-owned system to add capacity (and/or buy excess capacity from other systems) on any appreciable scale, let alone that which is required to power India’s economic growth.

Second, there are significant differences across states and utilities in performance and related indicators (including average revenue realization, collection efficiency, composition of demand, power units input, cost of supply, and physical losses). Also, the variability in performance among states and among utilities has increased between 2001–02 and 2004–05. The outcomes and many of the underlying explanatory variables have exhibited even greater unevenness after the reform measures than in 2001–02. Some states have improved significantly and some have deteriorated sharply. Five utilities account for 80 percent of the total cash losses and another five utilities contribute 78 percent of the cash profits.
 
Finally, using their IRO, authors note that the spread of performance between utilities increased in 2004–05, compared to the situation in 2001–02. While the average index value increased from 1.14 in 2001–02 to 1.3 in 2004–05, the associated standard deviation rose from 0.9 to 1.2. In other words, utilities had a more homogenous ordering of revenue orientation in 2001–02 than in 2004–05. The authors also show that the strongest influence on the extreme ends of the rankings in the IRO was the relative amount of power supplied to the subsidizing (industry) segment versus the subsidized (agriculture and residential) segment.

What implications do these findings have for policy? Various utilities have placed emphasis on different strategies for enhancing revenues. The fragmented information indicates that there is significant progress in many of the basic inputs of utilities. These, however, do not seem to be rapidly translating into higher revenues and cash flows. The unevenness in performance among discoms suggests that there would be large gains to tariff setting at the level of discoms rather than states, or, even at the level of distribution circle and city. This would attract reliable suppliers to discoms or circles who are paying their bills and lead to lower tariffs in an area with low ATC losses. The variation of improvements in different states is also a warning sign of the increasing disparities in the ability of states to attract investments and foster growth.

       

The fifth issue of the India Policy Forum, edited by Suman Bery, Barry Bosworth and Arvind Panagariya, includes papers on India’s financial sector, including capital account liberalization, currency appreciation and capital reserves, as well as growth and employment in Indian manufacturing and the impact of private education. The editors' summary appears below, and you can purchase a printed copy, or access individual articles by clicking on the following links: 

Download the 2008 India Policy Forum conference agenda »
Download India Policy Forum 2008-2009 - Volume 5 »
Purchase a printed copy of India Policy Forum 2008 - Volume 5 »

Download individual articles:

• Some New Perspectives on India's Approach to Capital Account Liberalization, by Eswar Prasad
• The Cost of Holding Excess Reserves: Evidence from India, by Abhijit Sen Gupta
• Big Reforms But Small Payoffs: Explaining the Weak Record of Growth and Employment in Indian Manufacturing, by Poonam Gupta, Rana Hasan, and Utsav Kumar
• What Explains India's Real Appreciation?, by Renu Kohli and Sudip Mohapatra
• Private Schooling in India: A New Educational Landscape, by Sonalde Desai, Amaresh Dubey, Reeve Vanneman, and Rukmini Banerji

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EDITORS' SUMMARY

The fifth annual conference of the India Policy Forum was held on July 15 and 16 of 2008 in New Delhi. This issue of the journal contains the papers and discussion presented at the conference. A total of five papers were presented. The first paper examines the growth of private schools in India and their influence on school quality. It is an extension of recent issues of this journal that have evaluated the performance of India’s education system. The second paper addresses a major question of why the growth of manufacturing output and employment in India has been disappointingly low. The final three papers share a common focus on India’s external financial relations. The third paper analyzes the process of capital account liberalization and the integration of India’s financial institutions into the global financial system. The fourth paper measures the evolution of prices in the nontradable and tradable sectors of the Indian economy and seeks explanations for the rise in the relative price of nontradables. The last paper addresses the issue of the adequacy of India’s current foreign exchange reserves.

Private Schooling in India: A New Educational Landscape

Although the growth of private schooling in India is ubiquitous even in rural areas, the contours and implications of this change remain poorly understood, partially due to data limitations. Official statistics often underestimate private school enrollment and our understanding of the effectiveness of private education in India is also limited. If we assume that parents know what is best for their children and that what is beneficial privately is also beneficial socially, their decision progressively to opt for private schools would suggest the superiority of the latter over public schools.

In their paper, Sonalde Desai, Amaresh Dubey, Reeve Vanneman, and Rukmini Banerji point out, however, that this is not a foregone conclusion. The vast body of research on school quality, especially that relating to the United States, suggests that much of the observed difference in school outcomes results from differences in parental background and levels of parental involvement with children going to different schools. In the Indian context, one runs the additional risk that many private schools are poorly endowed with resources, unrecognized (lack accreditation), and have untrained teachers. A proper empirical examination is essential to arrive at an informed assessment.

The authors use data generated from a new survey, the India Human Development Survey 2005 (IHDS), jointly conducted by researchers from the University of Maryland and the National Council of Applied Economic Research. These data allow them to explore some of the links between private school growth and school quality in India. They begin by providing a description of public and private schools in India as well as some of the considerations that guide parents in selecting private schools. They then examine whether private school enrollment is associated with superior student performance and whether this relationship is concentrated in certain sections of the population.
 
The IHDS data show considerably higher private school enrollment, particularly in rural areas, than documented in other studies. The authors place private school enrollment (including in schools receiving grants-in-aid from the government) among children aged 6–14 years at 58 percent in urban and 24 percent in rural areas. Private school enrollment is particularly high in India’s most populous state, Uttar Pradesh. In terms of outcomes, based on specially designed reading and arithmetic tests administered to children aged 8–11 years, those in private schools exhibit better reading and basic arithmetic skills than their counterparts in government schools.

But since these children also come from higher income households and have parents who are better educated and more motivated to invest in their children’s education, it is important to control for selectivity bias. The paper utilizes a variety of techniques (including multivariate regression, switching regression, and family fixed effects) to examine the relationship between private school enrollment and children’s reading and arithmetic skills. While no model is able to completely eliminate possible biases—there is a different source of bias left in each case—taken together, the results strongly indicate that private school enrollment is associated with higher achievements in reading and arithmetic skills. The magnitude of the gain from private school enrollment varies from one-fourth to one-third standard deviation of the scores.

The paper also distinguishes the relative magnitudes of the benefits from private schooling to children with rich versus poor economic backgrounds. It finds that the benefits to private school enrollment for children from lower economic strata are far greater than those for children from upper economic strata; at upper income levels, the difference between private and government school narrows considerably. This seems plausible since at upper income levels, students are likely to have better access to alternative educational resources including well-educated parents.

While the results of the paper point to positive benefits from private schools, especially for the underprivileged, the authors emphasize that their analysis does not imply that private schooling is the elixir that will cure the woes of primary education for children from poor families. They argue that both empirical results based on the IHDS data and theoretical considerations point to the need for caution.

Empirically, the paper finds that while private school students perform better than their counterparts in government schools, these effects are modest in comparison to other factors influencing the outcomes. For example, the results show substantial inter-state variation in the scores of both government and private school students. Controlling for parental characteristics, government school students in states as diverse as Kerala, Himachal Pradesh, Chhattisgarh, and West Bengal perform at a higher level than private school students in many other states. More importantly, the private school advantage seems to be concentrated in states such as Bihar, Uttar Pradesh, Uttarakhand (formerly Uttranchal), and Madhya Pradesh—states known for poorly functioning public institutions as well as high rates of poverty or low per capita incomes.

These results suggest that before a blanket embrace of private schooling, it may be worthwhile to understand why some government schools function well and others do not. Blaming teacher absence is superficially appealing, but theoretical considerations suggest that the complete story may be more complex. If the classroom environment in private schools is favorably impacted by the demands made by paying middle-class parents, a voucher program that brings a large number of poorer parents to the schools may dilute this effect. But this argument would seem to be undermined by the fact that the authors themselves find the private school effect to be significant in poor states with many students coming from poor families.

Nevertheless, the authors are correct in noting that it will be useful to further examine the processes that give rise to different classroom environments as between government and private schools before jumping to wholesale voucher programs leading to privatization of education. We must know, for example, whether children from poor households in private schools benefit because their parents are able to prevent teachers from resorting to physical punishment. And if so, would this benefit be diluted when vouchers rather than parents pay for the tuition? Can we devise mechanisms to ensure that government school teachers do not resort to discriminatory behavior when dealing with students from poor families? To date, the discourse on the benefits of private schooling in a developing country context has focused on teacher absence, lack of accountability, and lower costs of private schooling. While these are important issues, perhaps future research could try to shed additional light on other processes that establish different environments in private and public schools.

Big Reforms But Small Payoffs: Explaining the Weak Record of Growth and Employment in Indian Manufacturing

The promotion of manufacturing, particularly for export, has been a key pillar of the growth strategy employed by many successful developing countries, especially those with abundant labor. India’s recent experience is puzzling on two accounts. While India’s economy has grown rapidly over the last two decades the growth momentum has not been based on manufacturing. Rather the main contributor to growth has been the services sector. Second, the relatively lackluster performance of Indian manufacturing cannot be ascribed to a lack of policy initiatives. India introduced substantial product market reforms in its manufacturing sector starting in the mid-1980s, but the sector has never taken off as it did in other high-growth countries. Moreover, insofar as subsectors within manufacturing have performed well, these have been the relatively capital or skill-intensive industries, not the labor-intensive ones as would be expected for a labor abundant country like India.

One of the main components of reforms in India was the liberalization of the industrial licensing regime, or “delicensing.” Under the Industries Development and Regulation Act of 1951, every investor over a very small size needed to obtain a license before establishing an industrial plant, adding a new product line to an existing plant, substantially expanding output, or changing a plant’s location.

Over time, many economists and policymakers began to view the licensing regime as generating inefficiencies and rigidities that were holding back Indian industry. The process of delicensing started in 1985 with the dismantling of industrial licensing requirements for a group of manufacturing industries. Delicensing reforms accelerated in 1991, and by the late 1990s, virtually all industries had been delicensed. Large payoffs were expected in the form of higher growth and employment generation with this policy reform.
 
However, the payoffs to date have been limited. It could be argued that a lag between the announcement and implementation of the policy, and also a lag between implementation and the payoffs may be responsible. However, as many as 20 years have passed since the first batch of industries was delicensed, and the last batch of industries was delicensed almost a decade ago; the view that payoffs would occur with a lag is no longer easy to sustain.
 
What then could be the reasons for the rather lackluster performance of the industrial sector? The following factors are usually cited: (a) strict labor laws have hindered growth, especially of labor-intensive industries; (b) infrastructure bottlenecks have prevented industries from taking advantage of the reforms; and (c) credit constraints due to weaknesses in the financial sector may be holding back small- and medium-sized firms from expanding. More recently, two other factors have also been raised. First, it has been pointed out that the evolution of Indian industry may be influenced by path dependence or hysteresis so that despite the reforms of the mid-1980s and the early 1990s the relative profitability of capital and skill-intensive activities remains higher than that of labor-intensive activities. Second, the major reform initiatives undertaken so far—focused mainly on product market reforms—have been national ones. However, the working of product markets in a federal democracy such as India is influenced not only by regulations enacted by the Central Government, but also by those enacted by individual state governments. Moreover, much of the authority on administration and enforcement of regulation also rests with state governments. Accordingly, it has been pointed out that regulatory and administrative bottlenecks at the state level may be blunting the impact of reforms undertaken at the central level.

Using the Annual Survey of Industries (ASI) data at the three-digit level for major Indian states over the period 1980–2004, the paper by Gupta, Hasan, and Kumar analyzes the effects of delicensing reforms on the performance of what in India is called registered manufacturing. (The portion of manufacturing in the so-called unorganized sector is not covered by the ASI data and is therefore not analyzed in the paper; however, this component was also unlikely to have been affected by the licensing controls when these were in effect.) The paper utilizes variations in industry and state characteristics in order to identify how factors such as labor regulations, product market regulations, availability of physical infrastructure, and financial sector development may have influenced the impact of delicensing on industrial performance.

The main findings of the paper are as follows:

1. The impact of delicensing has been highly uneven across industries. Industries that are labor intensive, use unskilled labor, depend on infrastructure, or are energy dependent have experienced smaller gains from reforms.

2. Regulation at the state level matters. States with less competitive product market regulations have experienced slower growth in the industrial sector post-delicensing, as compared to states with competitive product market regulations. States with relatively inflexible labor regulations experience slower growth of labor-intensive industries and slower employment growth.

3. Infrastructure availability and financial sector development are important determinants of the benefits that accrued to states from reforms.

If supportive regulatory conditions prevailed and infrastructure availability allowed it, businesses responded by expanding their capacity and grew; thus hysteresis does not seem to matter. The authors acknowledge that their approach is subject to a few caveats. Several other major reforms have been introduced that impact Indian manufacturing, including reductions in barriers to trade and the dismantling of the policy of reserving particular industries for production by small-scale enterprises. These are not systematically examined and might interact with the impact of delicensing. Second, the neglect of the unorganized sector noted above means that the interactions between the “registered” and the “unorganized” sectors in adjusting to policy change is not systematically explored. Finally, regulations can affect firms and industries in many different ways. For example, they may create incentives for firms to operate in the informal sector, stay relatively small, or adopt particular types of techniques. While the analysis of aggregate data can shed (indirect) light on some of these effects, a more complete analysis would require the use of a microbased approach utilizing plant-level data.
 
The authors conclude that the agenda of reforms to promote manufacturing is not yet complete. Areas for additional action include further reform of labor market regulations; improvement of the business environment; provision of infrastructure and further development of the financial sector. In addition, in a federal democracy like India, reforms at the Center (especially those related to labor) need to be complemented by reforms at the state level.

Some New Perspectives on India's Approach to Capital Account Liberalization

Capital account liberalization remains a highly contentious issue. Proponents argue that rising cross-border flows of financial capital allow for a more efficient allocation of financial resources across countries and also permit countries to share their country-specific income risk more efficiently. Detractors have blamed capital account liberalization as being the root cause of the financial crises experienced by many emerging market countries. Their case has been strengthened by the lack of clear evidence of the presumed benefits of financial globalization. This debate has again become topical as many emerging market economies and even some low-income countries are coping with volatile capital inflows, with major economies like China and India contemplating further opening of their capital accounts.
 
A common argument in the literature in favor of openness from the viewpoint of the developing economies has been that access to foreign capital helps increase domestic investment beyond domestic saving. The recent literature has revived another older argument emphasizing the indirect benefits of openness to foreign capital, including the development of domestic financial markets, enhanced discipline on macroeconomic policies, and improvements in corporate governance.
 
In his paper, “Some New Perspectives on India’s Approach to Capital Account Liberalization,” Eswar S. Prasad argues that a major complication in considering capital account convertibility is that economies with weak initial conditions in certain dimensions experience worse outcomes from their integration into international financial markets in terms of both lower benefits and higher risks. For countries below these “threshold” conditions, the benefit–risk tradeoff becomes complicated and a one-shot approach to capital account liberalization may be risky and counter-productive. This perspective points to a difficult tension faced by low and middle-income countries that want to use financial openness as a catalyst for the indirect benefits mentioned above.
 
The author, nevertheless, maintains that the practical reality is that emerging market countries are being forced to adapt to rising financial globalization. In his view, capital controls are being rendered increasingly ineffective by the rising sophistication of international investors, the sheer quantity of money flowing across national borders, and the increasing number of channels (especially expanding trade flows) for the evasion of these controls. Hence, concludes the author, emerging market economies like China and India are perforce grappling with the new realities of financial globalization, wherein capital controls are losing their potency as a policy instrument (or at least as an instrument that creates more room for monetary and other macro policies). Against this background, the author provides a critical analysis of India’s approach to capital account liberalization through the lens of the promised indirect benefits from such liberalization. In recent years, the Reserve Bank of India (RBI) has taken what it calls a calibrated approach to capital account liberalization, with certain types of flows and particular classes of economic agents being prioritized in the process of liberalization. The result of these policies is that, in terms of overall de facto financial integration, India has come a long way, experiencing significant volumes of inflows and outflows. Although foreign investment flows crossed 6 percent of GDP in 2007–08, in the author’s view the flows are modest, placing India at the low end of the distribution of de facto financial integration measures in an international comparison across emerging market economies.

The RBI’s cautious and calibrated approach to capital account liberalization has resulted in a preponderance of FDI and portfolio liabilities in India’s stock of gross external liabilities. The author agrees that this is a favorable outcome in terms of improving the benefit–risk tradeoff of financial openness and has reduced India’s vulnerability to balance of payments crises. But he goes on to argue that the limited degree of openness has, nevertheless, hindered the indirect benefits that may accrue from financial integration, particularly in terms of broad financial sector development.

Against the backdrop of recent global financial turmoil, the author sees merit in a high level of caution in further opening the capital account. He states, however, that excessive caution may be holding back financial sector reforms and reducing the independence and effectiveness of monetary policy. He goes on to argue that increasing de facto openness of the capital account implies that maintaining capital controls perpetuates some distortions without the actual benefit in terms of reducing inflows. Flows of different forms are ultimately fungible and it is increasingly difficult, given the rising sophistication of investors and financial markets, to bottle up specific types of flows. In the author’s view, rising de facto openness in tandem with de jure controls may lead to the worst combination of outcomes—new complications to domestic macroeconomic management from volatile capital flows with far fewer indirect benefits from financial openness.

The author takes the view that a more reasonable policy approach would be to accept rising financial openness as a reality and to manage, rather than resist (or even try to reverse), the process of fully liberalizing capital account transactions. Dealing with and benefiting from the reality of an open capital account will require improvements in other policies—especially in monetary, fiscal, and financial sector regulations. This approach could in fact substantially improve the indirect benefits to be gleaned from integration into international financial markets.

In terms of specific steps, the author suggests that this may be a good time to allow foreign investors to invest in government bonds as an instrument of improving the liquidity and depth of this market. A deep and well-functioning government bond market can serve as a benchmark for pricing corporate bonds, which could in turn allow that market to develop. By providing an additional source of debt financing, it would create some room for the government to reduce the financing burden it currently imposes on banks through the statutory liquidity ratio—the requirement that banks hold a certain portion of their deposits in government bonds.

The author also recommends an “opportunistic approach” to liberalization whereby outflows are liberalized during a period of surging inflows. He suggests that if undertaken in a controlled manner, it could generate a variety of collateral benefits—sterilization of inflows, securities market development, and international portfolio diversification for households. The RBI has recently adopted such an approach by raising ceilings on external commercial borrowings in order to compensate for capital outflows. According to the author, these are steps in the right direction. But one potential problem he sees is that when taken in isolation rather than as part of a broader and well articulated capital account liberalization agenda, these measures are subject to reversal and unlikely to be very productive.

Despite this enthusiasm for capital account liberalization, the author goes on to suggest that none of this implies that the remaining capital controls should be dropped at one fell swoop. What it does imply is that there are some subtle risks and welfare consequences that can arise from holding monetary and exchange rate policies as well as financial sector reforms hostage to the notion that the capital account should be kept relatively restricted for as long as possible. It may seem reasonable to maintain whatever capital controls still exist in order to get at least some protection from the vagaries of international capital flows. However, in the author’s view, not only this is an unrealistic proposition, it could detract from many of the potential indirect benefits of financial integration. He sees steady progress toward a more open capital account as the most pragmatic policy strategy for India.

What Explains India's Real Appreciation?

India’s rapidly evolving economic landscape during the past two decades has elicited broad discussion of how changing economic factors will influence the future of India’s growth and prosperity. Often overlooked in the discussion are the effects of India’s changing economic structure on relative price dynamics, which have consequential effects on the allocation of resources in the economy. A host of recent developments would likely induce a change in relative prices, including the shift in economic policies beginning in 1991, the acceleration in economic growth, a rapid increase in exports, and rising per capita incomes and productivity growth. Taken together, these factors amount to the “catch-up” process that typically leads to an increase in the relative price of nontradables in developing economies.

In their paper, Renu Kohli and Sudip Mohapatra trace relative price developments in a two-sector, two-good (tradable and nontradable) framework for the Indian economy over the period 1980–2006. In line with their a priori expectations, the ratio of nontradable to tradable prices, also called the internal real exchange rate, rises consistently over the past one-and-a-half decades. Their empirical analysis confirms that this rise, or real appreciation, is driven by both demand and supply factors. A later section uses the results of the study to illuminate the evolution of past macroeconomic policies. Finally, using India’s recent robust economic performance as a guide, the paper concludes with a discussion on an appropriate macroeconomic policy mix for the future.

The authors construct the relative price of nontradables from the national accounts statistics using the degree of participation in trade as a criterion for classifying the economy into traded and nontraded sectors; the tradable– nontradable price series are derived as respective deflators for the two sectors. They find that the tradable and nontradable sectors are characterized by divergent inflation rates with the relative price of nontradables accelerating after 1991; on average, the difference exceeds 1 percentage point per year during 1991–2006. There are two competing explanations for such a divergent acceleration in prices: (a) the Balassa–Samuelson hypothesis posits that real exchange rates tend to appreciate as countries develop and (b) other demand-side explanations originate from changes in government spending and/or a shift in consumer preferences toward services (nontradable) as incomes rise. The preliminary analysis presented in the paper indicates a role for both factors in explaining the real exchange rate appreciation. A puzzle posed by the data, however, is the increase in the relative price of nontradables in conjunction with an expansion of the tradable sector, which suggests an offsetting role might have been played by economic reforms like import liberalization and exchange rate correction, leading to the emergence of new tradables through an increase in competitiveness.

The paper examines the determinants of this divergence in an integrated framework, exploring the role of both demand and supply side determinants. The relative price of nontradables is modeled as a function of the labor productivity growth gap between the tradable and nontradable sectors, real government expenditure as a share of gross domestic product, real per capita income, and a measure of import tariffs. The labor productivity growth gap and the import tariff rates capture the supply-side influences due to technological change (the Balassa–Samuelson effect) and the impact of trade liberalization, which accelerated after 1991. The fiscal and income growth variables summarize the demand side impact upon relative prices. The regression results reveal a significant influence of both demand and supply factors. A percentage point rise in the relative price of nontradables is associated with a 5 percent increase in the labor productivity growth gap, a 4 percent increase in per capita income growth, and a 3 percent increase in fiscal growth; the estimated impact of a fall in import prices upon the relative nontradables’ inflation rate is 0.04. The results are robust to a number of sensitivity checks, including different estimation methods, stability, specification, omission, and inclusion of variables as well as alternate definitions of the variables.

A decomposition of the relative price change over the sample period indicates that demand factors accounted for almost three-fourths of the average relative price increase over the sample period. In contrast, the supply-side influence stemming from the labor productivity growth differential between the two sectors accounted for only 35 percent of the mean of the dependent variable. Noting the rapid decline in import tariffs after 1991, the authors argue that this result underscores the role of convergence in tradable prices and its contribution to the divergence in sectoral inflation rates in liberalizing economies.

Kohli and Mohapatra link their results to macroeconomic policy by tracing the past evolution of exchange rate and fiscal policies in India. They argue that the fiscal expansion of the 1980s ending in the 1991 crisis led to a rise in the inflation rate of the nontradable sector, while the exchange rate policy favored steady depreciation in order to retain competitiveness and boost growth. Noting India’s recent and potential economic performance, its buoyant exports, and strong per capita income growth, they observe that the pressures upon real exchange rate appreciation, internal as well as external, are likely to continue—and indeed, accelerate—in the future. Under the circumstances, an appropriate macroeconomic policy mix would be to continue with the gradual increase in exchange rate flexibility so as to absorb the equilibrium shifts in the economy. This could be complemented with fiscal consolidation to offset competitiveness losses arising from the nominal and real exchange rate appreciation.

The Cost of Holding Excess Reserves: Evidence from India

Finally, the paper raises a number of critical data issues, not the least of which is the absence of a services price index in India. The implicit price series developed in the paper strongly suggests an understatement of generalized inflation through the current inflation indicator, the wholesale price index (WPI), which can be misleading. It also identifies gaps in the data on sectoral employment shares, emphasizing the need for sufficiently disaggregated information to enable fruitful analysis and informed policymaking.
 
The Asian financial crisis of 1997–98 served as a startling revelation to emerging economies of the drawbacks of financial integration. Neither the International Monetary Fund nor reliance on more flexible exchange rate regimes succeeded in preventing—or indeed, adequately combating—such a systemic crisis. Moreover, even countries practicing sound macroeconomic policies realized they were not immune to such crises as they can be hit by contagion and financial panic from other countries, regardless of their proximity. As a result, many countries have decided that they need to protect themselves against a speculative currency attack, and further, that the key to self-protection is the accumulation of substantial holdings of liquid foreign exchange. Over the past decade, developing countries, and particularly those in East and South Asia, have greatly expanded their foreign currency reserves. By the middle of 2008, the reserves of China, South Korea, Russia, and India alone amounted to over US$2.85 trillion. In the case of India, reserve accumulation has increased five-fold since 2001–02.
 
The security that results from high reserves does come at a price, however. The magnitude of reserves being held combined with the fact that most reserves are held as low-yield government bonds suggests that the opportunity cost of reserve holdings can be substantial. In his paper, Abhijit Sen Gupta employs a new empirical methodology to evaluate the factors influencing the demand for international reserves in emerging markets, and he estimates the costs incurred in the process for India in particular. Sen Gupta argues that the traditional analysis of the costs of reserve holdings, which considers a single adequacy measure (namely, import cover), does not reflect the multitude of factors influencing demand for international reserves in a financially integrated world. In addition to the desire to meet potential imbalances in current account financing, a central bank may also hold reserves to defuse a potential speculative run on its currency or to cover its short-term debt obligations.

The author first introduces a simple empirical model to highlight the principal determinants of reserve holding in emerging countries. Using the results of this model, one can create an “international norm” of reserve holding, and thereby calculate a measure of “excess reserves” which is the difference between actual reserve holdings and this international norm. Next, Sen Gupta provides a brief discussion of the history of reserve accumulation in India. As the bulk of India’s reserves are held in the form of highly liquid securities or deposits with foreign central banks and international organizations, the real return on these assets in recent years has been largely negative. In the final section, Sen Gupta estimates the cost of holding reserves in India by considering three alternative uses of the resources currently held in excess of the international norm described earlier.

The empirical section of the paper employs a sample of 167 countries over the period 1980–2005 and a regression framework that identifies the principal determinants of cross-country variation in the level of international reserves. In this context, reserves are defined as total reserves minus the country’s holdings of gold. The dependent variable is this measure of reserves scaled by Gross Domestic Product (GDP). The results of this regression accord well with the a priori expectations. The log of per capita GDP and a proxy for trade openness (measured as the ratio of imports to GDP) both record positive and significant coefficients for reserve holding, implying that richer countries and more open countries tend to have higher reserves. In addition, the regression results reveal that countries with less flexible exchange rate regimes and more capital account openness tend to accumulate greater reserves.

Next, the author uses the above framework for the period 1998–2005 to predict the demand for international reserves for various emerging countries. The difference between actual reserves and the reserve level predicted by the equation is interpreted as a measure of excess reserves. As illustrations of his results, Sen Gupta finds that by 2005, Indonesia, Philippines, and Argentina had reserves close to the amount predicted by the model, while Brazil’s reserve accumulation fill significantly short of the predicted value. In contrast, China, India, Korea, Russia, and Malaysia all exhibit significantly more reserves than what could be interpreted as an “international norm.”

In his discussion of India’s experience in reserve accumulation, Sen Gupta identifies several distinct episodes of significant reserve buildup in India: April 1993 to July 1995, November 2001 to May 2004, and November 2006 to February 2008. These three episodes account for more than US$ 220 billion worth of India’s current stock of reserve accumulation of US$ 300 billion. In each of these episodes, the author discusses the role that both the government and the Reserve Bank of India (RBI) played in the decision to accumulate reserves. Sen Gupta estimates that by the end of 2007, India had more than US$ 58 billion of excess reserves. In order to impute the costs of holding these excess reserves, he considers three alternative uses of the resources: financing physical investment, reducing the private sector’s external commercial borrowing, and lowering public sector debt. The cost is substantial across all specifications, both in terms of actual income foregone and as a percentage of GDP. The author estimates the annual cost of keeping excess reserves in the form of low-yielding bonds rather than employing the resources to increase the physical capital of the economy to be approximately 1.6 percent of GDP. Alternatively, if the resources were instead used to reduce private sector external commercial borrowing or public sector debt, India could gain more than 0.23 percent of GDP.

       

The sixth annual India Policy Forum conference convened in New Delhi from July 14-15. This fourth issue of the India Policy Forum, edited by Suman Bery, Barry Bosworth and Arvind Panagariya, covers the global financial crisis and the implications for India. The editors' summary appears below, and you can download a PDF version of the volume, or access individual articles by clicking on the following links:

Download the India Policy Forum 2009-2010 agenda »
Download India Policy Forum 2009-2010 - Volume 6 » 

Download the individual volumes:

• Why India Choked When Lehman Broke
• Global Crisis and the Indian Economy - On a Few Unconventional Assertions
• India Transformed? Insights from the Firm Level 1988-2007
• Climate Change and India: Implications and Policy Options
• India Equity Markets: Measures of Fundamental Value

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EDITORS' SUMMARY

The sixth annual conference of the India Policy Forum was held on July 14 and 15, 2009 in New Delhi. The meeting was dominated by considerations of the global financial crisis and its implications for India. The events of 2009 provided evidence of India’s growing integration with the global economy, an illustration of the resilience of country’s economic growth, and its emergence as a major participant in an expanded system of governance for the global economic system. This issue of the journal includes four papers and the associated discussion from the conference, and a fifth paper that was originally presented at the 2007 conference. 

Indian Equity Markets: Measures of Fundamental Value

Beginning in 2005, the Indian equity market underwent a period of explosive growth rising from a valuation equal to about 50 percent of GDP to a peak of 150 percent by early 2008. Growth of this magnitude raised concerns that the market was hugely overvalued and it was often characterized as an example of an asset market bubble. The market valuation subsequently fell back to about 70 percent of GDP during the global financial crisis. This experience stimulated interest in India in the question of what would constitute a reasonable or fair value for equities that could be use as a standard for evaluating market fluctuations. In “India Equity Markets: Measures of Fundamental Value,” Rajnish Mehra examines this question by comparing corporate valuations in India over the period of 1991–2008 relative to three key market fundamentals: the corporate capital stock, aftertax corporate cash flows, and net corporate debt.

Mehra’s model builds on the idea of a link between the market value of the capital stock and the debt and equity claims on that stock—a concept known as Tobin’s q. He extends the existing framework using some prior work by McGrattan and Prescott on US equity valuations, and he incorporates both intangible capital and key features of the tax code. It is a multi-period model in which firms maximize shareholder value subject to a production function with labor and two kinds of capital—tangible and intangible—as the inputs. Wages, intangible investment and depreciation of tangible capital are treated as tax-deductible expenses. It yields an equilibrium representation of the relationship between the market value of equity and the reproduction value of tangible and intangible capital in the corporate sector. All of the nominal values are normalized by GDP and the result is a framework that can be used to evaluate the effect on equity prices of a range of different policy actions, such as changes in the taxation of corporate dividends.

The model is calibrated to the Indian situation with respect to the capital stock, tax rates, and the characteristics of economic growth in the nonagricultural sector. Mehra also develops his own estimates of the valuation of intangible capital using three different methodologies. The first method is that used by McGrattan and Prescott and is based on the assumption that tangible and intangible capital earn the same rate of return along a balanced growth path. That assumption allows him to derive the equilibrium ratio of tangible and intangible capital. The alternative methods are based on recent work in the United States by Corrado, Hulten, and Sichel that involves cumulating investment flows to estimated stocks. Mehra uses two different methods to calibrate the Indian data with information from the United States, and he estimates the stock of intangible capital for two periods of 1991–2004 and 2005–08. The focus on two sub-periods is designed to capture a structural break in the data: Indian equity valuations as a fraction of GDP were fairly constant over the period 1991–2004, rising sharply starting in 2005. The two estimates of the stock of intangibles based on the comparison with the United States are very similar, but they are significantly lower than the estimates obtained with the McGrattan and Prescott methodology.

His analysis suggests that an optimistic estimate of the fundamental value of the current Indian equity market is about 1.2 times GDP, considerably lower than the 1.6 value observed in 2008, but close to the average over the full period. One effect on equity prices that the study does not account for is a change in investor demand from foreign institutional investors. If the effect of this is a change in the characteristics of the marginal investor, the relevant marginal rate of substitution will change, and with it market valuations. Thus, Mehra suggests that the extension of the model to include foreign investors should be a major objective for future research.

Why India Choked when Lehman Broke

Mehra’s paper generated an active discussion that centered on the difficulties of accurately measuring some of the values, such as the rate of technological change and real interest rates, required to calibrate the model to India’s situation. Several commentators also emphasized the important role of foreign investors. Others pointed to the difficulties of applying a model based on equilibrium conditions to the highly transitional nature of the Indian economy. In “Why India Choked when Lehman Broke,” Ila Patnaik and Ajay Shah analyze the rapid transmission of the impact of the Lehman bankruptcy into Indian financial markets. The authors propose an explanation that revolves around the treasury operations of Indian multinational corporations (MNCs). Such MNCs are less subject to the capital controls imposed on purely domestic Indian companies. 

The developments that emerged within Indian financial markets in September and October following the bankruptcy of Lehman Brothers on September 14, 2008 were quite extraordinary. First, there was a sudden change in conditions in the money market. Call money rates shot up immediately after September 15. Despite swift action by the Reserve Bank of India (RBI), the tightness persisted through the month of October. The operating procedures of monetary policy broke down in unprecedented fashion and interest rates were persistently above the target range of the Reserve Bank of India (RBI). The call rate consistently breached the 9 percent ceiling for the repo rate and attained values beyond 15 percent. There was a huge amount of borrowing from the RBI. On some days, the RBI lent an unprecedented Rs 90,000 crore through repos. These events are surprising given the extent of India’s de jure capital controls that were expected to isolate its financial markets from global developments. Greater understanding of crisis transmission, the effectiveness of capital controls, and India’s de facto openness could be achieved by carefully investigating this episode and identifying explanations.

The main hypothesis of this paper is that many Indian firms (financial and non-financial) had been using the global money market before the crisis to avoid India’s capital controls. This was done by locating global money market operations in offshore subsidiaries. When the global money market collapsed upon the demise of Lehman, these firms were suddenly short of dollar liquidity. They then borrowed in the rupee money market, converting rupees to US dollars, to meet obligations abroad.

The result was strong pressure on the currency market, and the rupee depreciated sharply. The RBI attempted to limit rupee depreciation by selling dollars. It sold $18.6 billion in the foreign exchange market in October alone. Ordinarily, one might have expected depreciation of the exchange rate in both the spot and the forward markets. However, instead of the forward premium rising in response to the pressure on the rupee to depreciate, it crashed sharply. The authors’ hypothesis is that some Indian MNCs that were taking dollars out of India planned to return the funds within a few weeks. To lock in the price at which they would bring that money back, they sold dollars forward. Thus, the one month forward premium fell sharply into negative territory.

Balance of payments data shows outbound FDI was the largest element of outflows in the “sudden stop” of capital flows to India of the last quarter of 2008. This supports the aforementioned hypothesis. During this time there was no significant merger and acquisitions activity taking place owing to the banking and money market crisis around the world. The explanation for the large FDI outflow when money market conditions in India and the world were among the worst seen in decades, could lie in the offshore money market operations of Indian MNCs. Finally, the authors analyze stock market data, finding that Indian MNCs were more exposed to conditions in international money markets as compared to non-MNCs.

This paper’s main contribution lies in showing that Indian MNCs are now an important channel through which India is financially integrated into the world economy. This raises questions about the effectiveness of India’s capital controls, which inhibit short-dated borrowing by firms. This restriction appears to have been bypassed to a substantial extent by Indian MNCs. This phenomenon contributes to a larger understanding of the gap that exists between India’s highly restrictive de jure capital controls and its de facto openness.

De jure capital controls have not made India as closed to global financial markets as expected. The expectation that a global financial market crisis would not hit India owing to these controls was proved to be incorrect when the financial crisis was transmitted to India with unprecedented speed. This evidence of India’s integration with global capital markets will influence the future discussion of its de facto capital account convertibility.

Climate Change and India: Implications and Policy Options

Climate change and the mitigation of greenhouse gas (GHG) emissions have moved to the forefront of international discussion and negotiations. While global warming may have adverse effects on Indian society, there are also concerns that efforts to mitigate emissions within India could seriously impair future economic growth and poverty alleviation. These concerns are the focus of the paper, “Climate Change and India: Implications and Policy Options” by Arvind Panagariya.

The basic perspective is that India’s current per capita carbon emissions are very small, only one-fourth those of China and one-twentieth those of the United States; and given the strong association between income and emissions, the capping of emissions at current levels would make it impossible for India to sustain the growth required to match Chinese income levels, much less narrow the gap with the developed economies. Panagariya argues that India should resist making binding emission commitments for several decades, or until it has made greater progress in poverty alleviation.

The paper begins with a discussion of various uncertainties relating to the response of temperatures to GHG emissions, and in turn, the impact of any temperature changes on rainfall and various forms of extreme weather. There is further uncertainty about the effects of those weather changes on productivity and GDP growth. The author discusses the changes in temperatures and rain patterns specific to India during the last century, as well as their impact if any on sea levels, glacier melting, and natural disasters such as drought and cyclones.

The paper then explores the question of optimal mitigation and instruments to achieve it. A key conclusion is that, absent any uncertainties, either a uniform worldwide carbon tax or a fully internationally system of tradable pollution permits should be employed to reach the optimal solution. A more complicated issue relates to the distribution of the costs of mitigation. Efficiency dictates that countries in which the marginal loss of output per ton of carbon mitigated is the lowest should mitigate more. But absent any international transfers, this may lead to an inequitable distribution of costs of mitigation. An additional question arises with respect to past emissions for which the responsibility largely rests with developed countries. A case can be made that if countries are asked to pay a carbon tax for future emissions, they should also pay for the past emissions. This is especially relevant since big emitters of tomorrow are likely to be different from big emitters of yesterday.

Panagariya argues that these distributional conflicts are the primary explanation of why countries have found it so difficult to arrive at a cooperative solution. Developing countries argue that since developed countries are responsible for the bulk of the past emissions and are also among the largest current emitters, they should undertake much of the mitigation. In turn, the United States has responded by raising the specter of trade sanctions against countries that do not participate in the mitigation efforts. The paper discusses whether such trade sanctions are compatible with the existing World Trade Organization (WTO) rules. It argues that the legality of the trade sanctions is far from guaranteed although the ultimate answer will only be known after the specific measures are tested in the WTO Dispute Settlement Body.

Turning to the specific situation of India, Panagariya argues that it should resist accepting specific mitigation obligations until 2030 or even 2040. The case for an exemption from mitigation for the next two or three decades is justified by the fact that India is a relatively small emitter in absolute as well as per capita terms. Based on 2006 data, it accounts for only 4.4 percent of global emissions, and in per capita terms it ranks 137th worldwide. This is in contrast to China, with which it is often paired. China currently emits the most carbon in the world in absolute terms, and as much as one-fourth of the United States in per capita terms. In addition, Panagariya argues that India needs to give priority to the reduction of poverty.

Given the situation of India and other poor countries, how can an international agreement to combat global warming be reached? Panagariya proposes first that significant progress can be made through agreements on the financing of investments devoted to the discovery of green sources of energy and new mitigation technologies. He believes that private firms will under-invest in such technologies due to the inherent uncertainties. Thus, he argues for establishing a substantial fund financed by contributions from the developed countries and using it to finance research by private firms with the proviso that the fruits of such research would be made available free of charge to all countries. Second, he argues that there is still considerable work to be done in completing an agenda of near-term actions. If developed countries are serious about the necessity of developing countries undertaking mitigation targets beginning some time in the near future, they need to lead by example and accept substantial mitigation obligations by 2020. Finally, he believes that mitigation targets for the developing countries should be stated in terms of emissions per capita or per unit of GDP.

The paper generated a lively exchange among participants on both the effects of climate change and on how India should participate in the international policy discussion. Some thought that Panagariya underestimated the costs to India of climate change, but most of the discussion centered on the development of an appropriate Indian policy response.

Beginning with the major 1991 reform, India has systematically phased out investment and import licensing. Progressive movement toward promarket policies accompanying this phasing out of controls was expected to bring about major shifts in India’s industrial structure. Partly because the opening up itself was uneven across sectors and partly because responses to liberalizing reforms were bound to differ across sectors and firms, it was expected that the changes would be highly variable.

India Transformed? Insights from the Firm Level 1988-2005

“India Transformed? Insights from the Firm Level 1988–2005” by Laura Alfaro and Anusha Chari, sets out to study the responses of firms and sectors accompanying the ongoing transformation of India’s microeconomic industrial structure. Relying on firm-level data, collected by the Center for Monitoring the Indian Economy from company balance sheets and income statements, they study the changes in firm activity from 1988 to 2005. They highlight the differing responses to reforms across sectors, private versus public sector firms, and incumbent versus new firms.
 
The authors define liberalization as consisting of trade and entry liberalization, regulatory reform and privatization that lead to increased domestic and foreign competition. They present a series of stylized facts relating to the evolution of firms and sectors accompanying and following liberalization. The database covers both unlisted and publicly listed firms from a wide cross-section of manufacturing, services, utilities, and financial industries. Approximately one-third of the firms in the database are publicly listed and the remaining two-thirds are unlisted. The companies covered account for more than 70 percent of industrial output, 75 percent of corporate taxes, and more than 95 percent of excise taxes collected by the Government of India.

Detailed balance sheet and ownership information permits the authors to analyze a range of variables such as sales, profitability, and assets for approximately 15,500 firms classified across 109 three digit industries encompassing agriculture, manufacturing, and services. Therefore, in contrast to most existing firm level studies that focus on manufacturers, the authors are able to study the firms in the services and agriculture sectors as well. The data also permit distinction according to ownership categories such as state-owned, business groups, private stand-alone firms, and foreign firms. The authors divide the years from 1988 to 2005 into five sub-periods: 1988–90, 1991–94, 1995–98, 1999–2002, and 2003–05. This division into sub-periods is intended to capture the effects of various reforms taking place over time.

The authors present detailed information on the average number of firms, firm size, as measured by assets and sales, and profitability as measured by operating profits and the return on assets. The information is presented by sector as well as by category of firm: state-owned enterprises, private firms incorporated before 1985 (old private firms), private firms incorporated after 1985 (new private firms), and foreign firms for the five sub-periods. Sales, entry, profitability, and overall firm activity are interpreted as disaggregated measures of economic growth and proxies for efficiency; and thus, they provide an understanding of the effectiveness of reforms. The authors also look at market dynamics with regard to promotion of competition in order to understand the efficiency of resource allocations. They also examine the evolution of industrial concentration over time.
 
Alfaro and Chari find some evidence of a dynamic response among foreign and private firms as reflected in the expansion of their numbers as well as growth in assets, sales, and profits. But overall, they find that the sectors and economy continue to be dominated by the incumbent state-owned firms and to a lesser extent traditional private firms that were incorporated before 1985. Sectors dominated by state-owned and traditional private firms prior to 1988–90, where dominance is defined by 50 percent or larger share in assets, sales, and profits, generally remain so in 2005. Interestingly, rates of return remain remarkably stable over time and show low dispersion across sectors and across ownership groups within sectors. Not only is concentration high, but there is persistence in terms of which firms account for the concentration.

The exception to this broad pattern is the growing importance of new and large private firms in the services industries in the last ten years. In particular, the assets and sales shares of new private firms in business and IT services, communications services and media, health, and other services have expanded at a rapid pace. These changes coincide with the reform measures that took place in the services sectors after the mid-1990s, and they are also consistent with the growth in services documented in the aggregate data.

According to Joseph Schumpeter (1942), creative destruction, defined as the replacement of old firms by new firms and of old capital by new capital, happens in waves. A system-wide reform or deregulation such as the one implemented in India may have been the shock that prompted the creative destruction wave. Creation in India seems to have been driven by new entrants in the private sector and foreign firms forcing the incumbent firms to shape up as well. Outside of the services sectors noted in the previous paragraph, and especially in many manufacturing sectors, transformation seems not to have gone through an industrial shakeout phase in which incumbent firms are replaced by new ones. In many of these sectors, stateowned enterprises and private business groups have continued to dominate despite many liberalization measures.

Different explanations may account for these findings. In part, continued dominance of public sector firms in certain sectors may reflect the high barriers to exit that not only impede destruction of marginal firms but also discourage new firms from entry. On the one hand, potential entrants know that exit of public sector firms is unlikely; on the other hand, they may fear paying high exit costs in case they fail to find a foothold. An additional explanation, perhaps not sufficiently stressed in the debate, is the possibility that entrenched public sector and business group firms subvert true liberalization in sectors in which they dominate. The authors find, for example, that both industry concentration and state ownership are inversely correlated with measures associated with liberalization.

Recent literature highlights the idea that economic growth may be impeded not simply by a lack of resources such as capital and skilled labor, but also by a misallocation of available resources. The high levels of state ownership and ownership by traditional private firms in India raise the question of whether significant gains could be made simply through the allocation of existing resources from less efficient to more efficient firms.

Land Reforms, Poverty Reduction, and Economic Growth: Evidence from India

In “Land Reforms, Poverty Reduction, and Economic Growth: Evidence from India,” Klaus Deininger and Hari K. Nagarajan consider the important but relatively neglected issues of land market policies and institutions. They focus attention on three issues: the role of rental markets in land, the contribution of land sales to the promotion of efficiency, and the potential benefits of better land ownership records and the award of land titles. The authors posit that well-functioning rental and sales markets lead to superior outcomes by raising productivity and providing improved access to land. On an average, these markets shift land toward more efficient farmers, thus contributing to poverty alleviation. The paper also brings into question the long-held view that land sales markets are dominated by distress sales whereby poor farmers facing credit constraints are forced to sell their land for below-market prices to their creditors.

In evaluating the impact of rental markets, the authors test three hypotheses: 

1. Whether a household becomes a lessor or a lessee should be a function of the household’s agricultural ability. Efficient but land-poor households would rent additional land to cultivate while inefficient and land-abundant households should rent out their land for cultivation by other more efficient households. In this manner, well-functioning rental markets in land enhance productivity and improve factor use in the economy.
2. The presence of high transactions costs inhibits households from participation in rental markets. These costs may force households to withdraw from rental transactions altogether and undermine productivity.
3. Participation in rental markets is crucially impacted by wage rates offered in the market. Increases in wage rates will prompt households with low ability to manage their land to rent their land to other households. The resulting increase in the supply of land to the rental markets leads to lower rental rates.

Using survey data, the authors test these various hypotheses. They show that rental markets improve productivity of land use by transferring land to more efficient producers. The results suggest that the probability for the most productive household in the sample to rent additional land is more than double that of the average household. The paper also shows that higher land and lower labor endowments increase the propensity of households to supply land to the rental market. By transferring land to labor-rich but land-poor households, markets allow gainful employment of rural labor. The current policies have severely curtailed rental and have therefore retarded advancement of efficiency and equity in rural India.

The authors next turn to markets for land sales. They examine the impact of a well-functioning land sales market on land access. The long-held view has been that land sales are primarily motivated by adverse exogenous shocks. To the contrary, the authors find that such markets have helped more productive and more labor-abundant farmers to gain access to land. The authors also show that land sales markets exhibit greater activity in the presence of higher economic growth. This suggests that if other factor market imperfections are removed, the role of sales markets in promoting equity and efficiency will be expanded. Finally, identifying the source of shocks leading to distress sales and adopting policies that directly address these shocks can ameliorate the adverse effects of such sales in otherwise well-functioning land sales markets.

The last issue addressed in the paper concerns the importance of land administration for the promotion of efficient rental and sales markets. In India, there exist multiple institutions governing land records, registration, and transactions. This situation has led to a duplication of land records, leading to confusion and conflicts over ownership. It also creates a general sense of insecurity of tenure. The authors argue that the computerization of land records can help alleviate these problems. They cite Karnataka and Andhra Pradesh as examples of this experience. They note that the computerization of records can reduce petty corruption, ease access to land records, and possibly increase the probability of land becoming acceptable as collateral to obtain credit.

       

The seventh annual India Policy Forum conference convened in New Delhi from July 13-14. This seventh volume of the India Policy Forum, edited by Suman Bery, Barry Bosworth and Arvind Panagariya, cover economic growth, infrastructure, and politics in India. The editors' summary appears below, and you can download a PDF version of the volume, or access individual articles by clicking on the following links:

Download India Policy Forum 2010-2011 - Volume 7 »

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EDITORS' SUMMARY

The India Policy Forum held its seventh conference on July 13 and 14, 2010 in New Delhi. This issue of the journal contains the papers and the discussions presented at the conference, which cover a wide range of issues. The first paper examines the services sector in India, evaluating its growth and future prospects. The second paper looks at India’s corporate sector, analyzing the profitability of firms in the wake of liberalization. The third paper explores the reasons for the large time and cost overruns that have been endemic to Indian infrastructure projects. The final two papers focus on more political issues, looking at the impact of political reservations used to increase women’s political voice, as well as the politics of intergovernmental resource transfers.

Among fast-growing developing countries, India is distinctive for the role of the service sector. Whereas many earlier rapidly growing economies emphasized the export of labor-intensive manufactures, India’s recent growth has relied to a greater extent on the expansion of services. Although there are other emerging markets where the share of services in Gross Domestic Product (GDP) exceeds the share of manufacturing, India stands out for the dynamism of its service sector. Barry Eichengreen and Poonam Gupta critically analyze this rapid service-sector growth in their paper “The Service Sector as India’s Road to Economic Growth?”

Skeptics have raised doubts about both the quality and sustainability of the increase in service-sector activity. They have observed that employment in services is concentrated in the informal sector, personal services, and public administration—activities with limited spillovers and relatively little scope for productivity improvement. They downplay information technology and communications-related employment on the grounds that these sectors are small and use little unskilled and semi-skilled labor, the implication being that a labor-abundant economy cannot rely on them to move people out of low-productivity agriculture. Some argue that the rapid growth of service sector employment simply reflects the outsourcing of activities previously conducted in-house by manufacturing firms—in other words, that it is little more than a relabeling of existing employment. They question whether shifting labor from agriculture directly to services confers the same benefits in terms of productivity growth and living standards as the more conventional pattern of shifting labor from agriculture to manufacturing in the early stages of economic development.

This paper evaluates these claims, coming up with an in-depth look at the services sector in India. Eichengreen and Gupta find that the growth of the sector has been unusually rapid, starting 15 years ago from a very low level. The acceleration of service-sector growth is widespread across activities, but the modern services such as business services, communication, and banking are the fastest growing activities. Other rapidly growing service sectors are hotels, restaurants, education, health, trade, and transport. Some observers have dismissed the growth of modern services on the grounds that these activities constitute only a small share of output and therefore contribute only modestly to the growth of GDP. However, the results show that the contribution of the category communication, business services, and financial services has in fact risen to the point where this group contributes more to growth of GDP than manufacturing. A slightly broader grouping of communication, business services, financial services, education, health, and hotels accounted for roughly half of total growth of the service sector in 2000–08. These activities explain most of the post-1990 acceleration in service sector growth.

Modern services have been the fastest growing in India and their takeoff began at much lower incomes than in the Organisation for Economic Co-operation and Development (OECD) countries. This, clearly, is a unique aspect of the Indian growth experience. Furthermore, the expansion of the modern service sector is not simply disguised manufacturing activity. Only a relatively small fraction of the growth of demand for services reflects outsourcing from manufacturing. Most production that does not go towards exports, in fact, derives from fi nal demand at home. Thus, the growth of service sector employment does more to add to total employment outside agriculture than outsourcing arguments would lead one to expect.

Looking at the proximate determinants of services growth, Eichengreen and Gupta show that tradable services have grown 4 percentage points a year faster than nontradable services, other things equal. Services that have been liberalized have also grown significantly faster than the average. Regulatory change has been an important part of the story: where essentially all services were heavily regulated in 1970, the majority have since been partially or wholly deregulated. The services segments which were both liberalized and tradable grew 7–8 percentage points higher than the control group (nontradable/nonliberalized services). All this implies that policy makers should continue to encourage exports of IT, communication, fi nancial, and business services while also liberalizing activities like education, health care, and retail trade, where regulation has inhibited the ability of producers to meet domestic demand.

The fact that the share of services has now converged more or less to the international norm raises questions about whether it will continue growing so rapidly. In particular, it will depend on the continued expansion of modern services (business services, communication, and banking). But, in addition, an important share of the growth will result from the application of modern information technology to more traditional services (retail and wholesale trade, transport and storage, public administration and defense). This second aspect obviously has more positive implications for output than for employment.

Finally, the authors find that the mix of skilled and unskilled labor in manufacturing and services is increasingly similar. Thus it is no longer obvious that manufacturing will need to be the main destination for the vast majority of Indian labor moving out of agriculture, or that modern services are a viable destination only for the highly skilled few. To the extent that modern manufacturing and modern services are both constrained by the availability of skilled labor, growth in both areas underscores the importance for India of increasing investments in labor skills.

The paper concludes that sustaining economic growth and raising living standards will require shifting labor out of agriculture into both manufacturing and services, not just one or the other. The argument that India needs to build up labor-intensive manufacturing and the argument that it should exploit its comparative advantage in services are often posed in opposition to one another. Eichengreen and Gupta argue that these two routes to economic growth and higher incomes are in fact complements, not incompatible alternatives.

In their paper “Sources of Corporate Profits in India: Business Dynamism or Advantages of Entrenchment?” Ashoka Mody, Anusha Nath, and Michael Walton ask whether the liberalization during the last two decades has led to increased competition, characterized by innovation and growth, or to profiteering through entrenchment and increased market power of the large firms. While the authors consider various indicators of market structures, the main focus of their analysis is the evolution of the profit rate at the firm level in the wake of liberalization. The authors find that while liberalization induced considerable new entry in the 1990s, that pattern did not continue into the 2000s. On the whole, the major business houses and public sector firms were able to maintain their dominance in terms of market share. 

The authors employ firm-level data from the Prowess database, which provides detailed information on large- and medium-sized companies in India. They focus on firms listed on the Bombay Stock Exchange. While they present some trends for the period spanning 1989–2009, their core econometric analysis covers the shorter period from 1993 to 2007, during which the sample size increased from 1,000 to about 2,300 firms. Several significant conclusions emerge from the authors’ discussion of corporate and macroeconomic trends and their econometric analysis.

First, despite some deviations in the early years, they find a consistent pattern that the corporate profit rate—measured as a return on assets—has gone up and down in line with overall economic growth. Profit rates were high in the early 1990s (with a median rate of 10–12 percent) when growth accelerated and fell subsequently as GDP growth decelerated until around 2001 (reaching about 4 percent). The rates rose again (to about 8 percent in 2007–08) as growth in the Indian economy accelerated again.

Second, unless the expansion of the tradable sectors lagged behind the growth in nontradable sectors—a possibility that cannot be ruled out—the trade liberalization of the late 1980s did not have a major influence on corporate profi ts. There is a striking similarity in the evolution of profitability in the tradable and nontradable sectors, both moving in unison with domestic growth. Tradable sectors enjoyed a somewhat higher profit rate than nontradable sectors.

In contrast to trade liberalization, industrial deregulation was associated with a more definite impact on profitability. Following deregulation around 1991, the number of firms increased in virtually all sectors. This increase was associated with reduced market shares. The authors’ econometric analysis suggests that smaller market shares, in turn, were associated with reduced profitability. Thus, in the second half of the 1990s, slower GDP growth and the scramble for market shares both contributed to driving down profit rates. 

The bulk of new entry, in terms of numbers, was of Indian stand-alone firms, but both government-owned firms and business houses remain dominant in terms of sales and asset shares. Indeed, the share of business houses in the total sales rose slightly from 41 percent in 1989 to 42 percent in 2008.

Firm profitability does show substantial year-to-year persistence, raising the possibility of some market power. But the persistence declines when profitability is averaged over longer periods (up to four years), implying that some “super-normal” profits are whittled away over time. Also, more efficient firms tend to have more persistent profits. Thus, some part of the persistence reflects greater efficiency, although because of the overlap between efficient and large firms, the possibility that market power may play a role in maintaining the profit rate over time cannot be completely ruled out.

There is no consistent evidence of a general influence of market concentration on profitability: if anything, firms in less concentrated sectors have slightly higher profit rates. The 2000s witnessed some reconcentration in some sectors, affecting about a third of all the firms, but the profit behavior of firms in re-concentrating sectors appears to be similar to that in the overall sample. Firms with growing market shares do enjoy higher profitability, but the pattern of results is more consistent with causality fl owing in the other direction, that is, with the success of dynamism. In particular, this association is at least as strong for small firms and for less concentrated industries. 

This said, following significant new entry and competition for market shares in the first half of the 1990s, the pace of entry abruptly stalled in the late 1990s, market shares stabilized, and concentration rates started to rise again in some sectors. Thus, the findings are also consistent with the possibility that the phase of competitive dynamism may be diminishing, with incentives for the exercise of market power and investment in business– government relationships being on the rise.

Finally, the authors’ econometric results show that the faster a firm grew, the higher was its profitability. Supporting descriptive statistics add interesting nuances to this finding. The gap in firms’ growth rates opened up in the 2000–07 period. During that period, the fast-growing firms opened up the largest gap in profitability rates relative to the medium-growth firms. Slow growing firms, typically much smaller in size, have had particularly low profit rates and have actually been shrinking in terms of real sales. This suggests that efficiency was rewarded: the dynamic medium-sized firms were able to grow fast and garner sizeable profits, reinforcing their ability to grow. The smallest firms fell increasingly behind. Thus, the shakeout resulted in a potentially more efficient structure.

Greatly expanded level of infrastructure investment is critical to sustaining Indian economic growth. During the last decade, an increasing volume of funds has been allocated to building infrastructure, and successive governments have accorded infrastructure a high priority. Nevertheless, delays and cost overruns remain large and frequent. Moreover, owing to a paucity of research on the subject, our understanding of the causes behind the cost and time overruns and their remedies remains poor. These issues assume additional importance in view of the recent changes in the official procurement policy in infrastructure. The central government as well as state governments are increasingly looking to private funding for infrastructure projects principally through public–private partnerships (PPPs). Though a shortage of funds within the government sector is largely responsible for this shift, there is equally a belief that private-sector participation can reduce delays and cost overruns. However, there is insufficient empirical work to either support or repudiate this confidence in the superiority of the private sector.

In his paper “Determinants of Cost Overruns in Public Procurement of Infrastructure: Roads and Railways,” Ram Singh provides a detailed analysis of time and cost overruns in infrastructure projects in India using two large datasets that contain information on the key dates for implementing and completing projects and the difference between planned and actual costs. The first dataset includes 934 infrastructure projects completed during April 1992–June 2009. The second dataset includes 195 road projects under the supervision of the National Highways Authority of India (NHAI). The analysis develops several hypotheses and subjects them to empirical testing. Among other issues, the paper compares delays and cost overruns in PPPs with traditionally funded projects.

A simple tabulation of the data shows large cost overruns, averaging 15 percent, and time delays of about 80 percent. However, the author also finds that delays and cost overruns have declined over time. It is also evident that time delays are the primary cause of cost overruns and that larger projects lead to larger percentage cost overruns. Projects in sectors such as roads, railways, urban development, civil aviation, shipping and ports, and power have experienced much longer delays and higher cost overruns than those in other sectors, but the author finds no evidence of any regional pattern of cost overruns or delays. He suggests that incompleteness in the initial planning and contracting is responsible for many of the cost overruns.

The study shows that the design of the contract has a significant bearing on the level of delays. Traditional item-rate contracts provide little or no incentives to avoid delays. In contrast, since a PPP allows contractors to reap returns as soon as the project is complete, it creates a strong incentive to complete the project at the earliest possible date. Moreover, by bundling responsibility for maintenance with construction, the PPP also motivates contractors to avoid compromising on quality. Somewhat surprisingly, PPP projects experience higher cost overruns even though they have significantly lower time delays. The author attributes the shorter time delays to the fact that the project revenues do not begin until it is complete. The larger cost overruns are more puzzling, but may reflect incentives to expand the scope of the project.

Finally, according to the author, a comparison of road with railways sector projects suggests that organizational factors also contribute to delays and cost overruns. The author identifies three specific aspects. The railways sector is slower during planning and contracting phases. Second, contract management by the railways sector is poorer than by the roads sector. While the NHAI awards most project works to a single contractor, the railways award different works to different contractors. This results in poor project coordination. Third, in the railways sector, projects are allocated funds only for the relevant fiscal year and this is done in the second half of the year. The NHAI’s project delivery mechanism is not subject to this constraint.

Despite recent progress in India toward the social inclusion and empowerment of women, their presence in the country’s state and national lawmaking bodies remains low, raising concerns about how well women’s interests are represented. Previous empirical evidence has substantiated these concerns: women have different policy preferences than men, and elected leaders tend to implement policies in line with their own personal policy preferences, regardless of earlier campaign promises. These arguments provide an important motivation for gender-based affirmative-action policies.

In order to increase women’s political voice, the Indian government amended its constitution in 1993, devolving significant decision-making powers to village-level councils called Gram Panchayats (GPs) and requiring a randomly selected third of all members and leaders (Pradhans) of these councils to be reserved for women. Most recently, in 2010, the upper house of the Indian parliament passed a bill applying similar reservation requirements to the state and national levels of government in the face of considerable resistance and skepticism. Despite the widespread adoption of such gender-reservation policies, several concerns about their effectiveness remain. First, little will change if husbands of female leaders elected to reserved seats lead by proxy, and second, reservation could leave fewer seats to be contested among other disadvantaged groups for which reservations were not established, such as India’s Muslims.

Using new data spanning 11 Indian states, the paper by Lori Beaman, Esther Duflo, Rohini Pande, and Petia Topalova, “Political Reservation and Substantive Representation: Evidence from Indian Village Councils,” assesses the impact of introducing political reservation in India’s GPs, with particular attention to the aforementioned concerns. In conducting their study, the authors collect GP meeting data across fi ve economically and socially heterogeneous states, obtain data on public-good provision from a nationwide survey, and conduct their own survey of 165 GPs within the Birbhum district of West Bengal.

The study examines the effect of reservations in local village councils; the results are likely to be applicable to similar provisions within higher levels of government because the electoral process is the same, voter participation is high, and political parties invest significant resources in elections across all levels of government. Furthermore, by exploiting the random assignment of GP gender reservations, the authors are able to ensure that observed effects can be attributed to political reservations, rather than other factors, such as social attitudes toward women and local demand for public goods. The expansive data and novel study design allow the authors to shed light on three distinct elements of the debate on gender reservations in policymaking: politician selection, citizen participation in politics, and policymaking. 

First, the authors assess the degree to which reservation affects politician selection. Encouragingly, they fi nd no evidence that reservation for women has caused the crowding-out of other politically underrepresented social groups. Evidence does suggest, however, that women elected to reserved seats are less experienced and more likely to enlist their husband’s help in carrying out their duties as Pradhan. Nevertheless, two years into their tenure, female Pradhans from reserved GPs claim they are as comfortable and effective in their roles as their counterparts in nonreserved seats.

The study also reveals the causal mechanisms through which issues important to women might receive insufficient attention in local government. The authors hypothesize that underinvestment in what they determine are “female-friendly” issues occurs because male leaders either possess entirely different preferences, or discriminate against the viewpoints of the opposite gender, regardless of whether or not their preferences diverge. The study revealed that neither is the case. Leaders in reserved GPs are neither more likely to react positively to a female-friendly issue, nor more likely to respond favorably to the inquiry of a female participant in Village Council (Gram Sabha or GS) meetings. On the contrary, women in both reserved and nonreserved GPs were found to receive more constructive responses in these meetings then men. This suggests that the problem lies not in unsympathetic leadership, but in a lack of female constituent participation in the political process that would voice women’s policy concerns. Accordingly, the study also examines the effect of gender reservation on female participation in politics. Reservation does have a positive effect on whether women participate at all in the GS meeting, and the degree to which they remain engaged throughout the meeting. Therefore, inasmuch as electing women to Pradhan seats continues to encourage the participation of women in GS meetings, the reservations will continue to prove effective.

Finally, the study takes advantage of new data to elucidate earlier claims regarding the effects of political reservations on allocations of public goods. A first dataset, much broader in geographic scope than that of previous studies, confirms earlier findings that female Pradhans elected to reserved seats deliver more drinking water infrastructure, sanitation, and roads than their nonreserved counterparts. However, in exploiting the richer cross-time variation of a second dataset, the study reveals that reservations have a much broader impact across sectors than previously thought. The data from the Birbhum region of West Bengal allow the authors to compare public goods allocation patterns between newly reserved GPs, GPs reserved twice in a row, and GPs that are currently unreserved but were reserved before. These new data indicate that, while continuing to push drinking water investments, women elected in the second term under a reserved seat also invest more in “male issues” such as school repair, health center repair, and irrigation facilities. These investment patterns are found to be enduring, as even male Pradhans elected to previously reserved seats continue to invest in female friendly issues, after female reservation for their GP has expired.

Taken together, the findings of the study provide important insights into how leaders in reserved seats are elected, affect policymaking, and actual policy outcomes. While women elected in reserved GPs do differ from their male counterparts in their experience as leaders, they are able to increase female participation in the political process and make different policy decisions. The basic structure of India’s fiscal federalism was in place within fi ve years of the country’s independence on August 15, 1947. The division of expenditure responsibilities and sources of revenue across units of the federation as well as the institutions for allocating resources between levels of government gave substantial discretion to the central government, thereby concentrating economic and political power at the federal level. The design was understandable in light of the perceived need to combat incipient forces of separatism and the economic logic of planned development. This framework for fiscal federalism has been remarkably stable, however, even as the fears of separatism faded, political power dispersed and new parties representing state interests gained representation at all levels of government, and markets replaced planners in directing investment.

In their paper “Inelastic Institutions: Political Change and Intergovernmental Transfer Oversight in Post-Independence India,” T.N. Srinivasan and Jessica Seddon Wallack examine the persistence, and in some cases strengthening, of centralizing features in India’s fiscal federalism, which is a surprising exception to the general trend toward decentralization that other analysts of India’s political economy have described.

The paper focuses in particular on the two institutions—the Finance Commission (FC) and the Planning Commission (PC)—that oversee the bulk of intergovernmental resource transfers. The FC, a constitutional body designed to be independent of both Center and state constitutionally defined jurisdictions, was created to ensure that states had predictable and stable resources and autonomy in their use. In practice, the FC has played a limited role relative to its constitutional potential. Many have argued that it has unique constitutional authority to oversee intergovernmental revenue transfers, but a substantial portion of these transfers are determined and allocated through the PC instead.

The PC, an entity created by a cabinet resolution and hence a part of the constitutional sphere of the Center, was to advise the Center on planning and plans for national development. In contrast to the FC, the PC has in fact played a much larger role in allocating transfers than advising would necessarily imply. As a transfer mechanism, it facilitates Central government oversight of states’ development policies and has ample scope for Central government discretion in transfers. The centralizing aspects of this arrangement have been highlighted in various high-profile public discussions questioning the division of responsibilities between the FC and the PC as well as the various mechanisms for transfers by the PC. Yet, little has changed in terms of the institutional oversight over resource flows.

The authors explore various explanations for the persistence of these centralizing features and conclude that the most likely explanation lies in the barriers that India’s federal institutions pose to collective action by states. State leaders have ample political reasons to seek greater control over their finances and in fact do appear to care about the centralizing implications of the fiscal federal framework. However, they are divided both by design—state boundaries were in many cases drawn on the basis of linguistic or cultural differences—as well as by the economic reality of diverging fortunes and varying dependence on transfers.

India’s institutions also offer no authoritative forum for states and Central government to discuss federal arrangements and propose alternatives. The available arenas for intergovernmental discussions are either toothless or have structures that create incentives for individualist behavior. The Union Parliament, for example, would be able to effect changes to the federal structure through instruments available to it under the constitution or through constitutional amendments if needed. However, the parliamentary system also gives those state parties that are part of the government a vested interest in preserving the status quo.

Srinivasan and Wallack’s analysis implies that there will be limited change in the intergovernmental transfer system, a conclusion that they find worrisome for India’s ability to adjust economically and politically to changing circumstances. Not only does conventional public finance theory favor decentralization of decision making with respect to the financing and provision of public goods and services, especially in heterogeneous societies, but “voices from below” are increasingly valuable as an information source about what is needed in a fast-changing world. They argue that India’s record of government performance also suggests a dearth of accountability, and that real decentralization of roles and responsibilities—not delegated expenditure duties—can be more effective in creating stronger performance incentives.

       

       

Event Information

A Brookings online discussion reviewing the 2015-2016 Indian budget.

On March 4, The India Project at Brookings hosted an online panel discussion to review the first full-year budget released by Prime Minister Narendra Modi’s government on February 28, 2015. Panelists discussed the significance of the budget, key takeaways, the hits, and misses, as well as what actions they would like to see the Indian government take vis-à-vis the Indian economy over the next few months. Panelists included James Crabtree, Mumbai bureau chief for the Financial Times; Eswar Prasad, the New Century Chair in International Trade and Economics at the Brookings Institution and senior fellow in Brookings’s Global Economy and Development program; and Shamika Ravi, fellow at the Brookings India Center in Delhi, in the Development Assistance and Governance Initiative at Brookings, and in Brookings’s Global Economy and Development program. Tanvi Madan, fellow in the Foreign Policy program and director of The India Project at Brookings, moderated the discussion.

Join the conversation on Twitter using #IndiaBudget

      

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On May 26, 2014, after the Bharatiya Janata Party won a convincing majority in India’s national elections, Narendra Modi took office as prime minister. The first Indian premier to be born after independence, he formed the first majority government in India in more than 25 years. Over the past 12 months, policymakers, corporate leaders, analysts, and the media in India and abroad have been watching closely to see whether Modi can deliver on the promises of growth, good governance, greater role and respect on the world stage, and getting things done.

On May 20, the India Project at Brookings hosted an event to assess the Modi government’s first year in office. The panel considered developments over the last year in the economic, social, energy, and foreign policy realms, as well as in domestic politics. Panelists discussed their perspectives of the government’s performance, where they see continuity vs. change, what has surprised them, what we might expect to see in the future, and key developments to look for over the next year.

Join the conversation on Twitter using #ModiYearOne

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• The Modi government in India turns one: An assessment

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• The Modi government in India turns one: An assessment

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• Uncorrected Transcript (.pdf)

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• 20150520_modi_government_transcript

       

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Over the last couple of years, a number of crucial political and policy-related developments have unfolded in India, as well as in U.S.-India relations. These developments have emerged as the next generation of Indian politicians, born after the country’s independence, is coming to the fore—including in parliament.

On October 7, The India Project at Brookings hosted a delegation of Indian parliamentarians to discuss the current state of Indian policy and politics. The panel featuring MPs from different political parties and states in India explored the state of the Indian economy and foreign policy, federalism, the role of regional parties, coalition politics, the role of the media and technology, and U.S.-India relations.

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Prime Minister Narendra Modi has made India’s external relations a key focus of his policy agenda over the past year and a half. The recently released book, "The Oxford Handbook of Indian Foreign Policy" (Oxford Press, 2015), is well-timed. Edited by David M. Malone, C. Raja Mohan, and Srinath Raghavan, the "Handbook" includes essays which focus on the evolution of Indian foreign policy, its institutions and actors, India’s relations with its neighbors, and its partnerships with major world powers.

On November 13, the Foreign Policy program at Brookings hosted a panel discussion featuring some of the contributing authors to the "Handbook." The panelists discussed the current state of Indian foreign policy, its past, and its future, as well as the tools available to India’s foreign policy practitioners today and the constraints they might face.

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The past year has been one of intense engagement in U.S -India relations with several high-level visits exchanged and working-level dialogues held between the two countries. Most recently, President Barack Obama and Prime Minister Narendra Modi met at the Paris climate change summit and Indian Defence Minister Manohar Parrikar will visit the United States to discuss the bilateral defense relationship.

On December 11, The India Project at Brookings hosted a conversation with U.S. Ambassador to India Richard Verma to reflect on developments in U.S.-India relations in 2015. He also discussed the recent high-level engagements on defense policy and climate change, as well as the road ahead for the bilateral relationship. Tanvi Madan, director of the India Project and fellow in Foreign Policy at Brookings moderated the discussion. Bruce Jones, vice president and director of Foreign Policy at Brookings provided introductory remarks.

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In this paper, we outline the manner in which design can help promote the Indian economy. We look at the status of design in India, review the country’s development challenges, discuss the opportunities of a design economy, and make recommendations to enhance design in India.

Highlights of Main Findings

• India’s design capacity in the number of patents granted is approximately 3 percent of China and less than 2 percent of the U.S.A.
• India’s industrial design capacity is approximately 1 percent of China and 6 percent of the U.S.A.
• Historically, non-resident entities have been granted the most number of patents within India.
• Since 2012, more patents have been granted to Indian entities abroad than the number of patents granted by the Indian government to either resident or non-residents entities within India.
• While in India and the U.S.A. the most number of patents are annually granted to non-resident entities, in China the most number of patents have been granted to resident Chinese entities since 2008.
• Among the broad economic factors that affect design economy in India, the role of higher education, FDI, digital connectivity, infrastructure and trade have been identified as the most important.

Some specific policy recommendations to boost design economy in India are:

• Curricular reform for research and development in higher education
• Workforce development for R&D sector
• Establishing design labs and special economic zones to focus on R&D
• Developing and enforcing domestic legislation for intellectual property protection<.li>
• Promoting greater collaboration between business, government, and academia

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A number of policymakers and analysts in the United States have called for countries like China and India to “do more” in the Middle East. Arguably, both Beijing and Delhi are doing more—though perhaps not in the way these advocates of greater Asian engagement in the Middle East might have wanted. President Xi Jinping recently traveled to the region and India’s Prime Minister Modi will return there over the weekend. After quick trips to Brussels for the India-EU Summit and a bilateral, as well as to Washington for the Nuclear Security Summit, Indian Prime Minister Narendra Modi will head to Riyadh tomorrow. The trip reflects not just the importance of Saudi Arabia for India but also the Middle East (or what India calls West Asia) and the opportunity this particular moment offers to Indian policymakers.

The Middle East has been crucial for India for decades. It’s been a source of energy, jobs, remittances, and military equipment, and holds religious significance for tens of millions of Indians. It’s also been a source of concern, with fears about the negative impact of regional instability on Indian interests. But today, as Modi visits, there’s also opportunity for Indian policymakers in the fact that, for a number of reasons, India is important to Saudi Arabia and a number of Middle Eastern countries in a way and to an extent that was never true before. 

It’s a two-way street

As it has globally, India has a diversified set of partnerships in the Middle East, maintaining and balancing its relationships with the Gulf Cooperation Council countries, Iran, and Israel. The region remains India’s main source of imported oil and natural gas (58 percent of its oil imports and 88 percent of its liquefied natural gas imports in 2014-15 came from the Middle East). In addition, as of January 2015, there were 7.3 million non-resident Indians in the region (64 percent of the total). These non-resident Indians remitted over $36 billion in 2015 (52 percent of the total remittances to India). Add to that India’s Sunni and Shiite populations (among the largest in the world), counter-terrorism cooperation with some countries, India’s defense relationship with Israel, the desire to connect with Afghanistan and Central Asia through Iran, and the potential market and source of capital it represents for Indian companies, and it becomes clear why this region is important for India. 

But, with many Middle Eastern countries pivoting to Asia or at least giving it a fresh look, India arguably has more leverage than it has ever had in the past. There have been a number of reasons why these countries have been looking east recently: 

• traditional strategic partnerships in flux and questions about the U.S. role in the region; 
• the economic slowdown in Europe and the U.S. following the 2008 financial crisis; 
• changing global energy consumption patterns; 
• growing concerns about terrorism in the region; 
• And, in Israel’s case, the boycott, divestment, and sanctions movement. 

In this context, India has some advantages. Its economy is doing relatively well compared to that of other countries and offers a market for goods and services, as well as potentially an investment destination. India, for example, has become Israeli defense companies’ largest foreign customer. 

Crucially for the oil and natural gas-producing states in the region, India also continues to guzzle significant—and growing—quantities of both. But, today, Delhi has buyer’s power. Why? Because oil prices are relatively low and there’s a lot of gas on the market, traditional buyers are looking elsewhere for fossil fuels or looking beyond them to cleaner energy sources. India, too, has more options and has been diversifying its sources of supply (compare India’s 74 percent dependence on the Middle East for oil in 2006-07 to the lower 58 percent that it gets from there now). 

India might still be dependent on the Middle East for energy, but now the Middle East also depends on India as a market.

Thus, India might still be dependent on the Middle East for energy, but now the Middle East also depends on India as a market. This has altered dynamics—and India’s increased leverage has been evident, for example, in the renegotiated natural gas supply deal between Qatar’s RasGas and India’s Petronet, which came with lower prices and waived penalties. Even countries like Iran, which now have more options for partners and have not hesitated to point that out to Delhi, still have an interest in maintaining their India option. Regional rivalries might have made Delhi’s balancing act in the region more complicated, but it also gives each country a reason to maintain its relationship with India. 

And the Modi government has been looking to take advantage of this situation. While its Act East policy received a lot more attention over the last couple of years—from policymakers and the press—this region hasn’t been missing from the agenda or travel itineraries. For example, Modi has traveled to the United Arab Emirates and met with Iranian President Hassan Rouhani on the sidelines of the last Shanghai Cooperation Organization conference, and the Indian president has traveled to Israel, Jordan, and the Palestinian territories. The Indian foreign minister has visited Bahrain, Israel, the Palestinian territories, Jordan, Oman, and the UAE and also participated the first ministerial meeting of the Arab-India Cooperation Forum in Manama earlier this year. The Modi government has also hosted the emir of Qatar, the crown prince of Abu Dhabi, the Bahraini, Iranian, Omani, Saudi, Syrian, and UAE foreign ministers, as well as the Israeli defense minister to India.

China’s increased activity in the region, as well as Pakistan’s engagement with Iran and the rush of European leaders to the latter, have led to calls for speedier action.

But there have been concerns that this engagement is not sufficient, particularly relative to that of some countries. For example, China’s increased activity in the region, as well as Pakistan’s engagement with Iran and the rush of European leaders to the latter, have led to calls for speedier action. The Indian foreign secretary’s recent comment that “we are no longer content to be passive recipients of outcomes” in this region also seemed to reflect the understanding that Delhi needs to be more proactive about deepening its relationships with the countries in the region, rather than waiting for them to take shape organically or just reacting to events as they occur. 

The Saudi connection

It is in this context that Modi travels to Riyadh. The relationship with Saudi Arabia is one of the key pillars of India’s Middle East policy. A major source of oil, jobs, and remittances, it is also a destination for over 400,000 Indians who go to the country for Hajj or Umra every year. In addition, in recent years, there has been more security cooperation, with Riyadh handing over individuals wanted in India and the two countries working together on countering money laundering and terrorism financing. 

The relationship has not been without problems from Delhi’s perspective. Just to list a few: 

• the Saudi-Pakistan relationship; 
• diaspora-related issues, including the treatment of Indian workers in-country and efforts towards Saudization that might limit employment opportunities for Indian expatriates;
• ideology-related concerns, particularly funding from Saudi Arabia for organizations in India, which might be increasing the influence of Wahhabism in the country; and
• regional dynamics, including Saudi Arabia’s rising tensions with Iran that has had consequences for Indian citizens, for example, in Yemen from where Delhi had to evacuate 4,640 Indians (as well as 960 foreigners).

More recently, incidents involving Saudi diplomats in India have also negatively affected (elite) public perceptions of the country, though the broader impact of this, if any, is unclear. Over the medium-to-long term, there are also concerns about potential instability within Saudi Arabia.

During Modi’s trip, however, the emphasis will be on the positives—not least in the hope that these might help alleviate some of the problems. The prime minister will be hosted by King Salman, who visited India as crown prince and defense minister just before Modi took office. He will also meet a slate of Saudi political and business leaders. The Indian wish-list will likely include diversification of economic ties, greater two-way investment, as well as more and better counter-terrorism cooperation. 

There will not be a large diaspora event—as Modi has done in Australia, Singapore, the UAE, United Kingdom, and the United States—but the prime minister will engage privately with members of the Indian community. He will also meet with Indian workers employed by an Indian company that is building part of the Riyadh metro. It is not hard to assess the reason for this particular engagement, given increased sensitivity in India (particularly in the media) about the treatment of citizens abroad, as well as the government’s interest in making a pitch for Indian companies to get greater market access. But, with Riyadh’s interest in creating jobs for Saudis, Modi will also try to highlight that Indian companies are contributing to the training and employment of locals (especially women) by visiting another Indian company’s all-female business process service center.

This will reflect the broader theme of highlighting to Riyadh and Saudis that it is not just India that benefits from the relationship—they do too. Some in India hope this has an additional effect: of giving Riyadh a reason not to let its relationship with Pakistan limit that with India, and perhaps occasionally making it willing to use some of its leverage with that country to India’s benefit. Despite recent irritants in the Saudi-Pakistan relationship, however, Delhi is realistic about the limits of weaning Riyadh away from Islamabad.

So does all this mean India will “do more” in the Middle East? For all the reasons mentioned above, the country has been involved in the region for a number of years—though, as the Indian foreign secretary has noted, this involvement was not in large part the product of active state policy. Indian interests in the region will likely increase in the future and, thus, so will its corporate and official engagement. But that engagement might not be what some American observers have in mind. As India’s capabilities grow, it might do more in terms of providing maritime security, intelligence sharing, evacuating expatriates when necessary, and contributing to U.N. peacekeeping operations. It could also potentially do more in terms of capacity building within these countries with the support of the host governments. There might also be scope for India to expand its West Asia dialogue with countries like the United States. But it will likely remain wary of picking sides or getting involved in non-U.N.-sanctioned military interventions in the region unless its interests are directly affected (the previous BJP-led coalition government did briefly consider—and then reject—joining the United States coalition in the Iraq war, for instance).

       

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In recent decades, India has taken on a growing global presence, one that has been seen as increasing even more since Prime Minister Narendra Modi took office nearly two years ago. In a new book, “India at the Global High Table: The Quest for Regional Primacy and Strategic Autonomy” (Brookings Institution Press, 2016), former U.S. ambassadors Teresita Schaffer and Howard Schaffer explore how India is managing its evolving international role, assessing the country’s strategic vision and foreign policy, and the negotiating behavior that links the two.

On April 20, The India Project at Brookings hosted a panel discussion to discuss the book and, particularly, four elements highlighted in it: India’s exceptionalism; its nonalignment and drive for “strategic autonomy;” its determination to maintain regional primacy; and, more recently, its surging economy.

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Editor's Note: For full disclosure, Tom Mann (joined by Norm Ornstein) filed an amicus curiae brief in Arizona State Legislature v. Arizona Independent Redistricting Commission.

James Madison would be pleased. The 5-4 decision announced today by the Supreme Court upholding Arizona’s use of the initiative to establish an independent redistricting commission is a model of constitutional reasoning and statutory interpretation. It underscores the essential connection between republican government and popular sovereignty, in which the people have the ultimate authority over who shall represent them in public office. The majority opinion quotes Madison to powerful effect: “The genius of republican liberty seems to demand . . . not only that all power should be derived from the people, but those entrusted with it should be kept in dependence on the people.”

Madison worried about the dangers of the manipulation of electoral rules to serve the immediate interests of political actors. He was himself the target of a gerrymander designed (unsuccessfully) to deny him a seat in the first Congress. The Elections Clause of the Constitution, by granting Congress the power to override state actions setting the time, place and manner of elections, was designed partly as a safety valve to contain the abuse of power by those in a position to determine which voters will hold them accountable.

Today’s intensely polarized politics drive major partisan campaigns to seize control of the redistricting authority in the states and to wield that power to boost prospects for majority standing in the House. Partisan gerrymandering is not the major source of our dysfunctional politics but it surely reinforces and exacerbates the tribal wars between the parties. A number of states have used the initiative device provided in their constitutions to establish independent commissions to replace or supplement the regular state legislative process in redrawing congressional and/or state legislative district boundaries. Such commissions are no panacea for partisan gerrymandering. Their composition and rules vary in ways that can shape the outcome. But the evidence suggests they can mitigate the conflicts of interest that are a part of the regular process and produce more timely plans less subject to judicial preemption.

The Court has upheld the right of those states to legislate electoral rules through a popular vote. Had the minority position prevailed, state laws governing many aspects of the electoral process would have been subject to constitutional challenge. And an important safety value available to the people of the states for responding to abuses of power by those in public office has been preserved.

This should not be read more broadly as a triumph of direct democracy over representative government. Many scholars who provided expert opinion supporting the majority opinion retain serious concerns about the overuse and misuse of initiatives and referendums. Instead, the decision strengthens the legitimacy of representative democracy by reinforcing the essential link between republican government and popular sovereignty.

       

With the economy still reeling from the effects of the recession, metropolitan areas have become increasingly willing to explore new approaches to economic development. Moving away from traditional one-size-fits-all approaches that emphasized Starbucks, stadium-building, and stealing businesses, metro leaders are instead crafting metropolitan business plans that grow jobs from within, building on their distinct market advantages.

By partnering with private industry, nonprofit intermediaries, universities, civic leaders, research institutions, and other interested parties, regional public sector leaders are working to strengthen their economies by focusing on those industries with the greatest potential for future growth.

For some regions, these efforts have involved helping existing firms make the transition to emerging industries. Northeast Ohio’s long struggle with post-deindustrialization was made worse by the Great Recession and the collapse of the auto sector and the foreclosure crisis.

In response, regional leaders came together to launch PRISM, the Partnership for Regional Innovation Services to Manufacturers initiative. The goal of PRISM is to help small and medium-sized manufacturers in old commodities industries, like steel and automotive, reinvent their products and business models to take advantage of growth opportunities in emerging markets like bio-science, health care and clean energy.

Led by the Manufacturing Advocacy and Growth Network (MAGNET), a regional intermediary organization, PRISM brings together higher education institutions, regional economic development organizations, and Ohio’s Edison Technology Centers to provide market research and business consulting services, increase firms’ access to capital and talent, and foster stronger relationships within growing industry clusters. [Full disclosure: The Brookings-Rockefeller Project on State and Metropolitan Innovation provided initial advisory support to PRISM.]

“Through PRISM, we hope to demonstrate that a growing manufacturing sector is not only possible, but desirable for the region,” says MAGNET president and CEO Daniel Berry. “Reclaiming the legacy of manufacturing innovation in Northeast Ohio will enable the region’s companies to create more well-paying jobs.”

In other parts of the country, partnerships are linking up existing industry strengths to create new growth opportunities. To ensure the Seattle region continues to be a global hub of innovation, public and private sector leaders have formed the Building Energy-Efficiency Testing and Integration (BETI) Center and Demonstration Network to develop new products, services and technologies around energy efficiency for customers around the world. BETI capitalizes and integrates this region’s distinct, competitive advantages – unparalleled software and information technology, strong sustainability ethos, an emerging building energy efficiency sector, and strong post-secondary institutions and talent that can support future demand. This is not a cookie cutter idea but one that can best work with the market formula found in the Puget Sound region.

With financial support from a federal i6 Green Challenge grant and a state match, BETI will help local businesses commercialize innovations in building energy-efficient technologies, platforms, and materials by providing product validation and integration services. In addition, BETI will foster greater collaboration among industry stakeholders, including businesses, entrepreneurs, trade associations, local and state government agencies, state universities, research networks, venture capitalists, and regional utilities.  

Both Northeast Ohio and the Puget Sound region arrived at these collaborative partnerships during the course of their efforts to develop metropolitan business plans. Like private sector business plans, these regional economic development plans are rooted in market dynamics and competitive assets. The metropolitan business planning process offers a framework for regional business, civic, and government leaders to assess their metro’s distinctive market position, identify pragmatic economic development strategies that capitalize on regional assets and set forth detailed implementation-ready plans for economic growth. Once established, these metropolitan business plans will act as roadmaps for metro economies as they drive the nation toward greater prosperity, increased job creation, and a leading position in the next economy.

      

In recent months, we’ve heard a lot about the tech industry's gender gap. According to the Bureau of Labor Statistics, women represent just 19.7 percent of software developers, an occupation with a median salary of over $92,000 a year.

Women’s underrepresentation in these and other well-paying tech jobs is a major concern given that women still earn only 78 cents for every dollar earned by men. Meanwhile, labor shortages in software development and other high-skill occupations have tech companies worried about whether they’ll be able to grow as fast as they’d like.

Seattle’s Ada Developers Academy takes aim at both challenges. This highly selective, tuition-free program prepares women students to be full-stack software developers, meaning that they can do both front-end—what the user sees—and back-end—what’s behind the scenes that makes everything work properly. Prior experience in tech isn’t necessary to earn a spot at Ada: The main prerequisite is a strong desire to pursue a career in software development.

Ada combines six months of intensive classroom instruction with a six-month internship at a sponsoring company so that students have the opportunity to apply what they’ve learned in real-world situations. Sponsoring companies—which currently include Nordstrom, Redfin, Zillow and Expedia, among others—also benefit from the internships, which provide direct access to prospective employees at a time when proficient software developers can be hard to find.

If Ada’s first cohort is any indication, the academy’s combination of rigorous in-class training and hands-on work experience has tremendous value on the job market. All 15 members of the inaugural class got job offers for software developer positions before they graduated from the program.

Seattle has long been known for its vibrant tech scene. Ada Developers Academy, its sponsoring companies and its graduates together enhance that reputation by fostering a more supportive environment for women in the city’s tech industry. In the face of serious gender disparities, organizations like Ada Developers Academy in Seattle show that it’s possible to create career pathways that will perhaps one day close the tech gender gap.

       

       

       

       

Before the City Club in Cleveland, Bruce Katz emphasized the importance of Ohio's older industrial cities for the state's overall prosperity and outlined, despite seemingly grim statistics, why now is the time for a rebirth of those places and how it can be achieved.

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For over 100 years, the driving force of Ohio’s economy has been the state’s so-called Big Eight cities—Columbus, Cleveland, Cincinnati, Toledo, Akron, Dayton, Canton, and Youngstown. Today, though, the driving reality of these cities is sustained, long-term population loss. The central issue confronting these cities—and the state and surrounding metropolitan area—is not whether these cities will have different physical footprints and more green space than they do now, but how it will happen.

The state must adopt a different way of thinking and a different vision of its cities’ future—and so must the myriad local, civic, philanthropic, and business leaders who will also play a role in reshaping Ohio’s cities. The following seven basic premises should inform any vision for a smaller, stronger future and subsequent strategies for change in these places:

• These cities contain significant assets for future rebuilding
  
• These cities will not regain their peak population
  
• These cities have a surplus of housing
  
• These cities have far more vacant land than can be absorbed by redevelopment
  
• Impoverishment threatens the viability of these cities more than population loss as such
  
• Local resources are severely limited
  
• The fate of cities and their metropolitan areas are inextricably inter-connected
  

These premises have significant implications for the strategies that state and local governments should pursue to address the issues of shrinking cities.

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Paper on Shrinking Cities Across the United States »

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The tragic and deadly attacks in Paris, the day before leaders were set to arrive in Antalya, Turkey, for the G-20 summit, underlined the divisions that Syria, its fleeing population, and the terrorists of ISIS have created, as fear and short-term political calculations seem to shove aside policies aimed at sustainable solutions to the unprecedented refugee challenge.

It had started on a more hopeful note. Turkey, which chairs the G-20 this year, had placed the refugee issue on the agenda, hoping for a substantive global dialogue while looking for broad-based solutions to the crisis in Syria and the terrorism challenge. No doubt the 2 million refugees in Turkey played a big role, as President Erdogan and other officials tried to rally support for this unusual situation in a variety of G-20 and other venues.

Turkey was supported by another full member of the G-20, the EU, the only non-nation state member of the group, which shrugged off its complacency when hundreds of thousands turned up on its shores in 2015. European Council President Donald Tusk and Jean-Claude Juncker, European Commission president, echoed the Turkish President in calling for a global response: “Meeting in Turkey in the midst of a refugee crisis in Syria and elsewhere, the G-20 must rise to the challenge and lead a coordinated and innovative response… recognizing its global nature and economic consequences and promote greater international solidarity in protecting refugees.”

The G-20 is an imposing group, consisting of the world’s 20 largest economies, accounting for 85 percent of its GDP, 76 percent of its trade, and two-thirds of its population. Established in 1999 and growing in reach since the 2008 financial crisis, it should be a body that carries weight beyond the economic, with effective mechanisms to have impact on the global agenda. Yet, while Syria and the refugee crisis was the first time the G-20 stepped outside its usual narrower economic mandate, the agenda was quickly overtaken.     

The tragedy in Paris highlighted deep divisions over the refugees. Poland’s new government was the first to announce that it would stop participating in the EU resettlement plan whereby it would have accepted 5,000 refugees. Politicians from Hungary, the Czech Republic, Slovakia as well as those with a nativist message from the Nordic countries, France, Germany, and others saw an opening for tighter border controls and a much less welcoming approach to the more than 800,000 refugees that have already made their way into Europe, not to mention the many more on the way. Such views linking refugees to terrorism are not restricted to Europe but can be seen on the other side of the Atlantic, as U.S. presidential candidates and some 27 State Governors declared that Syrian refugees were not welcome.

At this early date, except for a single Syria passport “holder”—a document easily acquired these days, and found near one of the suicide bombing sites in Paris—all those who died or are being sought as suspects are citizens of either France or Belgium. Clearly, there could be some who get into Europe by using the refugees as a cover but with literally thousands of Europeans fighting in Syria, the real threat emanates from the small number of home-grown extremists in Europe who have easy access to the West and a cultural and linguistic familiarity that will elude newcomers for years. This was the same scenario one saw in the Madrid, London, Copenhagen, and the Charlie Hebdo attacks in Paris earlier this year. 

Fear is winning out over policy

The EU also appears in disarray on aiding the 4 million refugees in Jordan, Lebanon, and Turkey. This is significant since it is reduced funding and aid that is leading to the worsening of conditions in Jordan, Lebanon, and Syria, and driving many to Europe. Turkey too is reaching its limits and may potentially face a million or more new refugees if Aleppo falls. Yet funds pledged to these countries remain largely unfulfilled—of the 2.3 billion euros pledged by EU governments, only 486 million are firm government offers. The discussions between the EU and Turkey for additional aid to refugees of 3 billion euros also remain less-than-certain since such aid requires that EU countries agree to receiving and distributing asylum-seekers from Turkey. It also underlines the lack of funding for Jordan and Lebanon.    

In the end, the G-20 yielded little by way of concrete actions on refugees, though additional border controls, enhanced airport security, and intelligence sharing were promised. There was a call for broader burden sharing and greater funding of humanitarian efforts, as well as a search for political solutions. The G-20 also added little to the broad outlines of a potential settlement on Syria discussed in Vienna, Austria, on November 14, 2015, a day before the start of the G-20 summit.

Unfortunately, these are the very things that separate G-20 members among and within themselves. The growing danger is that fear and political opportunism rather than well-thought-out polices will guide the global response to the greatest human displacement tragedy since World War II. It is precisely this fearful and exclusive reaction that ISIS seeks. Indeed, that legacy may live long after ISIS is gone.                           

       

       

The mobile economy in China and India has grown by leaps and bounds over the past decade. Mobile technology has the potential to shrink the broadband gap, improve financial inclusion, and support humanitarian efforts. A recent report from the Boston Consulting Group adds another interesting perspective into the existing conversation about the impact of mobile technologies. India appears poised to eschew building up its fixed broadband infrastructure and jump directly to mobile. Small and medium-sized enterprises (SMEs) in India appeared poised to take advantage of this amazing change.

Mobile innovation lower costs and improve performance

Source: Boston Consulting Group

Maximum download speeds have risen greatly when comparing second generation networks with current fourth generation technology. 2G networks were capable of reaching 20 kilobits per second and 4G technologies can reach 250 megabits per second, which is about 12,000 times faster. At the same time the actual cost of network infrastructure per megabyte is falling dramatically: a 95 percent decrease from 2G to 3G and 67 percent decrease from 3G to 4G. Subsequently, the consumer cost of data per megabyte decreased sharply. From 2005 to 2013, the average cost of a mobile subscription relative to the maximum data speed dropped about 40 percent each year or 99 percent in an 8 year period. Higher speeds and lower costs make mobile a viable development platform for SMEs. In America this had led to the growth of the app economy. In India this effect is even more pronounced.

Widespread use of mobile technologies fuels the leap

In 2013 India reached 900 million mobile connections and became the second largest market in terms of mobile connections and unique subscribers. Indians spend 45 percent of their incomes on mobile technologies and platforms whereas Americans only spend 11 percent.

Source: World Bank Indicators

For the average Indian, mobile is the only point-of-entry to the Internet. Mobile devices are much more common than computers. The PC penetration rate in India of 5 percent stands in stark contrast to the 75 percent rate for mobile devices. Rates of fixed broadband Internet usage increased at a snails pace in India and at the same time mobile cellular subscriptions soared. More and more people in India are choosing to access Internet solely through mobile devices. Currently about 34 percent of people in India access the Internet exclusively from mobile devices. Flipkart an Indian e-commerce company predicts that 75 to 80 percent of their customer’s traffic will come on mobile platforms. The proliferation of mobile technologies in India provides incentives for SMEs to focus on developing mobile oriented business models.

Existing mobile focused SMEs lead the leap

SMEs in India place a greater emphasis on mobile platforms compared to companies in other countries. About 25 to 35 percent of surveyed SMEs in India are identified as mobile leaders, firms that use mobile productivity tools, operational tools (real-time job tracking or mobile data analytics) and sales and marketing tools. In developed countries such as Germany, only 14 percent of the surveyed SMEs are mobile leaders. Further, mobile oriented SMEs are thriving in India in a variety of fields. India’s largest E-commerce marketplace Flipkart Sidesteps has seen its traffic grow twice as face on mobile when compared with PC. Anti-violence apps such as FightBack and mobile health initiatives such as Swasthya Samvedana Sena are also experiencing great success.

India is in the midst of a mobile revolution that is categorically different than other parts of the world. Without existing complex legacy systems, businesses in India are now in the unique position to leapfrog terrestrial Internet technologies and reap the full benefits of a truly mobile economy.

Yikun Chi contributed to this post

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Mobile devices are making a big difference in the lives of billions of people around the world who use them every day. Internet-enabled smartphones and tablets provide access to information and a channel of communication for users. Building wireless networks to support mobile devices requires large capital investments from wireless carriers who must purchase wireless spectrum and infrastructure. To ensure that mobile services are reliable and affordable, national governments must allocate enough wireless spectrum to commercial carriers to satisfy demand. This is the subject of a new paper from Shamika Ravi and Darrell M. West titled “Spectrum Policy in India."

A scarce resource

Mobile devices typically operate on frequencies from 30 kHz to 300 GHz on the radio spectrum. Unless spectrum is allocated efficiently, the scarcity of available frequencies leads to poor quality and high costs for mobile broadband. The growing demand for mobile service in India currently exceeds the amount of spectrum available to wireless carriers. The scarcity of wireless spectrum limits reliable Internet access for mobile subscribers who have no alternative point of access. According to the Cellular Operators Association of India, nearly 60 percent of Internet users only have access through their mobile phones.

Mobile service in India is relatively expensive for many consumers because the Indian military reserves so much spectrum for their own use. Much of this spectrum goes underutilized, even as commercial carriers plead for more spectrum to be released. When the Indian government does release spectrum, it is typically through auctions with high starting bids. Setting high starting bids for blocks of spectrum can lead to high selling prices that force wireless carriers to take out large loans. Higher prices for spectrum raise costs for consumers and reduce private sector investment in wireless infrastructure. Rather than make spectrum artificially scarce, the Indian government should work with wireless carriers to lower the prices for consumers. 

Investing in India’s future

Reliable mobile service has the potential to greatly enhance economic growth in India. Analysis from the Boston Consulting Group found that the India’s mobile sector grew at 12.4 percent annually from 2009-2014; it now accounts for 2.2 percent of India’s gross domestic product. Potential growth comes from filling gaps in educational and health care spending in rural communities. Innovative mobile applications provide a low cost method of sending education and health care resources to underserved rural communities that lack physical infrastructure. In India’s rapidly growing cities, mobile services are seen as a way to improve the quality of government services and promote entrepreneurship. Prime Minister Narendra Modi recently designated 100 “smart cities” that would use technology to overcome the challenges of India’s rapid urbanization.

India could free up spectrum by adopting the “NATO Band” of spectrum for military uses and auctioning off the remaining spectrum.  The NATO band is used by the militaries of NATO member countries and several of their allies, and it already overlaps with much of the Indian military’s spectrum.  Furthermore, the Indian government must lower the minimum bids at spectrum auctions and lower taxes so that wireless carriers have enough profits to build their networks.  Mobile technologies are rapidly evolving, and each new generation has greater demands for spectrum. Regulators in India will not only have to maintain affordable prices for the current generation of mobile technology, but also anticipate upgrades that will deliver more data at faster speeds.

      

In a new paper, Shamika Ravi and Darrell West examine mobile technology in India, particularly the crucial role spectrum policy plays in facilitating wireless growth. The availability of devices, high telecommunications costs, and taxes on mobile usage make it difficult for consumers and businesses to take full advantage of the mobile revolution. India has enormous potential for growth in mobile applications as is reflected in its massive number of mobile customers.

While smartphone use has risen in the developing world, increasing access and capacity in key areas like education, health care, transportation, and commerce, countries are finding increased wireless utilization running up against the constraints of radio spectrum available. The frequencies necessary to keep mobile devices connected represent for many countries a scarce natural resource often used for defined purposes that cannot be used for other purposes. Without adequate spectrum, consumers in developing countries in particular may face dropped calls, reduced wireless availability, or high prices, causing slower mobile growth in many countries.

Ravi and West recommend that India open up spectrum space, revamp auctions, make sure that costs are affordable so that consumers don’t pay high telecom prices, enable the trading and management of spectrum, and harmonize regional rules. Without this commitment to a viable digital ecosystem, mobile growth will stagnate and it will be difficult to obtain the benefits of the mobile revolution.

 

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Abstract

New and emerging work relationships arising in the “online gig economy” do not fit easily into the existing legal definitions of “employee” and “independent contractor” status. The distinction is important because employees qualify for a range of legally mandated benefits and protections that are not available to independent contractors, such as the right to organize and bargain collectively, workers’ compensation insurance coverage, and overtime compensation. This paper proposes a new legal category, which we call “independent workers,” for those who occupy the gray area between employees and independent contractors.

Independent workers typically work with intermediaries who match workers to customers. The independent worker and the intermediary have some elements of the arms-length independent business relationships that characterize “independent contractor” status, and some elements of a traditional employee-employer relationship. On the one hand, independent workers have the ability to choose when to work, and whether to work at all. They may work with multiple intermediaries simultaneously, or conduct personal tasks while they are working with an intermediary. It is thus impossible in many circumstances to attribute independent workers’ work hours to any employer. In this critical respect, independent workers are similar to independent businesses. On the other hand, the intermediary retains some control over the way independent workers perform their work, such as by setting their fees or fee caps, and they may “fire” workers by prohibiting them from using their service. In these respects, independent workers are similar to traditional employees.

Evidence is presented suggesting that about 600,000 workers, or 0.4 percent of total U.S. employment, work with an online intermediary in the gig economy. Although there are probably many more workers who currently work with an offline intermediary who would qualify for independent worker status than there are who work with an online intermediary, the number of workers participating in the online gig economy is growing very rapidly.

In our proposal, independent workers — regardless of whether they work through an online or offline intermediary — would qualify for many, although not all, of the benefits and protections that employees receive, including the freedom to organize and collectively bargain, civil rights protections, tax withholding, and employer contributions for payroll taxes. Because it is conceptually impossible to attribute their work hours to any single intermediary, however, independent workers would not qualify for hours-based benefits, including overtime or minimum wage requirements. Further, because independent workers would rarely, if ever, qualify for unemployment insurance benefits given the discretion they have to choose whether to work through an intermediary, they would not be covered by the program or be required to contribute taxes to fund that program. However, intermediaries would be permitted to pool independent workers for purposes of purchasing and providing insurance and other benefits at lower cost and higher quality without the risk that their relationship will be transformed into an employment relationship.

Our proposal seeks to structure benefits to make independent worker status neutral when compared with employee status, as well as to enhance the efficiency of the operation of the labor market. By extending many of the legal benefits and protections found in employment relationships to independent workers, our proposal would protect and extend the social compact between workers and employers, and reduce the legal uncertainty and legal costs that currently beset many independent worker relationships.

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This year shone a bleak light on the deep racial divides of the U.S. The flash-points of Ferguson, Baltimore and Chicago gave new impetus to movements to reform the criminal justice system and policing. But behind the headlines, the evidence for wide, stubborn race gaps on economic and social indicators is perhaps more troubling still. 

Especially for black Americans, race gaps in family formation, employment, household income, wealth, educational quality, and neighborhood segregation have shown little­—if any—sign of improvement in recent years. The very first Social Mobility Memos was about the barriers to black upward mobility, and in recent months, we have been focusing increasingly on issues of race, place, and opportunity, and here, to close 2015, we recap 15 of our pieces on the subject, including pieces from our colleague Jonathan Rothwell on college, drugs and neighborhoods, and the first Brookings piece from our new nonresident scholar, William Julius Wilson. 

Our hope is that 2016 will see a much greater focus on race and opportunity in America. 

1. Five Bleak Facts on Black Opportunity, Richard V. Reeves and Edward Rodrigue

What would Martin Luther King Jr. think of America in 2015 if he’d lived to see his eighty-sixth birthday? No doubt, he’d be pleased by the legal and political advances of black Americans, crowned by the election and re-election of President Obama.

2. Four charts that show the opportunity gap isn’t going away, Richard V. Reeves

Child poverty rates are coming down slowly, according to figures from the Pew Research Center, except among one racial group: African Americans. This is the latest reminder that the economic gap between black and white Americans is not closing over time. Indeed, on some dimensions, it is widening.

3. Obama’s Post-Presidency? Tackling the Social Mobility Challenge for Black Men, Richard V. Reeves

President Obama’s initiative to boost opportunities for young black men—My Brother’s Keeper—looks to be a post-presidential plan, as much as presidential one. Valerie Jarrett, his closest aide, said that it was a vocation the president and first lady Michelle Obama will undertake “for the rest of their lives…That’s a moral, social responsibility that they feel will transcend the time that he’s president.”

4. School readiness gaps are improving, except for black kids, Richard V. Reeves

Between 1998 and 2010, inequality in school readiness—in terms of math, reading, and behavior—declined quite significantly, according to Reardon and Portilla’s analysis of ECLS data, being presented today at the Association for Public Policy Analysis and Management Annual Conference. This positive trend can be seen for gaps in both income and race (or at least, for Hispanic-white differences).

5. Rich Neighborhood, Poor Neighborhood: How Segregation Threatens Social Mobility, Patrick Sharkey

Racial segregation in American cities has declined slowly, but steadily over the past four decades. This is good news. Over the same timeframe, however, the level of economic segregation has been rising. Compared to 1970, the rich are now much more likely to live in different communities than the poor.

6. Segregation and concentrated poverty in the nation’s capital, Stuart M. Butler and Jonathan Grabinsky

The social mobility gap between black and white Americans has barely narrowed in the last decades, and sharp differences in access to opportunity persist. This racial opportunity gap can, in part, be traced back to the neighborhoods where whites and blacks grow up: research from urban sociologists like Patrick Sharkey and Robert Sampson shows the damaging effects racial segregation and concentrated neighborhood poverty can have on children’s life chances. Washington, D.C. is a case in point.

7. The other side of Black Lives Matter, William Julius Wilson

Several decades ago I spoke with a grieving mother living in one of the poorest inner-city neighborhoods on Chicago’s South Side. A stray bullet from a gang fight had killed her son, who was not a gang member. She lamented that his death was not reported in any of the Chicago newspapers or in the Chicago electronic media.

8. Guns and race: The different worlds of black and white Americans, Richard V. Reeves and Sarah Holmes

“The nation’s consciousness has been raised by the repeated acts of police brutality against blacks. But the problem of public space violence—seen in the extraordinary distress, trauma and pain many poor inner-city families experience following the killing of a family member or close relative—also deserves our special attention.”

9. Measuring the Racial Opportunity Gap, Richard V. Reeves and Quentin Karpilow

The U.S. is sharply divided by race, not least in terms of the opportunities for children—a point that a new report from the Annie E. Casey Foundation vividly shows. At every life stage, there are gaps between kids of different colors.

10. How the War on Drugs Damages Black Social Mobility, Jonathan Rothwell

The social mobility of black Americans has suffered collateral damage from the “War on Drugs.” Being convicted of a crime has devastating effects on the employment prospects and incomes of ex-felons and their children, as my Brookings colleagues and other scholars have found. These findings are often used to motivate efforts to reduce criminal behavior. They should also motivate changes in our criminal justice system, which unfairly punishes black Americans—often for victimless crimes that whites are at least as likely to commit.

11. Black Students at Top Colleges: Exceptions, Not the Rule, Jonathan Rothwell

A generation has been lost in the journey towards race equality in terms of income. The income gap between blacks and whites has been stuck since 1980. Why? Dozens of factors count, of course, but one in particular is worth further exploration: the underrepresentation of black students in elite colleges. As I noted in a previous blog, this could help to explain why blacks earn less than whites, even in the same occupation and with the same level of education.

12. The stubborn race and class gaps in college quality, Jonathan Rothwell

Increasing the number of low-income adults going to—and through—college is an important step towards greater social mobility and reduced income inequality. College is also an important tool for tackling race gaps. But the challenge is not just about quantity: college quality counts for a good deal, too.

13. Single black female BA seeks educated husband: Race, assortative mating and inequality, Edward Rodrigue and Richard V. Reeves

There is a growing trend in the United States towards assortative mating—a clunky phrase that refers to people’s tendency to choose spouses with similar educational attainment. Rising numbers of college-educated women play a key role in this change. It is much easier for college graduates to find and marry each other when there are more equal numbers of each gender within an educational bracket.

14. Sociology’s revenge: Moving to Opportunity (MTO) revisited, Jonathan Rothwell

Neighborhoods remain the crucible of social life, even in the internet age. Children do not stream lectures—they go to school. They play together in parks and homes, not over Skype. Crime and fear of crime are experienced locally, as is the police response to it.

15. Space, place, race: Six policies to improve social mobility, Richard V. Reeves and Allegra Pocinki

Place matters: that’s the main message of Professor Raj Chetty’s latest research. This supports the findings of a rich body of evidence from social scientists, but Chetty is able to use a large dataset to provide an even stronger empirical foundation. Specifically, he finds that children who move from one place to another have very different outcomes, depending on whether they move to a low-opportunity city or a high-opportunity one.

      

       

       

       

Policy Brief #176

Recommendations
India's remarkable economic growth and newfound access to arms from abroad have raised the prospect of a major rearmament of the country. But without several policy and organizational changes, India's efforts to modernize its armed forces will not alter the country's ability to deal with critical security threats. Our research suggests that India's military modernization needs a transparent, legitimate and efficient procurement process. Further, a chief of defense staff could reconcile the competing priorities across the three military services. Finally, India's defense research agencies need to be subjected to greater oversight.

Introduction

India’s rapid economic growth and newfound access to military technology, especially by way of its rapprochement with the United States, have raised hopes of a military revival in the country. Against this optimism about the rise of Indian military power stands the reality that India has not been able to alter its military-strategic position despite being one of the world’s largest importers of advanced conventional weapons for three decades.

We believe that civil-military relations in India have focused too heavily on one side of the problem – how to ensure civilian control over the armed forces, while neglecting the other – how to build and field an effective military force. This imbalance in civil-military relations has caused military modernization and reforms to suffer from a lack of political guidance, disunity of purpose and effort and material and intellectual corruption.

The Effects of Strategic Restraint

Sixty years after embarking on a rivalry with Pakistan, India has not been able to alter its strategic relationship with a country less than one-fifth its size. India’s many counterinsurgencies have lasted twenty years on an average, double the worldwide average. Since the 1998 nuclear tests, reports of a growing missile gap with Pakistan have called into question the quality of India’s nuclear deterrent. The high point of Indian military history – the liberation of Bangladesh in 1971– therefore, stands in sharp contrast to the persistent inability of the country to raise effective military forces.

No factor more accounts for the haphazard nature of Indian military modernization than the lack of political leadership on defense, stemming from the doctrine of strategic restraint. Key political leaders rejected the use of force as an instrument of politics in favor of a policy of strategic restraint that minimized the importance of the military.

The Government of India held to its strong anti-militarism despite the reality of conflict and war that followed independence. Much has been made of the downgrading of the service chiefs in the protocol rank, but of greater consequence was the elevation of military science and research as essential to the long-term defense of India over the armed forces themselves. Nehru invited British physicist P.M.S. Blackett to examine the relationship between science and defense. Blackett came back with a report that called for capping Indian defense spending at 2 percent of GDP and limited military modernization. He also recommended state funding and ownership of military research laboratories and established his protégé, Daulat Singh Kothari, as the head of the labs.

Indian defense spending decreased during the 1950s. Of the three services, the Indian Navy received greater attention with negotiations for the acquisition of India’s first aircraft carrier. The Indian Air Force acquired World War II surplus Canberra transport. The Indian Army, the biggest service by a wide margin, went to Congo on a UN peacekeeping mission, but was neglected overall. India had its first defense procurement scandal when buying old jeeps and experienced its first civil-military crisis when an army chief threatened to resign protesting political interference in military matters. The decade culminated in the government’s ‘forward policy’ against China, which Nehru foisted on an unprepared army, and led to the war of 1962 with China that ended in a humiliating Indian defeat.

The foremost lesson of 1962 was that India could not afford further military retrenchment. The Indian government launched a significant military expansion program that doubled the size of the army and raised a fighting air force. With the focus shifting North, the Indian Navy received less attention. A less recognized lesson of the war was that political interference in military matters ought to be limited. The military – and especially the army – asked for and received operational and institutional autonomy, a fact most visible in the wars of 1965 and 1971.

The problem, however, was that the political leadership did not suddenly become more comfortable with the military as an institution; they remained wary of the possibility of a coup d’etat and militarism more generally.

The Indian civil-military relations landscape has changed marginally since. In the eighties, there was a degree of political-military confluence in the Rajiv Gandhi government: Rajiv appointed a military buff, Arun Singh, as the minister of state for defense. At the same time, Krishnaswami Sundarji, an exceptional officer, became the army chief. Together they launched an ambitious program of military modernization in response to Pakistani rearmament and nuclearization. Pakistan’s nuclearization allowed that country to escalate the subconventional conflict in Kashmir while stemming Indian ability to escalate to a general war, where it had superiority. India is yet to emerge from this stability-instability paradox.

We do not know why Rajiv Gandhi agreed to the specific kind of military modernization that occurred in the mid-eighties, but then stepped back from using this capacity in 1987 during the Brasstacks crisis. Sundarji later wrote in a veiled work of fiction and told his many friends that Brasstacks was the last chance India had to dominate a non-nuclear Pakistan.

The puzzle of Brasstacks stands in a line of similar decisions. In 1971, India did not push the advantage of its victory in the eastern theatre to the West. Instead, New Delhi, under uberrealist Prime Minister Indira Gandhi, signed on to an equivocal agreement at Simla that committed both sides to peaceful resolution of future disputes without any enforcement measures. India’s decision to wait 24 years between its first nuclear test in 1974 and the second set of tests in 1998 is equally puzzling. Why did it not follow through after the 1974 test, and why did it test in 1998?

Underlying these puzzles is a remarkable preference for strategic restraint. Indian leaders simply have not seen the use of force as a useful instrument of politics. This foundation of ambivalence informs Indian defense policy, and consequently its military modernization and reform efforts.

To be sure, military restraint in a region as volatile as South Asia is wise and has helped persuade the great powers to accommodate India’s rise, but it does not help military planning. Together with the separation of the armed forces from the government, divisions among the services and between the services and other related agencies, and the inability of the military to seek formal support for policies it deems important, India’s strategic restraint has served to deny political guidance to the efforts of the armed forces to modernize. As wise as strategic restraint may be, Pakistan, India’s primary rival, hardly believes it to be true. Islamabad prepares as if India were an aggressive power and this has a real impact on India’s security.

Imbalance in Civil-Military Relations

What suffices for a military modernization plan is a wish list of weapon systems amounting to as much as $100 billion from the three services and hollow announcements of coming breakthroughs from the Defense Research and Development Organization (DRDO), the premier agency for military research in India.

The process is illustrative. The armed forces propose to acquire certain weapon systems. The political leadership and the civilian bureaucracy, especially the Ministry of Finance, react to these requests, agreeing on some and rejecting others. A number of dysfunctions ensue.

First, the services see things differently and their plans are essentially uncoordinated. Coming off the experience of the Kargil war and Operation Parakram, the Indian Army seems to have arrived at a Cold Start doctrine, seeking to find some fighting space between subconventional conflict and nuclear exchange in the standoff with Pakistan. The doctrine may not be official policy, but it informs the army’s wish list, where attack helicopters, tanks and long-range artillery stand out as marquee items. The Indian Air Force (IAF), meanwhile, is the primary instrument of the country’s nuclear deterrent. The IAF’s close second role is air superiority and air defense. Close air support, to which the IAF has belatedly agreed and which is essential to the army’s Cold Start doctrine, is a distant fourth.

The Indian Navy wants to secure the country’s sea-lanes of communications, protect its energy supplies and guard its trade routes. It wants further to be the vehicle of Indian naval diplomacy and sees a role in the anti-piracy efforts in the Malacca Straits and the Horn of Africa. What is less clear is how the Indian Navy might contribute in the event of a war with Pakistan. The navy would like simply to brush past the problem of Pakistan and reach for the grander projects. Accordingly, the Indian Navy’s biggest procurement order is a retrofitted aircraft carrier from Russia.

India’s three services have dramatically different views of what their role in India’s security should be, and there is no political effort to ensure this coordination. Cold Start remains an iffy proposition. India’s nuclear deterrent remains tethered to a single delivery system: fighter aircraft. Meanwhile, the Indian Army’s energies are dissipated with counterinsurgency duties, which might increase manifold if the army is told to fight the rising leftist insurgency, the Naxalites. And all this at a time when the primary security threat to the country has been terrorism. After the Mumbai attacks, the Indian government and the people of India are said to have resolved to tackle the problem headlong, but today the government’s minister in charge of internal security, Palaniappan Chidambaram, is more under siege himself than seizing the hidden enemy.

Second, despite repeated calls for and commissions into reforms in the higher defense structure, planning, intelligence, defense production and procurement, the Indian national security establishment remains fragmented and uncoordinated. The government and armed forces have succeeded in reforms primed by additions to the defense budget but failed to institute reforms that require changes in organization and priorities.

The Kargil Review Committee, and the Group of Ministers report that followed, for example, recommended a slew of reforms. The changes most readily implemented were those that created new commands, agencies and task forces, essentially linear expansion backed by new budgetary allocations. The changes least likely to occur were those required changes in the hierarchy.

The most common example of tough reform is the long-standing recommendation for a chief of defense staff. A military chief, as opposed to the service chiefs, could be a solution to the problem that causes the three services not to reconcile their priorities. However, political leaders have rejected the creation of the position of military commander-in-chief, mainly for fear of giving a military officer too much power. Instead of a chief of defense staff, the government has tried to install an integrated defense staff that is supposed to undertake reconciliation between the services, but which really is a toothless body with little influence.

Lastly, the Ministry of Defense has a finance section deputed by the Ministry of Finance. This section oversees all defense expenditures, even after they have been authorized. Once the cabinet has approved a spending item, what authority does the section have to turn down requests? However, the finance section raises questions of propriety, wisdom and policy that should under normal circumstances be under the purview of the defense minister.

No Legitimate Procurement Process

Corruption in weapons procurement has been a political issue since the mid-1980s, when allegations of a series of paybacks in the purchase of Bofors artillery, HDW submarines and other items mobilized an opposition that removed Rajiv Gandhi from power in 1989. Since then, Indian political leaders have tried hard not to appear to be corrupt, going out of their way to slow down new purchases.

However, corruption is still a problem, as shown in the 2001 Tehelka expose of political leaders accepting bribes in return for defense contracts. Recently, Uday Bhaskar, the Indian Navy officer and defense analyst, wrote bitingly that for a number of years now the armed forces, which desperately need modernization, have been returning unspent funds to the treasury.

There is widespread recognition that corruption is morally venal and detrimental to the cause of Indian security. We believe, however, that the second- and third-order problems of corruption have unacknowledged impact on military modernization and capacity. The Defense Procurement Manual and Procedures on the Ministry of Defense’s website are the first steps in the right direction, but the Indian government has generally failed to build a transparent and legitimate procurement process.

The deep roots of corruption extend to military research and development and to the heart of India’s foreign relations. Since the mid-1970s, however, the DRDO embarked on a number of ambitious and well-funded projects to build a fighter aircraft, a tank, and missiles. All three projects floundered.

While the aircraft and tank projects have largely failed, the missile program is considered successful. The reputation of the success carried the director of the missile program, A.P.J. Abdul Kalam, to the presidency. Yet in 2010, no Indian missile in the arsenal of the armed forces has managed to alter the strategic equation with Pakistan or China. The Prithvi short-range missile is not useful because of its range and liquid fuel needs. The longer-range Agni models have gone through numerous tests without entering the army’s arsenal. Other variations, such as Nag and Akash, have limited strategic purpose.

The virtual monopoly over military research in state-owned labs has meant that the abundant energies of the Indian private sector have remained outside the defense industry. Where in the United States, small and medium-sized defense contractors form the backbone of the research complex, India is far from thinking along those lines. Despite recent efforts to include the private sector through various schemes, there continues to be distrust of private industry in the Indian defense establishment. We believe it is easier for a private foreign supplier to win a contract with the Ministry of Defense than it is for a small private Indian company to do so.

For decades, the Indian government has accepted dishonest promises made by DRDO as the basis for providing billions of dollars of support because of the persisting ideology of autarky. The greatest success of military research in India comes not from the DRDO, but from the Atomic Energy Commission, which built the nuclear devices. But the government has been unwilling to subject DRDO to public accountability. Instead, the head of DRDO serves as the defense minister’s scientific adviser. The two positions – of supplier and adviser – bring inherent conflict of interest, but this has not been an issue in India at all.

The second pattern of systemic corruption comes from the inability of the Indian defense system to wean itself from the supply of Soviet/Russian equipment. The reasons why India initially went to the Soviet Union for weapons are well-known. The United States chose Pakistan, India went to the Soviet Union. But that political decision was reinforced by ideas about the corruption-free nature of the state-owned Soviet defense industry and the profit-mindedness of western, and especially American, firms.

This characterization has always been untrue. Soviet/Russian suppliers have engaged in as much corruption as western firms, but because the Soviet Union was a closed system, the corruption – which was reported first in the press in the supplier countries – was never really reported in the Soviet Union. This tradition continues, though the Russian free press has been more critical of the country’s defense deals. Indeed, those who served as Indian ‘agents’ for the Soviet firms have highlighted the better business practice of Russians, a laughable matter in light of India’s recent travails with the retrofit and sale of the Russian aircraft carrier Admiral Gorshkov.

The tendency is reiterated in Indian preferences in dealing with the West as well. Western firms have always been seen as money-grubbing, an opinion that exists across the political spectrum and is prevalent in the civilian bureaucracy. New Delhi seems to prefer government-to-government foreign military sales, which are in turn causing some degree of protest from users who want longer-term maintenance arrangements with suppliers.

The political rapprochement between India and the United States has not yet filtered into the system for attitudes to change dramatically. India’s growing military supply relationship with Israel is instructive. The most successful Israeli firm in the Indian market is Israel Aerospace Industries (IAI), a state-owned company. IAI was quick to adopt the Russian model of operation in India: offering the DRDO co-development opportunities to win contracts. In contrast, American firms are reluctant to work with, let alone transfer high-end technology to a state owned enterprise. They would prefer to set up a subsidiary in India, which could retain control of the technology.

India has been one of the biggest importers of advanced conventional weapons in the last thirty years, but this sustained rearmament has not altered India’s strategic position. The armed forces push for modernization, but do not have the authority to mount the national campaign necessary for transforming the security condition of the country. Budget increases delivered by a rapidly expanding economy and access to western technology previously denied to India have led to optimism about Indian military power, but the dysfunction in India’s civil-military relations reduces the impact of rearmament. Arming without aiming has some purpose in persuading other great powers of India’s benign rise, but it cannot be the basis of military planning.

This Policy Brief is based on an earlier paper published by Seminar, New Delhi. Stephen Cohen is a senior fellow at the Brookings Institution. Sunil Dasgupta is director of UMBC’s Political Science Program at the Universities at Shady Grove and a nonresident fellow at Brookings. They are the co-authors of Arming without Aiming: India’s Military Modernization, published in September 2010 by the Brookings Institution Press.

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Editor's note: This article is part of a series marking International Women's Day, on March 8, 2016. Read the latest from Global scholars on bridging the gender inequality gap, women’s well-being, and gender-sensitive policies in sub-Saharan Africa. 

This Tuesday, March 8, marks the first International Women’s Day since world leaders agreed last September to launch the Sustainable Development Goals (SDGs) for 2030. A more rounded conception of gender equality marks one of the SDGs’ most important improvements compared to their predecessor Millennium Development Goals (MDGs). Two SDG targets help to illustrate the broadening geopolitical recognition of the challenges. They also help to underscore how much progress is still required.

A new target: Eliminating child marriage

The inclusion of SDG target 5.3 adds one of the most important new priorities to the global policy agenda: to “eliminate all harmful practices, such as child, early and forced marriage, and female genital mutilation.” Until only a few years ago, the child marriage portion of this target had received only scant international attention. The driving force advancing the issue has been Girls Not Brides, a fast-gelling coalition that now includes more than 550 civil society organizations from over 70 countries. The initiative was first spearheaded by Mabel van Oranje, the dynamic international policy entrepreneur.

At a practical level, ending child marriage faces at least two major challenges. First, it is largescale. Every year, an estimated 15 million girls around the world are married before the age of 18. Second, it is highly complex. There are no simple solutions to addressing cultural practices with deep roots. Impressively, Girls Not Brides has already published a thoughtful theory of change to inform policy conversations, accompanied by a menu of recommended indicators for measuring progress. Regardless of whether this specific theory turns out to be correct, the coalition deserves significant credit for advancing public discussions toward practical action and outcomes. One can only hope that every constituency that lobbied for an SDG target presents similarly considered proposals soon. The advocates for ending child marriage have already registered some early gains. In 2015, four countries raised the age of marriage to 18: Chad, Guatemala, Ireland, and Malawi.

A renewed target: Protecting mothers’ lives

The SDGs are also carrying forward the previous MDG priority of maternal health. Target 3.1 aims as follows: “By 2030, reduce the global maternal mortality ratio to less than 70 per 100,000 live births.” Formally this falls under Goal 3 for health and wellbeing, but it certainly represents a gender equality objective too. Part of that is by definition; mothers are female. Part of it is driven by the need to overcome gender bias; male decision-makers at all levels might overlook key health issues with which they have no direct personal experience.

As of the early 2000s, maternal mortality was too often considered a topic only for specialist discussions. One of the MDG movement’s most important contributions was to elevate the issue to the center stage of global policy. For example, former Canadian Prime Minister Stephen Harper made it a centerpiece among his own foreign policy priorities, including at the G-8 Muskoka summit he hosted in 2010.

Figure 1 shows an initial estimate of the gains across developing countries since 2000, as measured by maternal mortality ratios (MMR). The solid line indicates the actual rate of progress. The dotted lines indicate how things would have looked if previous pre-MDG trends had continued as of 1990-2000 and 1996-2001, respectively. (This is the same basic counterfactual methodology I have previously used for child mortality trends here and here, noting that maternal mortality data remain considerably less precise and subject to ongoing updates in estimation.)

The graph shows that developing countries’ average MMR dropped from approximately 424 deaths per 100,000 live births in 1990, down to 364 in 2000, and further to 233 in 2015. That works out to a 36 percent decline over the past 15 years alone, driven by acceleration in progress during the mid-2000s. Importantly, the value in 2015 was also at least 12 percent lower than it would have been under pre-MDG rates of progress—287 under 1990-2000 trends and 266 under 1996-2001 trends.

Figure 1: Developing country progress on maternal mortality, 1990-2015

A long road ahead

Whereas the MDGs focused on developing countries, the SDGs apply universally to all countries. In that spirit, and slightly different from the previous graph, Figure 2 shows an estimate of the current global MMR trajectory for 2030, extrapolating the rates of progress from 2005 to 2015. Drawing from available data for 174 countries with a current population of 200,000 or more, the world’s MMR is on course to drop from approximately 216 in 2015 to 163 in 2030. This would mark a 25 percent improvement, but falls far short of the global MMR target of 70. (These calculations follow a similar methodology to my assessment last year of under-5 mortality trajectories.)

Figure 2: Global maternal mortality - current trajectory to 2030

The mothers of nations

Although the SDG for maternal mortality is set at a global level (unlike the country-level target 3.2 for child mortality), it is worth assessing how many individual countries are trailing the MMR benchmark of 70. The geographic nature of the global challenge is underscored in Figure 3. It lists the number of countries with MMR above 70 across the respective years 2000, 2015, and—on current trajectory—2030. As of 2000, 90 countries still had MMRs greater than 70. By 2015, this was down to 77 countries. By 2030, on current rates of progress, the relevant figure drops only slightly to 68 countries.

Most notably, the figure for sub-Saharan Africa remains unchanged between 2015 and 2030, at 44 countries, even though most of the region is already experiencing major mortality declines. Rwanda, for example, saw its MMR plummet from 1,020 in 2000 to 290 by 2015. It is on track to reach 106 by 2030. Meanwhile, Sierra Leone saw a decline from 2,650 in 2000 to 1,360 in 2015, on a path toward 768 in 2030. The challenge is not a lack of progress. Instead, it is simply that these countries have huge ground to cover to reach the ambitious goal. On current trajectory, 11 African countries are on course to have MMRs of 500 or greater in 2030.

Figure 3: Scoping progress on SDG 3.1

Number of countries with maternal mortality ratios > 70

Women and girls deserve more

Although these two targets for child marriage and maternal mortality embody only a small portion of the SDGs’ broader gender equality imperatives, they reflect crucial aspects of the overall challenge. On the positive side, they provide inspiration for the ways in which long-overlooked issues can rapidly gain political and policy traction. But they also underscore the scale of the task ahead. The global challenges of gender inequality—ranging from discrimination to violence against women to inequalities of opportunity—all require dramatic accelerations in progress. On this International Women’s Day, we all need to recommit to break from business as usual. Our mothers, sisters, daughters, and partners around the world all deserve nothing less. 

Note: The maternal mortality figures presented above have been updated subsequent to the original post in order to correct for a coding error discovered in the original country-weighting calculations for global trajectories.

      

       

       

Indian and Israeli relations are getting even friendlier: Indian Foreign Minister Sushma Swaraj visited Israel in January, and the trip is widely thought to precede higher level visits, including by Prime Minister Narendra Modi (he’d be the first Indian head of government to visit Israel). Israeli President Reuven Rivlin and Prime Minister Benjamin Netanyahu have both also indicated that they plan to travel to India “soon.”

The foreign minister’s visit was part of the ongoing Indian effort not just to broaden and deepen India’s relationship with Israel, but also to make it more public. But the trip—not just to Israel, but to what the Indian government now routinely calls the state of Palestine—also highlighted the Modi government’s attempt to de-hyphenate India’s relations with the Israelis and Palestinians. 

What is the state of India’s relationship with Israel, the Modi government’s approach toward it, and this de-hyphenated approach? 

A blossoming friendship

Since India normalized relations with Israel in 1992, the partnership has developed steadily. The countries have a close defense, homeland security, and intelligence relationship—one that the two governments do not talk much about publicly. Shared concerns about terrorism have proven to be a key driver; so have commercial interests (including Israel’s quest for additional markets and India’s desire to diversify its defense suppliers, get access to better technology, and co-develop and co-produce equipment). India has become Israeli defense companies’ largest customer. Israel, in turn, has shot up on India’s list of suppliers. 

In the early 1990s, Israel—like the United States—did not really figure on India’s list of defense suppliers. However, between 2005 and 2014, it accounted for 7 percent (in dollar terms) of military equipment deliveries—the third highest after Russia and the United States. As Indian President Pranab Mukherjee recently noted, Israel has crucially come through for India at times “when India needed them the most” (i.e. during crises or when other sources have not been available, for example, due to sanctions). The president referred to the assistance given during the Kargil crisis in 1999 in particular, but there has also been less publicly-acknowledged help in the past, including during India’s 1965 and 1971 wars with Pakistan. 

Beyond the defense and security relationship, cooperation in the agricultural sector—water management, research and development, sharing of best practices—might have the most on-the-ground impact, including in terms of building constituencies for Israel at the state level in India. Israeli ambassadors have indeed been nurturing this constituency and reaching out to the chief ministers of Indian states for a number of years. (Incidentally, India, for its part, has felt that the closer relationship with Israel has created a constituency for it in the United States.)

Economic ties have also grown: The two countries are negotiating a free trade agreement, and have been trying to encourage greater investments from the other. The success of Indian and Israeli information technology companies has particularly led to interest in collaboration in that sector. 

The governments have also been trying to increase people-to-people interaction through educational exchanges and tourism, with some success. Israeli tourism officials have highlighted the 13 percent increase in arrivals from India over the last year. And tourist arrivals to India from Israel have doubled over the last 15 years, including thousands of Israelis visiting after their compulsory military service. 

Let’s go public

The India-Israel relationship has developed under Indian governments of different stripes. It was normalized by a Congress party-led government and progressed considerably during the United Progressive Alliance coalition government led by the party between 2004 and 2014. However, while some ministers and senior military officials exchanged visits during that decade, there were not that many high-visibility visits—especially from India to Israel, with the foreign minister only visiting once. A planned 2006 trip by then Defense Minister Mukherjee was reportedly cancelled because of Israeli military operations in Gaza and then the Lebanon war. The last Israeli prime minister to visit India was Ariel Sharon in 2003, and no defense minister had ever visited despite those ties. 

The Israeli ambassador has talked about the relationship being “held under the carpet.” More bluntly, in private, Israeli officials and commentators have said that India has treated Israel like a “mistress”—happy to engage intimately in private, but hesitant to acknowledge the relationship in public. The explanations for this have ranged from Indian domestic political sensitivities to its relations with the Arab countries.

[I]n private, Israeli officials and commentators have said that India has treated Israel like a “mistress”—happy to engage intimately in private, but hesitant to acknowledge the relationship in public.

When the Bharatiya Janata Party (BJP)-led government took office in May 2014 with Modi at its helm, there was a belief that the partnership with Israel would be a priority and more visible. Relations under the BJP-led coalition government between 1998 and 2004 had been more conspicuous. When in opposition, BJP leaders had visited Israel, and also been supportive of that country in election manifestos and speeches. 

As chief minister of the state of Gujarat, Modi himself had expressed admiration for Israel’s achievements, including “how it has overcome various adversities to make the desert bloom.” Traveling there in 2006 with the central agricultural minister, he also helped facilitate trips for politicians, business leaders, and farmers from his state to Israel. His government welcomed Israeli investment and technological assistance in the agricultural, dairy, and irrigation sectors. And, at a time when Modi was not welcome in many Western capitals, Israelis reciprocated: Businesses and government engaged with him, with Israeli ambassadors and consul generals from Mumbai meeting with him long before European and American officials did so. Thus, Modi’s elevation to prime minister was welcomed in Israel, as was the appointment as foreign minister of Swaraj, a former head of the India-Israel Parliamentary Friendship Group.

However, the Modi government’s response to the Gaza crisis in summer 2014 left many perplexed and some of its supporters disappointed. The Indian government initially sought to avoid a debate on the crisis in the Indian parliament, on the grounds that it did not want “discourteous references” to a friend (Israel). After opposition complaints, there was a debate but the government nixed a resolution. In its official statements, the Modi government consistently expressed concern about the violence in general—and, in particular, both the loss of civilian life in Gaza and the provocations against Israel—and called for both sides to exercise restraint and deescalate. Yet, it then voted in support of the U.N. Human Rights Council (UNHRC) resolution that condemned Israel, a move that left observers—including many in the BJP base—wondering why the government didn’t instead abstain. 

Since then, however, the Modi government has moved toward the expected approach. The first sign of this was Modi’s decision to meet with Netanyahu on the sidelines of the opening of the U.N. General Assembly in 2014—despite reported hesitation on the part of some in the foreign ministry. Since then, there have been a number of high-level visits and interactions (and Twitter exchanges), including a few “firsts.” This past October, Pranab Mukherjee, for example, became the first Indian president to travel to Israel, where he declared the state of the relationship to be “excellent.” 

The Israeli ambassador to India has observed the “high visibility” the relationship now enjoys. Also noticed more widely was India abstaining in a July 2015 UNHRC vote on a report criticizing Israeli actions in the 2014 Gaza crisis. Indian diplomats explained the vote as due to the mention of the International Criminal Court (ICC) in the resolution, but observers pointed out that India has voted for other resolutions mentioning the ICC. Israeli commentators saw the abstention as “quite dramatic;” the Israeli ambassador expressed gratitude. Palestinian officials, on the other hand, expressed “shock” and criticized the vote as a “departure.” 

In the defense space, cooperation is only growing: The Indian government moved forward on (delayed) deals to purchase Spike anti-tank missiles and Barak missiles for its navy; it recently tested the jointly-developed Barak 8 missile system, along with Israel Aerospace Industries; and an Indian private sector company has reportedly formed a joint venture with an Israeli company to produce small arms. Cooperation is also continuing in the agricultural sector, with 30 centers of excellence either established or planned across 10 Indian states. More broadly, the two governments are seeking to facilitate greater economic ties, as well as science and technology collaboration. 

There have been questions about why Modi hasn’t visited Israel yet, despite the more visible bonhomie. But, in many ways, it made sense to have the Indian president take the first leadership-level visit during this government. Mukherjee’s position as head of state, as well as the fact that he was a life-long Congress party member and minister, helped convey to both Indian and Israeli audiences that this is not a one-party approach. This point was reinforced by the accompanying delegation of MPs representing different political parties and parts of the country. For similar reasons, it would not be surprising if there was a Rivlin visit to India before a Netanyahu one. 

De-hyphenation? 

The deepening—and more open—relationship with Israel, however, hasn’t been accompanied by a U-turn on the Indian government’s policy toward Palestine. What the Modi government seems to be doing is trying to de-hyphenate its ties with Israel and Palestine. Previous governments have also tried to keep the relationships on parallel tracks—but the current one has sought to make both relationships more direct and visible, less linked to the other, while also making it clear that neither will enjoy a veto on India’s relations with the other. 

The deepening—and more open—relationship with Israel, however, hasn’t been accompanied by a U-turn on the Indian government’s policy toward Palestine.

The Modi government doesn’t demure from referring to the “state of Palestine” rather than “the Palestinian Authority.” It held the first-ever Foreign Office consultations with the Palestinians last spring, and the Indian foreign ministry made it a point to release separate press releases for the president’s and the foreign minister’s trips to Israel and Palestine. The Indian president became the first foreign head of state to stay overnight in Ramallah. Modi met with Mahmoud Abbas, whom the Indian government refers to as the “president of the state of Palestine, on the sidelines of both the U.N. General Assembly meeting in New York and the climate change summit in Paris in 2015. The Indian foreign minister met with Abbas in 2014 in New York, and again in Ramallah on her visit. During their trips, both she and the Indian president also went to the mausoleum of Yasser Arafat (who the BJP in the past called “the illustrious leader of the Palestinian people”).

The government has reiterated India’s traditional position on a two-state solution, indicating its belief in an independent Palestinian state with East Jerusalem as its capital. It voted in favor of the resolution on raising the Palestinian flag at the United Nations, and has continued to sign on to BRICS declarations “oppos[ing] the continuous Israeli settlement activities in the Occupied Territories.” In Ramallah, Sushma Swaraj emphasized that India’s support for Palestinians remained “undiluted.” 

The continuity on this front is not just driven by historic and domestic political factors, but also by India’s broader balancing act in the region. Even as India’s relations with Israel have deepened, it has maintained—and even enhanced—its relations with Iran and the Gulf Cooperation Council (GCC) countries. Modi has welcomed the emir of Qatar, visited the UAE, and met with Iran’s Hassan Rouhani. The first-ever Arab-India Cooperation Forum ministerial meeting also took place in January. It would not be surprising if the Indian prime minister visited Saudi Arabia this year or there were high-level visits exchanged between Delhi and Tehran. The government has emphasized its “strategic intent and commitment to simultaneously enhance relations with the Arab world as well as Israel, without allowing it to become a zero sum game.” And, overall, the Israelis, Palestinians, and GCC countries have not pushed for Delhi to make a choice. 

The de-hyphenated approach, in turn, potentially gives Indian policymakers more space to take India’s relationship with Israel further. But, as was evident during the Indian president’s visit to the region, it hasn’t been problem-free and it has not been feasible to keep the two relationships entirely insulated. An upsurge in violence reportedly caused Israel to nix a proposal for Mukherjee to visit the Al-Aqsa mosque in Jerusalem. There was also some heartburn about the Israeli delay in clearing 30 Indians' computers destined for an India-Palestine Centre for Excellence in Information and Communication Technology at Al-Quds University in Ramallah, as well as its refusal to allow communications equipment to be transferred. In the Israeli press, there was criticism of the president’s lack of mention of Palestinian violence. The Indian president and the foreign ministry also found themselves having to explain the president’s remark in Israel that “religion cannot be the basis of a state.”

There have been other differences between India and Israel as well, notably on Iran (something officials have tended not to discuss publicly). There might be other difficulties in the future, stemming, for example, from: negative public and media reaction in India if there’s another Israel-Palestine crisis; the stalled free trade agreement negotiations; potential Israeli defense sales to China; renewed questions about defense acquisitions from Israel; or the behavior of Israeli tourists in India. But the relationship is likely to continue to move forward, and increase in visibility, including with visits by Rivlin, Netanyahu, and Modi—potentially before the 25th anniversary of the two countries establishing full diplomatic relations on January 29, 2017.

      

While Israeli and Palestinian interests are best served by a negotiated two-state state solution, the peace plan that Sam Bahour proposed in his February post disregards Israel's demographic and security concerns and is tantamount to a Palestinian veto on a negotiated solution. His insistence on the right of return for Palestinian refugees and rejection of security limitations on Palestinian sovereignty in effect asks Israel to become a binational state while creating a militarized Palestinian state alongside it. Bahour rejects the notion of unilateral action, but his case only reinforces my belief that Israel may need to act independently to protect its interests.

The logic behind the Clinton parameters and President Obama’s peace plan was that in return for the creation of a Palestinian state, Palestinian refugees would relinquish their claim to Israel; the hope was that this would allow for the "two states for two peoples" to exist side-by-side. Yet Bahour rejects compromise on the refugee issue as the forfeiture of “basic components of statehood and basic principles of Israeli-Palestinian peace that are enshrined in international law.” Any peace agreement that both establishes a Palestinian state and recognizes the rights of millions of Palestinians to enter Israel would hasten the end of Israel's Jewish identity.

Israel's interest in the creation of a Palestinian state is also built upon the assumption that a sound agreement would improve its security rather than threaten it. To this end, Israel has called for a demilitarized Palestinian state, and this has been echoed by the United States, France, the Czech Republic, the European Union, and Australia’s Labor Party. Even Mahmoud Abbas accepted the premise of demilitarization, saying, “We don’t need planes or missiles. All we need is a strong police force.” Nevertheless, Bahour’s piece declares any limitations on the sovereignty of Palestine unacceptable. For Israel, a peace deal that grants one’s adversaries access to more deadly weaponry would be absurd.

Bahour argues that my strategies for reaching a two-state solution are doomed because they do not meet the "mutual interests" of the parties to the conflict, but his plan does not offer incentives for Israel to make peace.

Bahour argues that my strategies for reaching a two-state solution are doomed because they do not meet the "mutual interests" of the parties to the conflict, but his plan does not offer incentives for Israel to make peace. His proposal not only fails to improve Israel's situation in any tangible sense, but further endangers it. Rejectionist Palestinian positions like Bahour's (and Abbas's recent dismissal of Biden's initiative) would veto the two-state solution as a means to move towards a single binational state. That is precisely why Israel may need to act independently to keep a two-state solution viable.

      

Editor’s note: In the "Becoming Brilliant" blog series, experts explore the six competencies that reflect how children learn and grow as laid out by Kathy Hirsh-Pasek and Roberta Golinkoff in their new book "Becoming Brilliant."

The world is morphing into a place that no one can foresee. How can we prepare students to live and work in that place?

Not long ago, people could learn job skills and use them indefinitely, but now jobs and skill sets are becoming obsolete at an alarming rate. This means that students, and later adults, need to expect and thrive on challenges and know how to turn failures into stepping stones to a brighter future.

When I was a beginning researcher I wanted to see how children coped with setbacks, so I gave 5th graders simple problems followed by hard problems—ones they couldn’t solve. Some hated the hard ones, some tolerated them, but, to my surprise, some relished them. One unforgettable child rubbed his hands together, smacked his lips, and declared, “I love a challenge!” Another said, “I was hoping this would be informative.” They didn’t think they were failing, they thought they were learning. Although this was years ago, they were already 21st century kids.

I knew then that I had to figure out their secret and, if possible, bottle it. With help from my graduate students, figure it out we did. And we are learning how to bottle it too. 

So, what was their secret?

Our research has shown that these children tend to have a “growth mindset.” They believe that their basic abilities, even their intelligence, can be developed through learning. That’s why they love challenges and remain confident through setbacks. Their more vulnerable counterparts, however, have more of a “fixed mindset.” They believe their basic abilities are just fixed—set in stone­. So their key goal is to look and feel smart (and never dumb). To accomplish this they often seek easy over hard tasks. And when they do encounter setbacks, they tend to feel inept and lose confidence. Research shows that even exerting effort can make them feel unintelligent. If you’re really good at something, they believe, you shouldn’t have to work at it.

These mindsets make a difference. In one study we tracked hundreds of students across the difficult transition to seventh grade, akin to entering a new world with harder work, higher standards, and a whole new structure. Those who entered with more of a growth mindset (the belief that they could develop their intelligence) fared better. Their math grades quickly jumped ahead of those of students with a fixed mindset and the gap became wider and wider over the next two years. This was true even though the two groups entered with equivalent past achievement test scores.

Recently, we were able to study all the 10th-graders in the country of Chile. We found that at every socioeconomic level students with a growth mindset were outperforming their peers with a fixed mindset. What was most striking was that when the poorest students held growth mindsets they were performing at the level of far richer students with fixed mindsets.

What’s exciting is that we have been able to teach a growth mindset to students through carefully designed workshops. In these workshops, students learn that their brain can grow new, stronger connections when they take on hard learning tasks and stick to them. They learn to avoid categorical smart-dumb thinking and instead focus on their own improvement over time. They hear from other students who have benefitted from learning a growth mindset. And they learn how to apply growth mindset thinking to their schoolwork. In these workshops students also do exercises, such as mentoring a struggling peer using what they learned about the growth mindset. Such workshops have been delivered both in person and online and have typically led to an increase in students’ motivation and achievement, particularly among students who are encountering challenges—such as difficult courses, school transitions, or negative stereotypes.

We have also studied how teachers and parents can foster a growth mindset in children. Sadly, many do not—even many of those who hold a growth mindset themselves! This is because adults, in their eagerness to motivate children and build their confidence, can tend to do things that foster a fixed mindset.

Here is what we’ve found:

• Praising children’s intelligence conveys that intelligence is fixed and promotes a fixed mindset and its vulnerabilities. Praising the children’s learning process—their strategies, hard work, and focus—and linking it to their progress conveys a growth mindset.

• Reacting to children’s failures with anxiety, false reassurances, or comfort for their lesser ability (“Don’t worry, not everyone can be good at math”) can foster a fixed mindset. Reacting with compassionate questions and plans for future learning conveys a growth mindset.

• Research shows that how math teachers react to their students when the students are stuck is critical. Teachers can help students develop growth mindsets by sitting with them, trying to understand their thinking, and then collaborating with them on how to move forward and what to try next.

But how can teachers themselves develop more of a growth mindset?

In some quarters, a growth mindset became a “requirement.” This led many educators to claim a growth mindset without really understanding what it is or how to develop it. We have suggested that educators understand, first, that a growth mindset is the belief that everyone can develop their abilities. It is not simply about being open-minded or flexible. Second, they must understand that all people have both mindsets and that many situations, such as struggles or setbacks, can trigger a fixed mindset. Finally, they must learn how their own fixed mindset is triggered so that they can work to stay in a growth mindset more often.

As we prepare students to thrive in the new world, we can influence whether they see that world as overwhelming and threatening or whether they greet it with the confident words “I love a challenge.” The latter are the ones who can make the world, whatever it’s like, a better place.  

      

I have been coming to Charlotte for 25 years, consulting for the likes of Crosland and Faison Enterprises, and have observed in Charlotte one of the most remarkable metropolitan transformations in the country. The economy has obviously changed, becoming one of the largest concentrations of U.S. financial institutions, thanks to the likes of Hugh McColl, Bank of America and Wachovia.

Your town has seen the metropolitan edge grow into South Carolina and up past Davidson. This sprawl is balanced by the splendor of uptown, or Center City, partially a benefit of McColl's focus on your downtown.

I returned to Charlotte two weeks ago, courtesy of the Charlotte Region Civic By Design Forum, sponsored by AIA Charlotte, to see what has happened since my last visit and to give a speech about the structural shift in how the country is building its built environment. As I mentioned in a column in the Observer before I came (March 8, "Charlotte, walk this way"), the metro areas are changing from just offering the Ozzie and Harriet version of the American Dream and adding a "walkable urban" Seinfeld version as well.

So what did I see in Charlotte?

First, I saw the beginning of the end of sprawl. Like much of the rest of the country, the over-production of automobile-driven suburban development at the fringe of your metropolitan area has reached its limits. The combination of outrageous commutes, high gas prices, and the increasing number of consumers preferring a walkable urban way of life have combined to end the geometric increase in land consumption.

The sub-prime crisis has just accelerated an underlying trend. That trend demonstrates that a lifestyle predicated on cheap gas, subsidized infrastructure and long commutes could not last.

Walkable, urban places

But what is emerging to take its place?Metro Charlotte seems to be following a national trend in creating and growing high-density, walkable urban places. The opening of the Lynx light rail line to the south is showing the way. It starts in a re-energized Center City with the one-of-a-kind performing arts center, museums, high-rise temples of commerce, sports venues, a convention center, high-end hotels, the central library, among other regionally significant treasures. There is now a "there there" in Center City.

However, housing is the true sign that a downtown is viable. For years, the few urbanites in Charlotte found refuge in the Fourth Ward, one of the special places in the South. However, resilient, safe and racially and socially integrated housing districts have emerged in the First, Second and Third Wards, as well as the beginning of luxury high-rise living in the heart of Center City. There even are small grocery stores and some of the best dining in the region. You are seeing the emergence of a Big City.

But it definitely is not confined to Center City.

Downtown-adjacent places such as Southend, arts-focused places like NoDa, and emerging Elizabeth Avenue and Midtown all are providing rich options. Each of these places has its own character. These places offer a somewhat lower density, but still walkable urban, alternative to Center City.

There is going to be a major hurdle to transforming SouthPark into what it wants to be, an upscale walkable urban place like Winter Park in Orlando or Bethesda near Washington, D.C. It was built for the easy movement and storage of the car, and a decision will have to be made as to whether it wants to be a drivable place -- or a walkable place. Right now, it is trying to be both, is neither fish nor fowl, and this will fail. The fact that there are no plans for rail transit nearby is just one of many signs that it is a very confused area.

Metro Charlotte's future

Regardless of whether SouthPark figures out what it wants to be when it grows up, there will be 8-10 regionally significant, walkable urban places to develop in Metro Charlotte over the next two decades. Each will have a unique character and different density. What they will have in common is that they are walkable (also bikable) for most residents' everyday needs and maybe even employment.

Only four or five have begun to germinate so far. SouthPark should be on that list but won't be until it solves its identity crisis. Where will the others emerge? Best bet is to follow the rails. Most will be anchored by a transit station.

I think I have seen the future of Charlotte. Continue to build out the light-rail system and encourage mixed-use, high-density zoning around the stations. You will find that your extraordinary growth of the past generation will continue but in a new and different manner since the market demands different options. You will also find that this new kind of growth will be economically, financially and environmentally more sustainable.

       

For over 100 years, the driving force of Ohio’s economy has been the state’s so-called Big Eight cities—Columbus, Cleveland, Cincinnati, Toledo, Akron, Dayton, Canton, and Youngstown. Today, though, the driving reality of these cities is sustained, long-term population loss. The central issue confronting these cities—and the state and surrounding metropolitan area—is not whether these cities will have different physical footprints and more green space than they do now, but how it will happen.

The state must adopt a different way of thinking and a different vision of its cities’ future—and so must the myriad local, civic, philanthropic, and business leaders who will also play a role in reshaping Ohio’s cities. The following seven basic premises should inform any vision for a smaller, stronger future and subsequent strategies for change in these places:

• These cities contain significant assets for future rebuilding
  
• These cities will not regain their peak population
  
• These cities have a surplus of housing
  
• These cities have far more vacant land than can be absorbed by redevelopment
  
• Impoverishment threatens the viability of these cities more than population loss as such
  
• Local resources are severely limited
  
• The fate of cities and their metropolitan areas are inextricably inter-connected
  

These premises have significant implications for the strategies that state and local governments should pursue to address the issues of shrinking cities.

Full Paper on Ohio's Cities » (PDF)
Paper on Shrinking Cities Across the United States »

Downloads

• Full Paper

       

Editor’s note: This post is part of a series on the Brookings Financial and Digital Inclusion Project, which aims to measure access to and usage of financial services among individuals who have historically been disproportionately excluded from the formal financial system. To read the first annual FDIP report, learn more about the methodology, and watch the 2015 launch event, visit the 2015 Report and Scorecard webpage.

Convenient access to banking infrastructure is something many people around the world take for granted. Yet while the number of people outside the formal financial system has substantially decreased in recent years, 2 billion adults still do not have an account with a formal financial institution or mobile money provider.¹

This means that significant opportunities remain to provide access to and promote use of affordable financial services that can help people manage their financial lives more safely and efficiently.

To learn more about how countries can facilitate greater financial inclusion among underserved groups, the Brookings Financial and Digital Inclusion Project (FDIP) sought to answer the following questions: (1) Do country commitments make a difference in progress toward financial inclusion?; (2) To what extent do mobile and other digital technologies advance financial inclusion; and (3) What legal, policy, and regulatory approaches promote financial inclusion?

To address these questions, the FDIP team assessed 33 indicators of financial inclusion across 21 economically, geographically, and politically diverse countries that have all made recent commitments to advancing financial inclusion. Indicators fell within four key dimensions of financial inclusion: country commitment, mobile capacity, regulatory commitment, and adoption of selected traditional and digital financial services.

In an effort to obtain the most accurate and up-to-date understanding of the financial inclusion landscape possible, the FDIP team engaged with a wide range of experts — including financial inclusion authorities in the FDIP focus countries — and also consulted international non-governmental organization publications, government documents, news sources, and supply and demand-side data sets.

Our research led to 5 overarching findings.

1. Country commitments matter.

   Not only did our 21 focus countries make commitments toward financial inclusion, but countries generally took these commitments seriously and made progress toward their goals. For example, the top five countries within the scorecard each completed at least one of their national-level financial inclusion targets. While correlation does not necessarily equal causation, our research supports findings by other financial inclusion experts that national-level country commitments are associated with greater financial inclusion progress. For example, the World Bank has noted that countries with national financial inclusion strategies have twice the average increase in the number of account holders as countries that do not have these strategies in place.

2. The movement toward digital financial services will accelerate financial inclusion.

   Digital financial services can provide customers with greater security, privacy, and convenience than transacting via traditional “brick-and-mortar” banks. We predict that digital financial services such as mobile money will become increasingly prevalent across demographics, particularly as user-friendly smartphones become cheaper² and more widespread.³

   Mobile money has already driven financial inclusion, particularly in countries where traditional banking infrastructure is limited. For example, mobile money offerings in Kenya (particularly the widely popular M-Pesa service) are credited with advancing financial inclusion: The Global Financial Inclusion (Global Findex) database found that the percentage of adults with a formal account in Kenya increased from about 42 percent in 2011 to about 75 percent in 2014, with around 58 percent of adults in Kenya having used mobile money within the preceding 12 months as of 2014.

3. Geography generally matters less than policy, legal, and regulatory changes, although some regional trends in terms of financial services provision are evident.

   Regional trends include the widespread use of banking agents (sometimes known as correspondents)⁴ in Latin America, in which retail outlets and other third parties are able to offer some financial services on behalf of banks,⁵ and the prevalence of mobile money in sub-Saharan Africa. However, these regional trends aren’t absolute: For example, post office branches have served as popular financial access points in South Africa,⁶ and the GSMA’s “2014 State of the Industry” report found that the highest growth in the number of mobile money accounts between December 2013 and December 2014 was in Latin America. Overall, we found high-performing countries across multiple regions and using multiple approaches, demonstrating that there are diverse pathways to achieving greater financial inclusion.

4. Central banks, ministries of finance, ministries of communications, banks, non-bank financial providers, and mobile network operators have major roles in achieving greater financial inclusion. These entities should closely coordinate with respect to policy, regulatory, and technological advances.

   With the roles of public and private sector entities within the financial sector becoming increasingly intertwined, coordination across sectors is critical to developing coherent and effective policies. Countries that performed strongly on the country commitment and regulatory environment components of the FDIP Scorecard generally demonstrated close coordination among public and private sector entities that informed the emergence of an enabling regulatory framework. For example, Tanzania’s National Financial Inclusion Framework⁷ promotes competition and innovation within the financial services sector by reflecting both public and private sector voices.⁸

5. Full financial inclusion cannot be achieved without addressing the financial inclusion gender gap and accounting for diverse cultural contexts with respect to financial services.

   Persistent gender disparities in terms of access to and usage of formal financial services must be addressed in order to achieve financial inclusion. For example, Middle Eastern countries such as Afghanistan and Pakistan have demonstrated a significant gap in formal account ownership between men and women. Guardianship and inheritance laws concerning account opening and property ownership present cultural and legal barriers that contribute to this gender gap.⁹

   Understanding diverse cultural contexts is also critical to advancing financial inclusion sustainably. In the Philippines, non-bank financial service providers such as pawn shops are popular venues for accessing financial services.¹⁰ Leveraging these providers as agents can therefore be a useful way to harness trust in these systems to increase financial inclusion.

To dive deeper into the report’s findings and compare country rankings, visit the FDIP interactive. We also welcome feedback about the 2015 Report and Scorecard at FDIPComments@brookings.edu.

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¹ Asli Demirguc-Kunt, Leora Klapper, Dorothe Singer, and Peter Van Oudheusden, “The Global Findex Database 2014: Measuring Financial Inclusion around the World,” World Bank Policy Research Working Paper 7255, April 2015, VI, http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2015/04/15/090224b082dca3aa/1_0/Rendered/PDF/The0Global0Fin0ion0around0the0world.pdf#page=3.

² Claire Scharwatt, Arunjay Katakam, Jennifer Frydrych, Alix Murphy, and Nika Naghavi, “2014 State of the Industry: Mobile Financial Services for the Unbanked,” GSMA, 2015, p. 24, http://www.gsma.com/mobilefordevelopment/wp-content/uploads/2015/03/SOTIR_2014.pdf.

³ GSMA Intelligence, “The Mobile Economy 2015,” 2015, pgs. 13-14, http://www.gsmamobileeconomy.com/GSMA_Global_Mobile_Economy_Report_2015.pdf.

⁴ Caitlin Sanford, “Do agents improve financial inclusion? Evidence from a national survey in Brazil,” Bankable Frontier Associates, November 2013, pg. 1, http://bankablefrontier.com/wp-content/uploads/documents/BFA-Focus-Note-Do-agents-improve-financial-inclusion-Brazil.pdf.

⁵ Alliance for Financial Inclusion, “Discussion paper: Agent banking in Latin America,” 2012, pg. 3, http://www.afi-global.org/sites/default/files/discussion_paper_-_agent_banking_latin_america.pdf.

⁶ The National Treasury, South Africa and the AFI Financial Inclusion Data Working Group, “The Use of Financial Inclusion Data Country Case Study: South Africa – The Mzansi Story and Beyond,” January 2014, http://www.afi-global.org/sites/default/files/publications/the_use_of_financial_inclusion_data_country_case_study_south_africa.pdf.

⁷ Tanzania National Council for Financial Inclusion, “National Financial Inclusion Framework: A Public-Private Stakeholders’ Initiative (2014-2016),” 2013, pgs. 19-22, http://www.afi-global.org/sites/default/files/publications/tanzania-national-financial-inclusion-framework-2014-2016.pdf.

⁸ Simone di Castri and Lara Gidvani, “Enabling Mobile Money Policies in Tanzania,” GSMA, February 2014, http://www.gsma.com/mobilefordevelopment/wp-content/uploads/2014/03/Tanzania-Enabling-Mobile-Money-Policies.pdf.

⁹ Mayada El-Zoghbi, “Mind the Gap: women and Access to Finance,” Consultative Group to Assist the Poor, 13 May 2015, http://www.cgap.org/blog/mind-gap-women-and-access-finance.

¹⁰ Xavier Martin and Amarnath Samarapally, “The Philippines: Marshalling Data, Policy, and a Diverse Industry for Financial Inclusion,” FINclusion Lab by MIX, June 2014, http://finclusionlab.org/blog/philippines-marshalling-data-policy-and-diverse-industry-financial-inclusion.

       

Editor’s Note: The Center for Technology Innovation released the 2015 Financial and Digital Inclusion Project (FDIP) Report on August 26^th. TechTank has previously covered the FDIP launch event and outlined the report’s overall findings. Over the next two months, TechTank will take a closer look at the report’s findings by country and by region, beginning with today’s post on India. 

With about 21 percent of the world’s entire unbanked adult population residing in India as of 2014, the country has tremendous opportunities for growth in terms of advancing access to and use of formal financial services.

In the 2015 Financial and Digital Inclusion Project (FDIP) Report and Scorecard, we detail the progress achieved and possibilities remaining for India’s financial services ecosystem as it moves from a heavy reliance on cash to an array of traditional and digital financial services offered by diverse financial providers.

As noted in the 2015 FDIP Report, government-led initiatives to promote financial inclusion have advanced access to financial services in India. Ownership of formal financial institution and mobile money accounts among adults in India increased about 18 percentage points between 2011 and 2014. Recent regulatory changes and public and private sector initiatives are expected to further promote use of these services.

In this post, we unpack the four components of the 2015 FDIP Scorecard — country commitment, mobile capacity, regulatory environment, and adoption of traditional and digital financial services — to highlight India’s achievements and possible next steps toward greater financial inclusion.

Country commitment: An unprecedented year with no sign of slowing

India’s national-level commitment to promoting financial inclusion earned it a “country commitment” score of 100 percent. A historic government initiative helped India garner a top score: In August 2014, Prime Minister Narendra Modi launched the “Pradhan Mantri Jan-Dhan Yojana,” the Prime Minister’s People’s Wealth Scheme (PMJDY). This effort — arguably the largest financial inclusion initiative in the world — “envisages universal access to banking facilities with at least one basic banking account for every household, financial literacy, access to credit, insurance and pension facility,” in addition to providing beneficiaries with an RuPay debit card.

As part of this effort, the program aimed to provide 75 million unbanked adults in India with accounts by late January 2015. As of September 2015, about 180 million accounts had been opened; about 44 percent of these accounts did not carry a balance, down from about 76 percent in September 2014.

The PMJDY initiative is a component of the JAM Trinity, or “Jan-Dhan, Aadhaar and Mobile.” Under this approach, government transfers (also known as Direct Benefit Transfers, or DBT) will be channeled through bank accounts provided under Jan-Dhan, Aadhaar identification numbers or biometric IDs, and mobile phone numbers.

The Pratyaksh Hanstantrit Labh (PaHaL) program is a major DBT initiative in which subsidies for liquefied petroleum gas can be linked to an Aadhaar number that is connected to a bank account or the consumer’s bank details. As of July 2015, about $2 billion had been channeled to beneficiaries in 130 million households across the country.

Mobile capacity: Ample opportunity for digital services, but limited awareness and use

India received 16^th place (out of the 21 countries considered) in the 2015 FDIP Report and Scorecard’s mobile capacity ranking. India’s mobile money landscape features an extensive array of services, and the licensing of new payments banks (discussed below) may drive the entry of new players and products that can improve low levels of awareness and adoption of digital financial services.

An InterMedia survey conducted from September to December 2014 found that while 86 percent of adults owned or could borrow a mobile phone, only about 13 percent of adults were aware of mobile money. Awareness of mobile money is increasing — the 13 percent figure is double that of the first wave of the survey, which concluded in January 2014 — but uptake remains low. The Global Financial Inclusion (Global Findex) database found only 2 percent of adults in India had a mobile money account in 2014.

Implementing interoperability across mobile money offerings, increasing 3G network coverage by population, and enhancing unique mobile subscribership could boost India’s mobile capacity score in future editions of the FDIP report.

Regulatory environment: Opening up the playing field to non-bank entities

India tied for 7^th place on the regulatory environment component of the 2015 Scorecard. The country’s recent shift to a more open financial landscape contributed to its strong score, although more time is needed to see how recent regulations will be operationalized.

India has traditionally maintained tight restrictions with respect to which entities are involved in financial service provision. Non-banks could manage an agent network on behalf of a bank as business correspondents or issue “semi-closed” wallets that did not permit customers to withdraw funds without transferring them to a full-service bank account. These restrictions likely contributed to the country’s slow and limited adoption of mobile money services.

However, 2014 brought significant changes to India’s regulatory landscape. The Reserve Bank of India’s November 2014 Payments Banks guidelines were heralded as a major step forward for increasing diversity in the financial services ecosystem. These guidelines marked a significant shift from India’s “bank-led” approach by providing opportunities for non-banks such as mobile network operators to leverage their distribution expertise to advance financial access and use among underserved groups.

While these institutions cannot offer credit, they can distribute credit on behalf of a financial services provider. They may also distribute insurance and pension products, in addition to offering interest-bearing deposit accounts.

We noted in the 2015 FDIP Report that timely approval of license applications for prospective payments banks, particularly mobile network operators, would be a valuable next step for India’s financial inclusion path. In August 2015, the Reserve Bank of India approved 11 applicants, including five mobile network operators, to launch payments banks within the next 18 months. As noted in Quartz India, the “underlying objective is to use these new banks to push for greater financial inclusion.” India has also made strides in terms of establishing proportionate “know-your-customer” requirements for financial entities, including payments banks.

While India has made significant progress in terms of promoting a more enabling regulatory environment, room for improvement remains. For example, concerns have been raised regarding the low commission rate for banks distributing DBT, with many experts noting that a higher commission would enhance the ability of these banks to operate sustainably.

Adoption: Access is improving, but promoting use is key

India ranked 9^th for the adoption component of the 2015 Scorecard. Recent studies have demonstrated that adoption of formal financial services among traditionally underserved groups is improving. For example, InterMedia surveys conducted in October 2013 to January 2014 and September to December 2014 found that the most significant increase in bank account ownership was among women, particularly women living below the poverty line. Still, further work is needed to close the gender gap in account ownership.

As noted above, adoption of digital financial services such as mobile money is minimal compared with traditional bank accounts (0.3 percent compared with 55 percent, according to the September to December 2014 InterMedia survey); nonetheless, we believe that the introduction of payments banks, combined with government efforts to digitize transfers, will facilitate greater adoption of digital financial services.

While PMJDY has successfully promoted ownership of bank accounts, incentivizing use of these services is critical for achieving true financial inclusion. Dormancy rates in India are high — about 43 percent of accounts had not been deposited into or withdrawn from in the previous 12 months, according to the 2014 Global Findex.

More time may be needed for individuals to understand how their new accounts function and, equally importantly, how their new accounts are relevant to their daily lives. A February 2015 survey designed by India’s Ministry of Finance, MicroSave, and the Bill & Melinda Gates Foundation found about 86 percent of PMJDY account holders reported the account was their first bank account. While this survey is not nationally representative, it provides some context as to why efforts to promote trust in and understanding of these new accounts will be key to the success of the program.

An opportunity for promoting adoption of digital financial services was highlighted during the public launch of the 2015 Report and Scorecard: As of June 2015, it was estimated that fewer than 6 percent of merchants in India accepted digital payments. The U.S. government is partnering with the government of India to promote the shift to digitizing transactions, including at merchants.

The next annual FDIP Report will examine the outcomes of such initiatives as we assess India’s progress toward greater financial inclusion. Suggestions and other comments regarding the FDIP Report and Scorecard are welcomed at FDIPComments@brookings.edu.