India's kinder and gentler form of globalization

Pratap Bhanu Mehta, Yale Center for the Study of Globalization, New Delhi

Prime Minister Manmohan Singh's first official action after assuming office in May was to meet families of drought-stricken farmers in the state of Andhra Pradesh. Crushed by unpayable debts, close to 200 farmers in the region have committed suicide over the last two years. The economist-turned-politician's visit was meant to symbolize the priorities of the new government: A concern for India's most vulnerable, and a renewed attention to the farm sector. Not content to pay only lip service to rural problems, his government's first budget allocates funds for rural development but continues to facilitate foreign investment inflows to India.

Singh's visit, and the dual-track budget announced shortly thereafter, crystallized a debate over what the last ten years have meant for ordinary Indians. To be sure, integration into the global economy and internal deregulation has allowed a shiny new middle class to emerge as the darlings of the developing world's experiment with neo-liberal reforms. But what has globalization brought to the rural farmers who make up the bulk of India's one billion people? And what can the government do to help make economic reform benefit the country's poor?

The statistical story of the last few years would have been scant consolation to these farmers. India recorded an impressive 8.2 percent growth rate in 2003, ironically helped by that most unpredictable of economic factors, a good monsoon. India's poverty levels had significantly declined over the last decade. Its foreign reserves stood at over $100 billion, and it was attracting foreign investment and reducing dependence on foreign loans. Meanwhile, its manufacturing exports were picking up, and its service sector was booming.

After his election in May, however, the question that many were asking Singh was: Are farmers in Andhra Pradesh and other poor states suffering despite the economic reforms enacted over the last few years, or because of them? This government's first budget answers quite emphatically: "Despite reforms, not because of them." Economic reforms have to continue, but those reforms are, in principle, compatible with addressing the needs of those who the economy was leaving behind.

The sober economist in Manmohan Singh would be telling those concerned with the plight of the farmers that globalization is not the cause of rural poverty and can even help alleviate it. Admittedly, government investment in agriculture has fallen considerably over the last decade. The brunt of these cuts came at the expense of irrigation projects and research into new technologies. Some argue that these cuts in public investment were a direct result of the "Washington consensus" that called for a fiscal conservatism whose costs were borne by the poor. In the 1990s, the need to attract foreign investors led the government to make cuts in its spending programs. To make matters worse, concern over the health of Indian banks was reducing their ability to target loans to the needy. So while Wall Street was being wooed, the Indian farmer was left without help. Or so the story goes.

But the truth is that the plight of these farmers had little to do with a government bent on sending signals to investors. Rather, the indebtedness that was prompting such misery was a product of several vicious cycles. Many farmers currently have to rely on informal networks and oppressive moneylenders for their financing needs.

On the other hand, the government itself partly produced the crisis it was responding to. Sops in the form of free electricity had led to indiscriminate use of water pumps, reducing water tables and producing a grave water crisis. Most of the indebtedness came from the need for inordinate expenditures to drill further for water. And cooperative banks, set up to respond precisely to such crises by providing cheap credit, made themselves insolvent by lending indiscriminately.

So we have the vicious paradox of a credit crisis having been generated by cheap credit in the past, and a water crisis generated partially by state subsidies. What was doing the damage to the Indian farmer? The invisible allocation of the market? Or the visible hand of the state?

Many globalizers argue that just as the state compensates for market failure, the market ought to be a mechanism that can compensate for state failure. The difficulty, unfortunately, is that the market cannot always provide a solution for state failure.

This seemed to be the premise behind the new government's first budget, and policy pronouncements since. The visible hand of the state will have to address the concerns of the farmer. In particular, there would be increased allocations for restoring water resources, new investments in irrigation, rural infrastructure and agriculture research, employment schemes to guarantee minimal rural employment, and substantial outlays on education.

The new budget demonstrates that globalization, rather than shrinking the power of the state, can enable an expansion of state activity. The government of India is able to increase spending outlays in the areas relevant to vulnerable farmers without risking financial meltdown or a decline in India's credit ratings.

But remarkably, while the budget attempts to address the needs of rural India, it resists runaway expenditure. The Fiscal Responsibility and Management Act, passed last year, enjoins the government to eliminate revenue deficits by 2006. With minor modifications, this government has accepted that constraint. While we can argue whether the revenue projections of the government are wholly accurate, they at least show glimpses of a strategy to help the vulnerable. The government is relying on an expansion of its tax collections.

But this increase is arguably made more plausible by the performance of sectors closely tied to the global economy. So the government went for a modest increase in service taxes and for a new transactions tax on the capital market. It is also trying to expand the role foreign investment can play in crucial sectors like insurance and telecommunications. Whether or not the government will be successful will depend primarily upon the government's ability to reform the administrative structure of the state, so that financial outlays reach the citizens for whom they are intended.

The one thing this budget gave lie to was the idea that globalization can provide an alibi for preventable suffering. The call to humanize globalization is not just a call to acknowledge the intended recipients of its benefits; it is also a call for a visible human face to reassure the vulnerable that something can be done for them. Singh's promises to the farmers may yet be derailed by politics as usual, or by state inertia, but his budget was at least an acknowledgement that globalization cannot and does not entail the displacement of responsibility.

There is and ought to be no contradiction between a Prime Minister trying to bring relief to vulnerable farmers and a Finance Minister rushing to Mumbai to assuage nervous markets. The lesson for states around the world is that globalization is a constraint if you let it be one, but an opportunity if you imaginatively make something of it.

The writer is President designate of the Center for Policy Research in Delhi, India.