Sebastian Morris

Towards Reform of Land Acquisition Framework in India

We bring out the fundamental and more important problems with the current framework of land acquisition in India, regulations on land and the functioning of land markets. We argue that reform is overdue and the current framework would be unsustainable in a democracy that is India. Current land prices are highly distorted owing largely to regulatory constraints and the process of takings. Land acquisition more than any other factor is the most important constraint on development and especially in infrastructure development. We bring out the core elements of the reform – the need to define “public purpose” ex-ante for compulsory acquisition of land, the measures that would allow the market price of land to play its correct role, and the approach to valuation. We also argue for an independent valuer when compulsory taking is involved and methods of valuation to ensure that the land owner including the farmer gets the correct value for this land in both compulsory acquisition and in voluntary sale. We also argue the need for a parallel non-compulsory framework for acquisition and develop the key elements of the same. We also bring out alternatives to physical acquisition of land especially in the context of infrastructure development in central places.

Economic Growth in Gujarat in Relation to the Nation and Other States in Recent Times - A Statistical Analysis

Growth rates of regions (states) have generally followed the national level growth rates over time with small lags or leads. We find much coherence between the aggregate performance of regions over time and that of the nation, so that the periodization at the national level is also useful at the regional level. Growth of regions since the reform of 1991-93 can be considered in two phases 1992-94 to 2002-03 and 2003-04 onwards. The very growth achieved in the latter period is mirrored at the regional level with particularly the services sector growth rate moving upwards in the second period. Gujarat like many other states is no exception. But its large competitive advantage in manufacturing means that the growth achieved in the manufacturing sector may have been less than what was possible given the monetary and exchange rate conservatism of the Reserve Bank of India. Both Maharashtra and Gujarat in the period since 2003-04 show strong positive residual (regional) factors explaining their high growth performance in this period. The contrast is with Tamil Nadu and West Bengal in the very same period. What is remarkable though of Gujarat is that it has been able to maintain and enhance its comparative advantage despite a high level of per capita income. Gujarat shows better performance on both agriculture and electricity but especially the latter which therefore inter alia has influenced local industrialization. But the roles of the factors considered must not be exaggerated. Coherence of national level growth with regional being high, the focus in discussions of the performance of states and state governments should shift to income distribution, performance of public services, locally provided infrastructure, social services over which state governments have far better and possibly even overriding control.

Agriculture: A Perspective from History, the Metrics of Comparative Advantage, and Limitations of the Market to Understand the Role of State in a Globalising World

Multilateral agencies and economists with much influence have been urging laissez-faire in agriculture. While success with the rich countries has been minimal despite the commitments under the WTO, many poor countries with much agricultural potential in the long run have been coaxed to adopt near free trade in agriculture with disastrous results especially for the poor in these economies. There are fundamental problems in achieving even global (leave aside optimum for any particular country) optimality through world trade in agriculture given the immovability of land. Additionally the fact that poor countries start their transformation process with much of their population engaged in agriculture imposes special requirements upon agriculture. Incomes have to rise in agriculture to overcome poverty and to constitute rising domestic demand for modern manufactures and therefore the infant industry argument holds with additional force. We bring together the historical experience of agricultural development, the relationship between economic development and agriculture, trade in agriculture, the role of state action especially in the late industrialisation context. The differences between land endowed and land poor countries are recognised in their analyses. We develop a perspective on the comparative advantage of nations in agriculture and the evolution of the same. The metrics of agriculture and trade, arising out of the dynamics of the share of agriculture in GDP, the dependence of agriculture on land endowments, the biological limits to consumption of agricultural products, underlie a dynamic structural model of the revealed comparative advantage which is developed and tested using panel data from about 100 countries. The nature of agricultural products on several dimensions – its long lead in production, its perishability in some cases, its storability in others, but above all the grouping of many agricultural products into low price and income elasticity of demand – is used. The purpose is to draw insights that can usefully inform the content of state intervention, and trade policy especially from the point of view of a country like India which is likely to lose its comparative advantage in many agricultural products as incomes rise. The comparative advantage of countries in agriculture is most usefully characterized as rising of the arable land endowments per person and declining as the per capita income rises relative to the worlds “average” per capita income. A structural model on the lines above is estimated empirically. The Model is also dynamic since the rise in per capita incomes at a faster rate in transforming countries can be used as data to predict with a high degree of reliability that they would see a decline in their competitiveness. Similarly countries with low arable land per person would see a rapid fall in their competitiveness. Yet land abundance in poor countries does not automatically result in high competitiveness. [The abundance of easily mined other natural resources like fuels acting through the balance of payments could lower greatly the revealed competitiveness of agriculture]. To realize the same, much land has to be brought under the plough and enhanced, a task where the role of the state is important. Irrigation development as also the use of machinery on land enhances the competitiveness of agriculture. And the former is dependent much upon the ability of the state to put together public irrigation and support private irrigation. Even more importantly the investments in storage, market support, transportation, information provision, demonstration of new technologies and extension all of which are required at the beginning of the agricultural transformation require active intervention of the state. The problem for the poor countries with land abundance is compounded by the large distortion of international prices resulting from subsidization by rich countries as they face declining competitiveness in agriculture due to very high incomes. The coaxing of land rich poor countries in this situation to embrace laissez faire policies by the multilateral agencies is shameful and nothing short of suicide for these countries. The costs of subsidization in the rich countries are very small and the political benefits very large, so a roll back of subsidization is least likely. Agriculture is the first industry where surpluses can arise to stoke development as such. The historical evidence that no country of substantial size has been able to industrialize without a prior or simultaneous agricultural revolution has to be noted. And the infant industry argument is valid for agriculture as much as for industry. Both these further condemn the laissez faire position. Protection of agriculture is therefore the least distortionary way for the “large” land-poor poor countries as they advance to protect their employment. Protection alone without active support of the state to overcome the significant market distortions in agriculture and its inputs may not be enough. Protection in land scarce economies ought to be scaled down only as such economies are able to absorb labour shed by an advancing agriculture in other segments of the economy. Functionality also demands that the role of the state in agriculture and subsidization recognizes not only the market failures arising out of the public good nature of many inputs, but also the perversities that low price and income elasticities, when combined with the long “lead” can bring to the functioning of markets. Similarly the structure of the value chain from production to final consumption in distant lands – especially the fact that the aggregators and processors in the value chain would be able to capture rents – creates the basis for a crucial role for the state in trading, stocking and processing. Shortages and variations in output again create the need for buffer stocking. Successful late agricultural transformations have been built upon the state playing these roles. The state’s role in processing while crucial has not generally been successfully realised, the complexity of the tasks being a basic bottleneck. Laissez faire policies in agriculture when without reference to the stage of development, and state failure to compensate for the market perversities underlie the disaster that agriculture has been for poor countries with much agricultural potential.

Corporation and its Shareholders: What Should B-Schools Teach?

Presents a colloquium on the role of business schools in teaching students about the kind of objectives the top managers should pursue. Principles behind the corporation and its shareholders; Purpose of business school instruction; Need for business schools to articulate their position and reflect the same in their curriculum, culture and incentive and punishment systems.

Efficient Subsidisation of Lpg: A Study of Possible Options in India Today (Based on a Report Commissioned by the Petroleum Federation of India)

The budget contained an announcement that the central government would actively explore the option of using an appropriate form of the ‘food stamps’ or an alternative scheme to improve the efficacy and reduce the cost of the current system of administration of food subsidies. The announcement provides an opportunity to discuss the issues of subsidy on account of LPG and device a system of subsidisation based on ‘LPG Stamps’ or some other scheme to improve the efficacy of subsidisation and remove the large distortions created by the current system. LPG subsidy has grown historically and has become quite high because of aggressive growth in connections and increase in per connection consumption in addition to rising input costs. Given that there is evidence that LPG subsidy has been ineffective in increasing penetration in rural and poorer households, there is a case for capping and targeting LPG subsidy. Otherwise it can explode over time unless new connection growth is curbed, which is indefensible. The best option to curtail LPG subsidy would be to eliminate it straight away. However, there are at least two factors which are likely to make it difficult. Firstly, the input costs are high (from a historical point of view). Secondly, the high input prices coupled with lack of preparatory ground work may result in political mobilization against the move. The next best option which sharply focuses on the deserving segment is direct subsidy to below poverty line families. These households may be given up to 8 coupons every year. Each coupon can be used for subsidy for a cylinder. A separation of the identification and issuance of coupon is critical to the success of this scheme. As clarified elsewhere in the study, by coupon we mean any technology which allows the target group to get a well-defined and secured entitlement. It could be paper coupons with security features or smart cards, using IT for identification and entitlements. Direct subsidy to BPL family through coupon would allow them to pay cash equal to retail price less the subsidy per coupon. This amount and a coupon would entitle them to get a cylinder. The coupon surrendered to the dealer would be in turn be surrendered by him to the Oil companies, who would pay equivalent cash to the dealer. In fact, dealer may get an additional compensation for the cost of accounting and administration. The BPL coupon holders may be allowed to trade the coupons as this would convert the LPG subsidy to income subsidy. Even if the transfer or trade is not allowed, it is bound to take place and the net effect of that would be sharing of subsidy between intended beneficiary and some intermediary. Targeting LPG subsidy to BPL consumers may encounter problems in improper identification about which Oil companies need to work closely with district/ local administration so as to proactively eliminate inappropriately classified consumers. Targeting BPL consumers for LPG subsidy also leaves open the possibility of non-BPL consumers taking connections in the name of BPL consumer and that of BPL consumers opting for multiple connections. Both problems are to some extent self limiting (due to conflict and due to connection charges) but warrant closer examination of new connections under BPL category. Coupon based direct subsidies require efficient administrative support associated with coupon distribution, appropriate documentation, coupon accounting, collection and cash reconciliation. Coupons have to be difficult to copy and print to prevent frauds etc. This can be ensured by printing of coupons at a security press, or by suitable IT enabled mechanisms. Irrespective of any method of LPG subsidy reduction, there is a need to examine the taxes built in currently estimated gross subsidy. The net subsidy to the consumers should be the basis of elimination otherwise the target is self-defeating (by being higher) and not justifiable (elimination of gross subsidy means moving from net subsidy to net tax regime). Even if the state governments continue to collect sales tax, the central government which also collects taxes and simultaneously bears subsidy should neutralize the subsidy estimate from central taxes. The state governments need to be persuaded to retain the current amount of sales tax (but at a lower rate) otherwise states get higher revenue and the price target goes up. In case the state governments were to pay truant on this issue, there is a need to explore whether differential issue prices can be used as a deterrent. Another issue which warrants closer examination is the impact of volatility of input costs on retail prices. Had the industry been competitive, this would not have been a major issue. Clearly, some oversight or regulation is required so that prices are changed at appropriate intervals and are still neither excessive nor too low. It would be appropriate to set up a regulator to review periodically review the input costs and allow changes. He may allow prices on the basis of average cost with a lag or may prescribe a band linked to input costs and may monitor the prices to prevent any abuse. The rationalisation of prices and of tax reform in this sector is long overdue. These need to be simultaneously pursued. It is possible for the entire sector to move towards a revenue neutral cenvat based tax regime. That in itself and the direct subsidization of kerosene and LPG through coupons is necessary to remove all the distortions. The ill effects of the distortions that result in misuse, diversion, revenue loss, and added environmental and governance problems can only be feasibility addressed by the movement away from price based subsidies to direct subsidies. Similarly kerosene subsidises if correctly targeted and administered can have large spillovers in the management of subsidies in LPG.

Explaining Foreign Direct Investments in Gujarat: A Study Based on an Opinion Survey of Persons Involved in the Foreign Direct Investment Process

Gujarat has attracted more foreign direct investment (FDI) than what its GDP size alone would suggest. But relative to its peer states (especially Tamilnadu, Delhi, Maharashtra and Karnataka, and possibly Andhra Pradesh) it has fallen short significantly. The above findings which we made in an earlier study are further confirmed through a survey of opinions and views of CEOs and others intimately concerned with the foreign investment decision process. The survey also brought out the crucial importance of infrastructure, and the quality of governance. Interestingly most of the problems are capable of being corrected through appropriate government action. The intrinsic exploitable advantages of the state remain large. Electricity supply – its poor quality, inadequacy and high price; the adverse law and order situation including the impact of the communal strife and riots and the perception of biases in the implementation of law have been important in adversely affecting FDI. The large comparative advantage of the state in industry and manufacturing implies that the states’ future is intimately dependent upon the growth of manufacturing in India. Success therefore involves coordination with the central government, because many of the difficulties in moving forward and in evolving into modern industries faced by Gujarat’s existing manufacturing involve policy infirmities at the central /macroeconomic level. Important among these are the `inverted tariff structures’ that many of Gujarat’s manufacturing, especially those in the small and medium scale industries, face and the tame pricing of the Indian rupee, in contrast to East Asian countries’ strategy of undervaluing their currencies. There is much that Gujarat can do to attract the new manufacturing and service industries (offshore industries of a wide variety, IT and biotechnology industries). Besides the improvement of Governance especially with regard to control over communal strife, it would need to improve the quality of life in cities and overcome the infrastructural constraints especially with regard to education and availability of technical skills. If Ahmedabad its principal city, can improve its ranking in the hierarchy of central places, Gujarat could successfully attract a lot more FDI, and other non-equity forms of collaboration in the new manufacturing and service industries.

Role of Trade and Macroeconomic Policies in the Performance of Special Economic Zones (SEZS)

Special economic zones following the enormous success of China have been widely imitated. But it is to be entirely anticipated that the results would vary greatly. Earlier avatars of SEZs in the form of Foreign Trade Zones (FTZs) and Export Promotion Zones (EPZs) were important in the export led growth of east Asia especially South Korea. But more than SEZs or EPZs per se it is the pursuit of “export led growth policies” which underlie the success of exporting and hence of SEZs. SEZz / EPZs can be seen as a (not necessary) microeconomic and spatial initiative in the pursuit of ELG under rather special circumstances by China, and South Korea and Taiwan to more limited extent in their early phases of transformation. In other countries not pursuing ELG the success of SEZs/EPZs has been rather modest. The roles played by the SEZs/ EPZs etc whatever their original purpose were constrained and determined by the macroeconomic policies, trade policies, and regional alignments. There is little meaning in studying SEZs beyond their layout and design without reference to these broader trade and macroeconomic policies. Thus early pioneers like India could make little out of their EPZs since the policies are severely biased against exports. We characterise export led growth (ELG) as the strategy that has allowed the late twentieth century industrialisations, which is far from both import substitution (as conventionally understood) and laissez faire, and to be the simultaneous pursuit of both IS and EP. With this framework we are able to understand the role and evolution of SEZs in a wide variety of countries. These help us to explain and anticipate that unless the policy turns sharply to favour exports (more correctly tradables over non tradables) the success of Indian SEZs would be modest and nowhere near that registered in China. Following from our characterisation of Import Substitution, Export Led Growth and Laissez Faire we also bring out the nature and performance of “special zones” when these are promoted under the very same regimes.

Technology Export from the Indian Public Sector: Case Study of BHEL

Bharat Heavy Electricals Limited, a large Indian public enterprise in the power sector, has been successful in judiciously blending technology imports and indigenisation. Through the mid-1970s and 1980s, it has progressively increased its ability not only to search for, bargain and purchase advanced technologies, but also to achieve design and engineer ing within its main business lines. However, it could not emerge as a major technology exporter despite some initial advantages. This case study probes deeper into the apparent failure of BHEL in the international market.

Determinants of Outward FDI: Empirical Analysis of OECD Source Countries

The study analyzes the relationship between outward foreign direct investment (OFDI) stocks pertaining to 34 OECD source and 160 destination countries. The principal findings are: (i) The gravity model variables explain nearly 50 per cent of the variation in the OFDI stock. (ii) Common language and colonial linkages explain further variations in OFDI stock, over the gravity model. (iii) Index of revealed comparative advantage of natural resources for source country bears positive relation with OFDI. (iv) Common currency between source and destination country lowers transaction costs and reduces risk in transactions thus increasing OFDI level.

Determinants of the sources of FDI into India

Inward FDI flows over 2000-01 from many source countries into India, one of the fastest growing large developing economies in the period, have been explained by an extended gravity model and the an extended allometric models by incorporating other variables such as common language, tax status, interest differential, and distance to arrive at the importance of these variables. Additionally, in representing the “size” in the both models by not GDP but as a constitution of per capita income and population, the difference between countries with the same GDP but at different levels of development are accounted for in the normalization itself so that the influence of the economic variables is more robustly estimated. The allometric model is found to be superior in explaining the overall variance in FDI inflows.