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JOURNAL OF

REGIONAL DEVELOPMENT AND PLANNING

Volume 1 Issue 1 March 2012

CONTENTS

Pages

Editorial Note i

Articles

Spatial Organization of Production In India: Contesting

Themes and Conflicting Evidence Satyaki Roy 1

Regional Disparities in the Post Reform Period Ajit Kumar Singh 17

Agricultural Growth Deceleration in India: A Review of

Explanations

Kiran Kumar

Kakarlapudi 25

Application of Travel Cost Method to Assess the Pricing

Policy of Public Parks: The Case of Kaziranga National

Park

Abinash Bharali and

Ritwik Mazumder 44

Book Reviews

Development, Displacement and Disparity: India in the

last quarter of the twentieth century; Ed: Nirmala

Banerjee and Sugata Marjit

Tanushree De 53

JOURNAL OF REGIONAL DEVELOPMENT AND PLANNING

Journal of Regional Development and Planning, Vol. 1, No. 1, 2012

i

Editorial Note

A hatchling requires introduction to the world. Journal of Regional Development and Planning

is being launched as a peer reviewed journal to provide interdisciplinary and applied perspective

on regional development situation, potential, planning, and outcome of ongoing programs.

Regional imbalance is a matter of serious concern throughout the globe, especially in

geographically large countries of the third world. In a large economy, regions with different

resource bases and endowments would have dissimilar growth paths over time. However, even

small differences in the growth rates, when cumulated over long periods, will create large

differences in standards of living of the people across regions. Such inequality tends to generate

economic, social, and political tension among regions, which may snowball into movements

calling for secession of provinces/regions and ultimate breaking-up of formerly stable and

powerful nation states. To prevent this, the nation state often takes redistributive policies that are

not economically justified leading to misallocation of resources and negative effects on

subsequent growth and development of the economy.

Theoretical generalizations about growth and regional disparities were provided in the pioneering

works of Gunnar Myrdal, Albert Hirschman, and William Alonso, through the concepts of

Backwash effects, Spread effects, Polarization effects, and Trickle-down effects. The seminal work

of Williamson covering a broad spectrum of countries at different levels of development strongly

suggested that regional disparities behave in an inverted U-shaped fashion, first increasing and

then declining. This reflected the neoclassical postulate that when an economy takes off, initially

regions with better resources would grow faster than others, widening regional imbalance, but

later, as law of diminishing returns sets in, growth rates converges, bridging the regional divide.

Empirical evidence on this is however debatable, especially when investment decisions are mainly

in private domain. Regions with better infrastructure would attract more investment, economic

activities will concentrate in core regions due to agglomeration economics, and regional

inequality will rise. This was the main reason why centralised and regional economic planning

was advocated to restrain regional disparity in federal countries like India. While regional

imbalances were kept in check throughout most of the second half of the last century, new global

economic order with focus on non-interventionist state since the last two decades has resulted in

increased regional disparity in most part of the globe, including China, Russia, Mexico, South

Africa, and India. Increased spatial inequality has raised several questions about both theory and

experience of convergence/divergence among regions, how secessionist tendencies may be

thwarted, and how to bring about balanced development of the nation state. Regional Analysis is

therefore very much at the cynosure of development studies at present, strengthening the argument

that development of the pieces is the only way to develop the whole.

Journal of Regional Development and Planning will publish original work that explores

conceptual and empirical papers from all branches of social sciences with a focus on, but not

limited to, regional development. It will provide a platform for exchange of ideas among a broad

spectrum of policy makers, administrators and academics on issues related to regional studies and

regional planning, especially in the context of India and other developing economies. It is hoped

that the Journal will go beyond this introduction and create its own niche in the world.

RM

JOURNAL OF REGIONAL DEVELOPMENT AND PLANNING


1

SPATIAL ORGANIZATION OF PRODUCTION IN INDIA: CONTESTING

THEMES AND CONFLICTING EVIDENCE

Satyaki Roy1

The emergence of space as a determinant in the functional relations linked to production and

growth is a recent development in theories of industrial organization. This paper primarily

reviews the contesting themes in explaining changes in relative importance of space. In reference

to industrial clusters in India, the paper argues that it is the heterogeneity of the industrial

organizations that captures ‘space’ as an analytical category and broad generalizations often do

not address the spatial dimensions. Neither also is it true, at least for developing countries such as

India, that small enterprise clusters always reflect the post-Fordist dimension of change in the

production organization. In the context of global production chain, this paper further argues that

participation in such value chains might lead to contradictory outcomes in production

organization giving rise to increased rift between the ‘global’ and the ‘local’.

THE CONTEXT

The emergence of space as a determinant in the functional relations linked to production and

growth is a recent development in theories of industrial organization. Space was generally

considered to be synthetic and uniform, as symmetrical containers in which inputs are rationally

allocated. In neoclassical theory, transaction costs are assumed to be zero while in other theories

although there has been implicit recognition of the geography of production but was considered to

be perturbations in theorization. Region emerged as a distinct parameter of growth only when

endogenous determinants of growth were recognised in theoretical discourse. It is primarily the

identification of the spatial dimension of knowledge which plays a key role in the dynamics of

growth of a region. Moreover, globalisation has made marginal cost of transmission of

information and physical capital across geographical space close to zero but that, at the same time,

increased the relative cost of tacit knowledge. The components of knowledge that could not be

easily codified are difficult to transact across long distances, they are mostly localized and have

made space a serious point of investigation.

Change in the relative importance of space is also reflected in the emerging patterns of

international division of labour. In early phases of industrialization we find industries concentrated

in locations that are endowed with all the factors required for that specific industry. Since 1940s

we come across a division of labour where the entire production process of a specific industry is

laid down across the globe depending on the distribution of endowments in regions. In other

words regions are no longer producers of the entire product but they perform specific tasks in the

entire production process. This draws our attention to global value chains or to a more holistic

concept of global production networks. The unit of investigation spreads beyond specific

industries and also specific regions. This signifies a marked change in the sphere of industrial

1 Assistant Professor, Institute for Studies in Industrial Development, New Delhi. E‐mail:

[email protected]

JOURNAL OF REGIONAL DEVELOPMENT AND PLANNING 2

research in the sense, value chains include all activities, both within and beyond the specific

industry, related to the final act of profit making. The production and distribution of profits is

viewed as an ensemble of several factors in place of linear relations between inputs and output and

might include activities related to agriculture or services mediated through a complex web of

relational structures (Coe et. al., 2008). However, splitting up of production and the spatial

organization of the chain of activities has given opportunities to less developed countries in

contributing to the global production process. This reduces the entry barrier for developing

economies because a highly skill intensive final product might have a low-skilled component and

a region endowed with low-skilled labour would get the opportunity in contributing to the

production of a high-valued product (IDR, 2009). Nevertheless, participation is not all and the

distribution of value-added as well as the realized profit draws us to the issues of power relations

involved in the governance of such value chains.

The other dimension of space emanates from discourses related to ‘new competition’ that

primarily identifies the post-Fordist shift because of complex obligations of new trade and

demanding markets. The speed of change in the demand has become faster and focuses

customized goods instead of standardized products. The supply of such products is further

facilitated by information and communication technology, developments in fields of bio-

engineering and material sciences. Competition has also undergone a change in the sense among

other means, exacting timeliness, punctuality in delivery, minimum inventory and other non-price

qualitative parameters are increasingly becoming important determinants. In the world of

customized goods, it is assumed that more discretion and greater autonomy is required to replace

the command structure of the Fordist model. This changing pattern of demand and required

change in the production structure signifies what is meant to be the ‘Second Industrial Divide’ in

the literature (Piore and Sabel, 1984; Gertler, 1988; Belussi and Pilotti 2002; Beacattini, 1992).

Instead of hierarchy, coordinated production of smaller firms or synergy between large and small

firms on the basis of cooperative competition emerges as the new paradigm of industrial

organization (Zenger and Hesterly, 1997; Schmitz, 1999). The geographical and social

embeddedness of such clusters of firms once again brings to the fore the spatial dimension of

production.

This paper primarily aims to contextualize the empirical evidence drawn from several industrial

clusters in India in reference to the changing perspectives in spatial organization of production.

The principal hypothesis of this paper is that, it is the heterogeneity of the clusters that captures

‘space’ as an analytical category and broad generalizations often do not address the spatial

dimensions. Neither also is it true, at least for developing countries such as India, that small

enterprise clusters always reflect the post-Fordist dimension of change in the production

organization. In the context of global production chain, this paper further argues that participation

in such value chains might lead to contradictory outcomes in production organization giving rise

to rift between the ‘global’ and the ‘local’. In the following section we discuss the theory of space

as a determinant in economic choice; Section 2 draws attention to the spatial organizations of

production, clusters and value-chains in the context of new international division of labour;

Section 3 brings to the fore the contesting themes that emerge from empirical evidence derived

from various clusters located in India; and Section 4 identifies some broad contours of regional

dimension of industrial policy.


3

REGION AS A DETERMINANT IN PRODUCTION

The neoclassical production function begins with the assumption of constant returns to scale and

perfect and costless information. Constant returns to scale imply that production is highly divisible

and optimal size of the firm is given by the technology of production and determined at the

minimum point of the long-run average cost curve. The assumption of full and costless

information precludes any advantage of proximity. Furthermore, there is no externality and if it

exists at all it only impedes investment to take place at the optimum level because individual

producers could not capture all the benefits of investment in price. As a result, externalities caused

by knowledge spillovers in a region that pops up dynamic comparative advantage could not be

captured in neoclassical production functions. Although it is admitted that regional differences

exist, nevertheless, neoclassical theory suggests that spatial disparities would vanish over time by

movements of factors of production that finally leads to equalization of factor productivities across

regions. The implicit assumption of free movement of factors across regions presumes that labour

and capital could be allocated to similar containers of space that might have varying endowments

but the space itself does not play any role in the final outcome.

The regional context becomes relevant once we recognize that firms choose their location of

activities in the same way they choose other factors of production. If we assume that total cost is

the sum of production costs plus transportation costs and the latter being dependent on the average

distance between the site of production and that of sale then so long as transportation costs assume

some positive value, space remains to be one of the important choice variables. However, in such

arguments space is linear and fails to capture the multidimensional dynamic aspects of space. The

new growth theory identified endogenous determinants of growth and that laid the foundation of

regional development theories (Abdel-Rahman, 1988; Gianmarco et. al., 2001; Fujita et. al., 1999;

Pred, 1977; Myrdal, 1957). It conceptualizes stylized space in place of uniform space, introduces

increasing returns to factor productivities, non-linear transportation costs and views technological

progress as an endogenous response to economic actors. Technological development and the

diffusion of knowledge and innovation is the central concept in regional growth. Despite the fact

that region as an analytical category had long been conceived in concepts of ‘growth pole’ and

inter-regional relations in the form of backward and forward linkages, the dominant analytical

approach flows from modeling of imperfect competition and increasing returns to scale within the

framework of monopolistic competition. In Dixit-Stiglitz (1977) model it is assumed that utility is

a function of variety and the spatial version of this model runs as follows. If internal economies of

scale are strong and transportation costs are low then it circulates in the following manner; large

size of the local demand creates higher profits that result in higher nominal wages for workers, and

on the other side greater variety of goods increases worker’s real income and greater backward

linkages. Krugman (1991) introduced a model involving economies of scale and labour mobility

to capture the geography of production. The model reinterprets the Marshallian notion of

externalities originating from localized pool of labour and specialized demand for non-traded

inputs. A related body of literature originating from new growth theory argues that when

individuals or firms accumulate new capital, both physical and human, they actually contribute to

the productivity of capital held by others. As Romer (1990) demonstrated if the spillover effects

are strong enough, the private marginal product of physical or human capital can remain


permanently above the discount rate, even if individual investments would face diminishing

returns in the absence of external boost to productivity.

The regional dimension of growth was also captured in various strands of localization theory.

Externalities characterized by knowledge spillovers between firms in a spatially concentrated

industry are generally known as Marshall-Arrow-Romer (MAR) types of externalities. In a

dynamic context it is argued in this theory that local monopoly is better for growth than local

competition because local monopoly restricts the flow of ideas to others and allows innovation-

internalisation. The other approach derived from urbanization economics, however, says that

external economies are generated by large-scale agglomerations and passed to entrepreneurs. It is

the dense network of economic and non-economic knowledge generating institutions located in the

cities that create such externalities. In contrast to MAR-type, diversity might emerge as the key

source of agglomeration economies as knowledge transfers take place through interactions with

other industries (McCann and Oort, 2009). Hence, there are contesting arguments in favour of

agglomerations emanating from both similar and diverse kind of activities. The underlying

argument of new growth theory was that because of imperfect markets and externalities there

would be increasing returns to output and hence prevent rise in the capital-output ratio by use of

knowledge capital. In line with the new growth theory, Lucas (1988) identified human capital as a

possible explanation for endogenous growth. However, so far there has not been very great

application of human capital theory in understanding regional growth precisely because an

economy belongs to the nation rather than a region. Only when the rate of in and out migration is

low or the net inflow is low or the heterogeneity of migration propensities is low will the flow

variables be low in relation to stock variables and in that case regional growth can be modeled in

terms of stock of human capital similar to national growth models (McCann and Faggian, 2009).

Although new growth theory recognizes the spatial dimension of knowledge but it ignores two

crucial facts: first, knowledge in general cannot be equated to economic knowledge and

knowledge does not spill over automatically as crucial knowledge filter exists (Acs et. al., 2006).

Second, plant or firm no longer remains the appropriate unit of analysis although new growth

models aim to capture increasing returns to scale in reference to firms. Assuming an automatic

translation of knowledge investment to economic knowledge results in a gap in understanding

entrepreneurship and that is primarily because of the missing bridge between explaining the

objective creation of opportunities and the subjective appropriation of such opportunities. The

knowledge spillover theory offers a clue to this riddle: Knowledge capital may be necessary but

not a sufficient condition—neither to ensure that such investments would automatically lead to

commercialization of knowledge, nor did it necessarily generate the cognitive capabilities to

contextualize the available stock of knowledge. On the other side, relative increase in the price of

tacit knowledge explains the relevance of region. The knowledge production function is found to

be robust at the regional level where output of innovation is a function of the innovative inputs in

that location. This calls for a dynamic understanding of space in place of modeling at the firm

level.

Conceiving space as an active factor of production generating static and dynamic advantage to the

firm is a different notion altogether. It not only debunks uniform abstract space in the sense of

physical container of development, but also transcends linearity and calls for diversified relational

space that endogenizes growth and development. As a result, instead of efficient allocation of


5

resources, outcomes depend on territorial organization of production and territories are defined as

dynamic space, the theatre of cumulative synergies between firms and local level public and

private institutions. Regional economics in that case brings back supply-side economics to the fore

in order to analyse the differential performance of regions. The growth of demand at the national

level is important but it is assumed to affect all regions equally. Success stories refer to regions

that could acquire the larger share of the given pie. Hence given the same macroeconomic

policies, capabilities of regions differ and that needs to be explained by supply-side factors that

fuel endogenous growth. However, the supply-side factors are different from the notions used in

neoclassical economics. It talks more about collective inputs and interdependence; relies more on

qualitative variables that are cumulatively generated through cooperative competition and are

mutually constitutive. The perspective is a developed cognitive approach that supersedes the

traditional functional relations between input and output and conceives the process of production

as a complex interaction between economic and non-economic forces.

SPATIAL ORGANIZATION OF PRODUCTION

The relevance of space once conceived draws our attention to the spatial organization of

production. In the context of globalisation, the change in the spatial distribution of production can

be viewed in terms of three related themes: a) changes in technology that drives change in the

organization of production; b) the re-organization of the international division of labour; c)

reconstruction of space as a ‘spatial fix’ to the problem of capitalist accumulation.

Hirschhorn (1984) argued that the nature of work that arise in given historical periods are often

conditioned by the dominant paradigm of technology on which they rely. The nature of

bureaucratic organizations that prevailed during the Fordist regime could at least partly be

explained by the rigid, fixed motion constraints of machine design that prevailed. With the

eventual development of programmable machines, the bureaucratic structure gradually gives way

to flexible production organizations. The technological determination of production organization

was further captured in post-Fordist theories, which basically argue that new process technologies

compel the adoption of organizational forms that rely less on authority and more on dialogue and

‘consensual legitimacy’. Brusco (1982) proposes flexible specialization theory primarily as a

historical account of institutions. It views economic structures neither being determined by the

needs of economic efficiency, nor by the notion of underlying ‘mode of production’. It views them

as a complex outcome determined by social, political and ideological influences. This perspective

gives a ‘constructionist’ analysis of the Fordist regime (Piore and Sabel, 1984; Gertler, 1988). It

was argued that the demise of craft production and the triumph of Fordism was because of some

concrete factors specific to United States and could hardly be appreciated in terms of efficiency.

Technological regimes, however, require complimentary regulatory environment that helps in

maintaining balance between production and consumption outside the firm. In the Fordist regime

such regulations were constructed in several ways. It was believed that the process of capital

accumulation is the prime driver of growth and this can be achieved through promotion of big

companies as national champions. Entry barriers were high and large structures were meant to

produce mass consumption goods. Institutional regulations related to welfare state as well as

Keynesian policies and industrial relations system helped maintaining the demand for mass

consumption goods. As a result of the decline of the welfare state, the regulatory regime that


evolved was no longer conducive to the Fordist structure. Moreover in a globalised regime with

open economies Keynesian demand management became ineffective while developments in

technology were increasingly making space for differentiated demands. On the other side,

developments in information technology helped in reducing entry barriers in producing niche

goods and with the use of multipurpose machines one could reduce the capital-output ratio to a

large extent. Larger scales no longer remained an imperative to reduce average costs; rather

smaller scales with flexible machines could meet the double requirement of producing

differentiated products and also at lower costs. The response was both ways: the large industrial

structures were disaggregated to create subsidiaries and satellites while smaller enterprises

increasingly agglomerated to reap the benefits of collective indivisible inputs. As a result, the

spatial organization of production undergoes a change with agglomerations, clusters, and

industrial estates increasingly becoming important markers of industrial development.

The second related theme underscores the fact how international division of labour changed over

time giving rise to changing spatial dimensions. Industrial development was concentrated in its

early phase in regions with high concentration of raw materials, especially coal. In a later phase

concentration was more around regions producing materials and means of production, primarily

processing industries. The third phase signifies concentration in urban space, in cities surrounded

by non-industrial areas but driven by the market for durable consumer goods provided by such

cities. However, in all these phases we did not find that activities belonging to the same industry

are splinted up and distributed across space. Only since 1940s we find that the whole production

being split into segments depending on the requirement of skill and technology and deployed onto

regions where such inputs are easily available (Hudson, 1988). This was made possible by

increasing integration of nations and markets. The reservoir of disposable labour in developing

economies was made accessible to all and productivities of such labour were made comparable to

developed countries by taking recourse to longer hours of work and other precarious forms of

labour process. Furthermore, division and subdivision of the production process were made in

such minute details along with increased use of technology and routinisation that the need for

skilled labour gradually declined. This process of splitting the production process gave rise to

global value chains where tasks and parts are performed in different locations and combined by

the use of transport and communication technology.

The value chain describes the full range of activities that are required to bring a product from its

conception, through the different phases of production, to its end use and beyond. This includes

activities such as design, production, marketing, distribution and support to the final consumer.

This approach is based on transaction costs analysis and looks through the various activities and

the strategic role of relationships between firms and actors spread across the globe (Kaplinsky and

Morris, 2000). This was further developed to define the notion of ‘governance’ of value chains

incorporating the notions of authority and power relationships in determining the allocation and

flow of financial, material, and human resources within a chain (Gereffi, 1994). The global

production network provides a framework to go beyond the underlying linearity in value chain

concepts. It is argued that production networks are inherently dynamic and in a process of flux—

evolving both organizationally and geographically. Hudson (2004) argued that production process

always involves multiplicity of linkages, and the spatial-temporality of such networks is highly


7

variable and contingent. Appreciating the dynamics of change requires a heuristic framework that

is time and space sensitive, and global production network concept constitutes such a framework.

The destruction of old sites and the emergence of new space as Harvey (1986, 2002) argued is a

result of capital’s insatiable drive to resolve the inner crisis. The relevance of space was primarily

explained by the notion of ‘socially necessary turnover time’, that is, the average time taken to

turn over a given quantity of capital at the average rate of profit under normal conditions of

production and circulation. Hence to the individual capitalists there is always a relentless move to

turn over their capital faster than the social average to earn excess profits. As a result, there is

always a need to reduce the friction of distance. The drive to a ‘spatial fix’ to capitalist crisis is

reflected by an incessant intent to create new spaces and devalue others. The crisis of over-

accumulation prevalent in capitalism is reflected by a situation where surplus capital and surplus

labour power exist side by side with no way to bring the two together. Hence, labour or capital

that could not be absorbed would be devalued and the way to avoid such devaluation is to find

alternative sites for investment or use. The problem with the ‘spatial fix’ is that this geographical

expansion is driven by fixity and mobility of capital at the same time. Mobility of capital requires

physical spaces to be created in the form of capacities such as infrastructure, institutions and so on

such that mobile capital could be usefully deployed. But this creation of new space eventually

generates its own surpluses that need to be deployed elsewhere to roll on. As a result, the same

dynamics of displacing the crisis goes on, driving in an ever increasing geographical space and by

that way defining the spatial distribution of production.

All the above perspectives on spatial organization of production draw attention to one common

fact at the minimum: space is neither uniform nor passive to the global process of production and

it is deliberately created rather being an outcome of rational allocation through efficiency norms.

In the following section in reference to specific contexts of industrial clusters in India we would

like to go beyond the above-mentioned minimum and see how the concrete differs from the broad

trends and also how different outcomes evolve out of various dimensions of interplay of

capabilities, markets and institutions that constitute the space.

LOOKING BEYOND UNIFORMITY: CONFLICTING EVIDENCE

The interventions made in this section in the discourse on regional industrial development are

drawn from a couple of field surveys covering a wide variety of clusters ranging from highly

technology intensive automobile manufacturing cluster, skill-intensive cluster producing surgical

instruments, traditional clusters related to foundries and those producing footwear and garments.

Industrial clusters in this analysis provide an entry point to look into the complex process of

interaction between production organization and space; how regional clusters capture the ‘local’

and the way specifics deviate from received theories. Some of these clusters have a large export

share such as footwear cluster in Agra (Uttar Pradesh) or garments producing clusters located in

Tirupur (Tamil Nadu) and National Capital Region while foundries in Howrah (West Bengal) and

surgical instruments producing cluster in Baruipur (West Bengal) are mostly targeted to the

domestic market although having some share in exports. The automobile cluster in Pune

(Maharashtra) has a large concentration of domestic players who have tied up with FDI and major

global players in the automotive sector. This gives us a spectrum of high-end to low-end clusters

in India although the paper neither aims to construct some taxonomy of clusters nor a detailed


analysis of individual clusters. Rather in some eclectic manner we focus on some distractions from

the received theory that are contextual to each of these clusters and might help us to understand

the reconstruction of the division of labour in a more concrete way.

Heterogeneity in size distribution of firms

One can start from a preliminary observation that clusters are heterogeneous both across and

within a specific cluster. The heterogeneity spans from issues related to size distribution of firms,

variety in the composition of output, production organization and division of labour; the labour

process, market and non-market institutions related to the cluster that includes non-economic

dimensions as cultural and political milieu and so on. Let us begin from the widely agreed

determinants of size distribution of firms within industrial clusters as well as that of scale of

operation that defines the spatial organization of production. The techno-allocation paradigm

informs us how the optimal size of the firm is determined at the minimum point of the firm’s long

run average cost curve. However, if the long run average cost curve has flat stretches then the

minimum point and hence the optimal size of the firm becomes indeterminate. Furthermore,

according to this argument if there are global decreasing returns to scale then appropriate size

would be infinitesimal while if there are global increasing returns to scale then optimal scale

would be infinite. So, how and when diseconomies of scale due to organization and technology set

in remains largely unexplained in theory. One can say that the appropriate size of the firm will be

determined at the intersection between rising economies of scale flowing from increasing returns

and diseconomies of organization arising from increasing size. But this involves a dynamic

analysis that cannot be limited to technological factors alone.

However, the technological determinants help us to explain the difference in size distribution of

firms across clusters if not the distribution within. More the average production becomes capital

intensive, the more would be the average size of the firm in different clusters. The automobile

cluster would always have a larger average size of firms than that in garments or footwear cluster.

On the other side, within a cluster the difference in size could not always be explained by

difference in technology. For instance in the footwear producing cluster in Agra it is seen that

larger exporting firms operate with more or less the same technology albeit with greater division

of labour and detailed planning and standardization of the production process. With similar capital

intensities in technology, division of labour in the production process determines the average size.

The tiny firms in Agra producing shoes on an average have a larger size compared to chappal

producing firms in footwear cluster at Kolkata and the reason being that production of shoes

involves greater division of labour than that in chappals. Technological determinants apart from

other things might have strong influence on the size of the cluster as a whole. For instance, in the

case of Tirupur producing knitted garments there can be large number of permutations and

combinations within stages such as knitting, dyeing and printing depending on the type of the

garment and it is very difficult to produce all the types by a single firm. Rather cooperation

between specialized subcontractors emerges as the natural outcome. Thus, large integrated firms

seem to be less efficient an arrangement compared to coordination between similar sized firms

having strong complementarities between them. The average size of the firm in a cluster might

well be the result of various institutional factors. Sometimes legal norms limit the size of a firm in

way of determining the land allotted by the local government. The garments producing firms in


9

Delhi have a greater uniformity in size because of such reasons and institutional rules offer options

only for horizontal expansion rather than vertical integration.

Is this flexible specialization?

The rise of industrial clusters has often been explained uncritically by the notion of ‘flexible

specialisation’ signifying the post-Fordist structure of production. In India only a few clusters are

involved in the production of customized goods that is assumed to require flexible production

process. In majority of the clusters goods are produced to cater to the lower end of the domestic

market. Within a cluster we might find only a thin layer of firms producing high valued goods for

exports or for the higher value-added demand in the domestic market. The exporting firms in

garments and footwear produce goods, especially catering to the demands of the mass market in

Europe and US. Although, on an average, India might have a higher edge compared to Bangladesh

in terms of variety in value-added but products with similar quality and even with much higher

value-added are being produced in larger scale of production structures in China and also some in

Bangladesh. The underlying fact precisely is that Indian firms on an average do not operate at a

quality range that is incompatible to Fordist structure of production organization. On the contrary,

in many instances the nature of subcontracting relationships that exists in most of the clusters

discourages producing higher value-added goods. In many of the cases the parent firm retains part

of the working capital of the subcontracting firm in such a way that the subcontracting firm would

not be inclined to invest for producing higher value added goods and get entangled to increased

dependence. The subcontracting relationships that define the interaction between small firms in

most of the clusters in India reflect the cause of numerical flexibility driven by cost concerns that

hardly has any relation to the kind of flexibility often talked about in the context of ‘new

competition’.

The reproduction of clusters producing low valued goods could be explained both from the

demand and supply side. Low valued consumer goods are produced in clusters of small enterprises

in this case not because of increased customization in demand. It is only because of the absence of

standardized mass market together with highly fragmented multilayered demand for consumer

goods that the small enterprise clusters exist. Income inequality and resulting segmentation in the

domestic market might not allow firms to produce at the minimum point of the long run average

cost curve given by a technology that fits to larger scale. On the other side, the large reservoir of

low wage labour contributes to the demand for low quality goods and supply labour at a lower cost

for the production of the same. The availability of large pool of unskilled labour gives rise to

contradictory and opposing trends in the choice of technology. On the one hand, in labour

intensive sectors it delays the process of ‘creative destruction’ in the sense that because of low

labour costs use of outdated technologies would not impede profitability. On the other hand, in

industries with higher technology intensity, such as automobile, the response would be

introduction of technologies that deskill the labour process. Firms in the automobile component

sector introduce machines and production techniques that standardize and routinise the production

process at a level such that undergoing a training of one or two days would make a ‘raw’ labour

capable of working in the automotive industry. This process is quite similar to the Fordist mode of

standardization involving routinised labour albeit with higher levels of technology. This narrative

matches well with the situation that prevails in the large majority of the small enterprise clusters in

India and could be better explained by the notion of ‘flexible accumulation’ rather than ‘flexible


specialisation’. Nevertheless, the other side of the picture exits although limited to a small

minority of automobile and IT clusters that might capture the image of the ‘second industrial

divide’.

Disconnect between the ‘global’ and ‘local’

There are a large number of firms in Tirupur, Agra as well as in National Capital Region that are

exclusively involved in exporting garments or footwear. These are buyer driven value-chains

although all the firms produce the final product and none such are found performing some

intermediate task in the global value chain. These global chains seem to have a limited extension

in the domestic production process. In fact one can easily find a ‘disconnect’ within the cluster

between exporters and those producing for the domestic market. The size of the exporting firm as

mentioned earlier is relatively large not because of the technology of production, but primarily

because of the following two reasons: First, exporters could get access to a large volume of

standardized demand at a lesser transaction cost compared to those selling in the domestic market

because exports involve only a few number of buyers, comparatively less circulation time, and

also relatively no fixed costs for establishing marketing channels; Second, more the asset

specificity increases due to the rise in the quality of goods, the more it becomes difficult to

coordinate through market transactions and that prompts vertical integration giving rise to

comparatively large exporting firms. But this might not be the only possible response to the rising

demand for quality. The institutional aspect of size distribution of firms goes beyond the domain

of technology. Transactions become idiosyncratic with rise in the quality of product and since

most of the smaller firms could not secure the required standard, the value chain could not flow

further down involving the vast number of tiny firms in the cluster. However, if the necessary

monitoring of quality could be done otherwise, vertical integration might not be the necessary

outcome. This is the case in Tirupur where trust among the owners and subcontracting firms

primarily flows from caste relations to which the majority of the owners belong to. These value-

chains represent some sort of Taylorism in which low labour costs are the primary determinant of

competitiveness.

Autonomy or fragmentation?

The rise in the relative scarcity of tacit knowledge and also transforming the knowledge output

into commercial products brings to the fore the critical input of entrepreneurship and the notion of

autonomy in the work process. And this critical input, although remains largely unexplained,

determines the responses of firms to risks and uncertainty. These responses define the amount of

irreversible investments the firm would like to incur and is critically influenced by the nature of

capital engaged in the production, their short and long run interests, social embeddedness and so

on. The rise and expansion of small enterprise clusters in India might be viewed as a nursery of

such entrepreneurship and proliferation of autonomy in the production process. In many of the

clusters the number of small firms is increasing but this might be because of different reasons

altogether. In knowledge intensive sectors, especially in sectors such as information technology,

the contribution of the worker who might be a programmer or an inventor is the largest

contribution to the production of output. But the input in this case is highly intangible and non-

standard. In such sectors, as the argument goes, if the gap on expected return occurring from the

potential innovation between the inventor and the corporate decision-maker is sufficiently large


11

and if the cost of starting a new firm is sufficiently low, then the employee might decide to

establish a new enterprise (Audretsch and Aldridge, 2009). In the case of knowledge intensive

industries, the proliferation of new start ups could be explained by such dynamism in the

mismatch in expected returns but the reasons for spawning of tiny firms in traditional clusters are

largely linked to the production organization that exist in such clusters.

The dynamics of growth in any of the small enterprise clusters in India producing footwear or

surgical instruments is conditioned by the exchange relationship between traders and small

producers. A large number of small producers depend on a few buyers. The parent firms or the

traders although face a competitive market in selling their products, however, while buying

intermediate goods or final products they behave like oligopsonists. The power relation involved

in the governance of the value chain gives rise to a situation where the producer can only get

access to the final market by mediation of the trader. The trader-producer relationship in these

clusters is a contested exchange, where the trader has the power over the small producer to impose

sanctions affecting the future stream of revenue while the latter lacks the capacity with respect to

the trader (Bowles and Gintis, 1990). To the small producer the objective function is not to

maximize profits as they can hardly access the market independently. Rather, the producer’s goal

of maximizing sales and increasing the revenue in that case is subject to paying a greater premium

of profit to the trader, be it directly or indirectly. More the degree of imperfection, the less will be

the margin of profit for smaller units as the pressure for reducing costs cannot be transferred to the

workers whose wage level has already touched the level of reservation wage. The only space left

for an owner of a small unit is to restrict the upward mobility of labour, by refusing to recognize

the skill accumulation, and thereby claims for increased wage. And if the wage increment after a

certain period is not remunerative to the skill and productivity that the worker attains, the skilled

worker would be inclined to establish a new unit if the initial capital required is relatively low and

enjoy the ‘freedom’ of self-exploitation. The tiny producer in that case might earn more than what

s/he earned earlier as wage worker because of having the option of working for longer hours.

Thus, the expansion of clusters in most of the traditional sectors is the result of some sort of

‘forced autonomy’ driven by the dynamics of self-exploitative fragmentation.

‘FLUID’ LABOUR AND ‘FOOTLOOSE’ INDUSTRY

Finally, I draw attention to the process of creation of space as a ‘spatial fix’ to the problem of

accumulation. Although in the literature on clusters we find the underlying importance of social

embeddedness defined by the cumulative interaction between firms and institutions. The meaning

of institutions in this discourse is not limited to the context of transaction costs relevant to

technological interface; it rather includes those cultural and political interactions which increase

the predictability of repeated transactions. The notion of ‘trust’ in industry district literature is

such an institution that grows in a cumulative manner; it might be originally built upon ascribed

characteristics such as caste, linguistic homogeneity or other sociological identities but it could

gradually be transformed into acquired characteristics over time due to increasing predictability in

transactions. These intangible inputs are often captured in the nebulous term ‘social capital’ since

1990s, which in so many words tries to factor in the complex interaction between economic and

non-economic elements as essential to understand the production process. In the context of

geographical clusters this brings back the ‘place’ once again, where people live and work; the


social and political milieu in which the cluster is embedded. However, the drive towards

profitability in reference to concrete situations might give rise to contradictory determinations.

The owners would not be inclined to horizontal cooperation if there are no proper institutions in

place to protect the property rights of designs and developments they produce. As a result,

localization would not necessarily lead to knowledge spillovers and cooperative efficiency.

Moreover, many units often prefer to employ migrant workers and discourage employing local

workers for the following reasons: a) migrant workers normally do work on lower reservation

wage; b) they normally do not have the social clout to raise there claims. On the other side, there is

an increasing trend of choosing and creating new sites of production in order to get rid of the

rising rents in established cities as well as to take advantage of low paid workers in far away sites.

Industries are looking for new ‘space’ creating new areas of production, denying the role of

‘place’ and the social embeddedness talked about in the context of cluster. In such situations we

find a combination of ‘fluid labour’ and ‘footloose industry’ and, of course, neither the capital nor

the labour participates in the production process from a long term perspective (Roy, 2009). What

follows is a typical ‘spatial fix’ that reflects the conflicts between mobility and fixity in the course

of spatial organization of production and at the same time underlines the fact that in competitions

heavily dependent on labour costs the availability of critical inputs embodied in social milieu

hardly matters.

TOWARDS A REGIONAL POLICY

The primary aim of this paper was to focus on the contesting themes that confront the existing

literature on spatial organization of production. It is neither to say that such distractions nvalidate

the broader perspectives, nor does it aim to propose an alternative set of generalizations that could

be applicable to all the industrial clusters. Nonetheless the limited hypothesis one could draw is

that policies need to be contextualized, appropriate institutions need to be built and authorities be

empowered at a more disaggregated level. Industrial structures across the world are undergoing

significant changes. Participation of developing countries in global manufacturing and exports

shows a decisive rise, although share in trade in manufacturing is increasing much faster than the

growing share in output. Moreover, scale and specialization bottle-necks that primarily emerge

because of limited domestic market could also be released to a great extent, as expected, through

globalization. But integration of markets on the other side gives rise to a situation in which

howsoever big few firms might be, they would not really be capable of supplying the required

amount. The optimal size becomes indeterminate and the point at which diseconomies of scale sets

in is determined by political, cultural and social aspects of organization of production.

In the case of goods for mass consumption the Fordist structure was sustained by appropriate

policy regimes that created enough employment and hence generated demand for such goods. In

the process of globalization such policies are no more in place. On the other side, integration with

the global market has driven large enterprises into a process of competition that primarily depends

on the ability of generating innovation-rents and the same process, as a result, involves more

capital-intensive technologies and hence lesser employment elasticities. The ‘small’ in this context

has been traditionally considered as ‘absorbing sponge’, but absorption by default does not imply

gainful employment and hence needs to be looked at in reference to its contribution in the process

of generating economic surplus. This primarily calls for promoting modern enterprises that could


13

be linked either to the global value chain or could cater to domestic demands for higher valued

goods. Promotion of modern small enterprises is not just a supply-side issue; rather it involves

significant intervention in policies that affect income distribution. The demand needs to be

propped up by a shift in distribution of income that reduces both the high and low segments of the

income spectrum implying a gradual reduction of demand of very high quality luxury

commodities on the one hand, and low-end products on the other.

Given the fact that the premise of policy intervention is increasingly getting blurred at the national

level, it is even more difficult in a space such as a region that is relatively more porous and open

ended. Because of the nature of the space, policies at the regional levels have to be more oriented

towards supply-side mechanisms that are targeted towards increasing capabilities and creating

institutions appropriate for an upward spiral of growth. However, retaining capabilities also needs

generating a virtuous circle where idiosyncratic skills and knowledge are required in the

production of high-valued goods. Only such skills that are context specific could be relatively

more sticky and hence promotion of such skills and specialized production could be one of the

major considerations for regional intervention. Even if few firms in the cluster grow at a faster

rate, this higher growth path has not been diffused at large since most of the dynamic firms get

linked to higher value added markets, and so it becomes imperative to break all sorts of

subcontracting linkages with household enterprises that hardly suffice to provide a standard norm

of quality. As a result, there seems to be little diffusion of the incremental value added and the

small firms remain caught in the lower end of the market. Policies on small enterprise clusters

should evolve tools to codify quality and enhance capabilities of tiny enterprises such that most of

them could be integrated to a larger value chain through subcontracting.

In the context of goods for mass consumption it is generally argued that although larger scale of

operation would be appropriate for the production of standardized goods, in India we have small

enterprise clusters involved in such activities. Quite often issues related to labour market

regulations are drawn in saying that firms would go for higher scale employing more workers if

they could be given the option of shedding excess labour during cyclical downturns. Apparently

there can be two kinds of choices left to the firm: One, given there is no constraint in demand a

firm would like to bear the costs of regulations including those related to labour only when such

costs are outweighed by the gains they make through scale economies and related economies of

coordination. Two, a strategy quite suitable in the face of demand uncertainties as well as that of

fragmented markets is to limit the scale of operations to a smaller establishment that might be

operating within a larger network of subcontracting units and compete on the basis of low labour

costs by taking advantage of the unregulated labour market. Both these strategies would not be

sustainable for two separate reasons: First, the former strategy of large-scale employment based

industries would gradually drive up the wages, as happened in the case of China, waning out the

comparative advantages derived from margins on wage cost. Second, the strategy of remaining

small and catering to relatively customized markets but at the same time deriving advantages from

avoiding labour laws would not work for long. This is simply because catering to customized

markets would increasingly demand more skills and that would obviously entail higher costs:

either in the way of training workers or by employing skilled workers who would ask for higher

premium. Hence it is always better to plan for a longer time horizon, create proper infrastructure

and skills and move up the value chain such that value realized could be much greater than the


cost borne. This is precisely suggesting a gradual transformation to a ‘high road strategy’ that of

course requires a critical size and entails competing on the basis of quality and flexibility in place

of ‘low-road’ where competition is primarily based on reducing labour costs.

Finally the regional dimension needs to be incorporated in policy discourse in a more effective

way. For instance, evaluation of cluster development should be primarily based on collective

efficiency using meso-level parameters such as total output of the cluster, size distribution of units

in terms of output and employment, extent of horizontal and vertical linkages, collaborative efforts

within the cluster and resilience to fluctuations in changing demand and so on. Facilities and

subsidies given to firms at various levels should encourage clustering and cooperative

competition. Within a cluster a firm participating in joint action, participating in bulk raw material

purchase, introducing new technologies or contributing in workers’ training should be preferred

against those who do not. This helps in building the critical core, which becomes self-perpetuating

and creates a different norm of performance and a structure of rewards and punishments. A

process of regional planning should evolve primarily to take care of these issues specific to the

region. This also involves a political process such that the voice of the cluster should be

adequately represented in order to appreciate their claims in the public good not as individuals or

households but with the defined identity of a cluster.

________________________________

The paper was presented in SSE Conference, 2011 at Houston, Texas. The comments received on the earlier

version of the paper presented at the International Conference organised by ISID, CSH and CEFC, 2010 is

highly appreciated.

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17

REGIONAL DISPARITIES IN THE POST REFORM PERIOD

Ajit Kumar Singh1

Interstate economic disparities in India have sharply risen in the post reform period, bringing

back the issue of regional disparities into the debate on Indian political economy. Present paper

contends that while the economy has moved to a higher growth path, the pattern of growth has

been regionally concentrated and many regions have been bypassed in the race towards economic

growth. This uneven pattern of growth lies behind the demand for creation of separate states from

different regions of the country. A valid question that rises in this context is whether the creation

of new and smaller states will be desirable in the national interest and help in promoting faster

development in the lagging regions. The author is of the view that the feelings of regional identity

if channelled into healthy lines can provide a powerful force to mobilise people of a region for

regional and national development and there is a strong case for another reorganisation of the

Indian states into smaller units based on objective criteria. Political sagacity demands that a

rational and objective view of these issues is taken and timely action initiated instead of waiting

till the time when the situation takes a violent turn and goes out of hand as has happened in

several parts of the country recently. It is high time for a Second State Reorganisation

Commission.

INTRODUCTION

Independent India inherited a backward and regionally imbalanced economy reflecting the

distorted pattern of development imposed by the colonial power to subserve its own interests.

Most of the industrial and commercial activities were concentrated in the three metropolitan

centres, namely, Bombay, Calcutta and Madras and a few major cities like Ahmedabad, Kanpur

and New Delhi. Most of the other areas of the country remained in the backwaters of

underdevelopment. Not only there were marked disparities in economic development at the state

level, but in nearly all the state were characterised by sharp intra-regional disparities.

Removal of the existing regional disparities was thus a major challenge before the policy makers.

Rightfully, balanced regional development has been one of the important objectives of economic

planning in the country since the beginning. A large battery of policy instruments was pressed into

service to achieve the objective of balanced regional development. These included larger flow of

resources in favour of the poorer states, location of public sector projects in the backward areas,

capital and transport subsidies to industrially backward areas, etc. (see for details Ajit Kumar

Singh 1981, Ch. 1). In due course of time, several area based programmes were adopted for the

development of geographically handicapped regions like Drought Prone Area Development

Programme, Desert Development Programmes, Hill Area Development Programme and Tribal

Area Development Programme. Horizontal equity among states was also given priority in resource

transfers to the states both by the Finance Commissions and the Planning Commission.

In several earlier studies the present author has examined the impact of the government policies

and measures on inter-state disparities in the Country (Ajit Kumar Singh 1984, 1992, 1999). It

was found that disparities declined in the fifties, but showed a divergent trend in the sixties (Ajit

1 Director, Giri Institute of Development Studies, Lucknow; E-mail: [email protected]


Kumar Singh 1984). The process of divergence continued in the seventies, but it seemed to have

been arrested in the early eighties (Ajit Kumar Singh 1992). The study of the experience of the

first four decade of development planning in India led the present author to conclude that:

“Development planning did succeed in breaking the long standing barriers to growth and initiating

a geographically wide spread process of growth throughout the country, though it has not been

able to fully reverse the process of spatially uneven development. At the best it has slowed down

the inherent economic tendency towards increased regional imbalances” (Singh 1992).

IMPACT OF ECONOMIC REFORMS

The economic reforms initiated in India from 1991 brought about a paradigm change in the

economic policy regime. The policy of state led and directed development gave place to market

led growth. The regulatory mechanism which was under operation for last four decades was

gradually dismantled and a policy of liberalisation of domestic and external market was vigorously

adopted. This led to withdrawal of state from several important sectors of the economy and greater

reliance on private capital both domestic and foreign to spur economic growth in the country.

Thus, we find that the share of public investment, which exceeded 60 percent of total investment

in the earlier plans, has gradually come down to 22 percent in the Eleventh Five Year Plan.

The fiscal crisis which widely characterised the budgets of the central and state governments

affected the capacity of the government to invest in productive activities or economic and social

infrastructure, where again public private partnership mode was adopted. The backward states

were particularly handicapped in this respect.

The main public instruments which were used in the pre-reform era to direct the flow of public

and private investment in favour of the backward states and regions were withdrawn. These

included the location of public sector projects in backward regions, removal of licensing control

which provided for relaxation of investment in backward regions by private sector, withdrawal of

capital subsidy and other financial incentives for investment in backward areas, etc. The financial

sector reforms too led to dilution of the social objectives of directed flow of credit to backward

regions and priority sectors. The states were also persuaded to remove the concessions they

offered to attract industry to their respective states.

In the new policy regime private investment was likely to flow to regions which will yield highest

profits rather than which need higher investment. The richer states with better infrastructure were

likely to attract more private investment to the detriment of the poorer states.

From the very beginning of the reform process economists expressed the apprehension that the

new economic policies would promote a regionally more concentrated pattern of investment and

growth and adversely affect the regional disparities in the country. This led to renewed interest in

the issue of regional disparities and a number of articles and studies came out in the nineties and

the present decade seeking to examine whether growth is leading to regional convergence or

divergence (Ahluwalia, 2000; Bhattacharya and Saktivel, 2004; Gupta and Kalra, 2005; Singh,

1999).

Flow of Private Investment

The actual pattern of investment flow in the post reform period confirms the apprehension of the

economists that the new liberal economic policies will lead to a concentrated pattern of investment


19

in favour of the richer states. Table 1 shows the statewise distribution of proposed investment

through IEMs (Industrial Entrepreneurs Memorandum). Thus, during the period 1991-2001 almost

68 percent of proposed investment went to the eight richest states of India. Only three states,

namely, Maharashtra, Gujarat and Andhra Pradesh cornered half of the investment. Among the

poorer states the share of UP and MP was about 7 percent each, much below their share in

population. Rajasthan’s share was about 4 percent, while Orissa got only 2.3 percent and Bihar a

paltry 1.4 percent.

Table 1

Statewise Investment Proposed – Industrial Entrepreneurs Memorandum (1991-2009)

1991-2001 2001-2009 1991-2009 States Investment

(Rs. Crore) % of Total Investment

Investment (Rs. Crore)

% of Total Investment

Investment (Rs. Crore)

% of Total Investment

Haryana 28423 3.00 47892 1.00 76315 1.33

Maharashtra 205431 21.72 342995 7.13 548426 9.53

Kerala 7959 0.84 2842 0.06 10801 0.19

Punjab 38189 4.04 54209 1.13 92398 1.61

Gujarat 157491 16.65 567297 11.80 724788 12.59

Tamil Nadu 56512 5.97 204560 4.25 261072 4.54

Karnataka 43759 4.63 404639 8.41 448398 7.79

Andhra Pr 105467 11.15 392737 8.17 498204 8.66

West Bengal 31681 3.35 259851 5.40 291532 5.07

Rajasthan 37426 3.96 66436 1.38 103862 1.80

Orissa 21424 2.26 701823 14.59 723247 12.57

Jharkhand 388737 8.08 388737 6.75

Madhya Pr 66878 7.07* 300843 6.26 367721 6.39

Uttar Pr 71515 7.56* 120319 2.50 191834 3.33

Bihar 13436 1.42* 28145 0.59 41581 0.72

India 945965 100 4809369 100 5755334 100

Note: States are arranged in Descending order of Per Capita GSDP

Source: Ministry for Industries, Govt. of India

During the current decade, there was some improvement in the pattern of investment in terms of

its spatial spread. The share of the top 8 states came down to 42 percent from 68 percent in the

previous decade. The share of Maharashtra, Gujarat and Andhra Pradesh, which attracted the

largest investment in the previous decade declined markedly in this period. The main gainers were

the states of Orissa and Jharkhand. These states are richly endowed with mineral resources, which

attracted heavy investment. However, other poor states like UP, Rajasthan and Bihar show a

dismal situation in this respect. However, taking the entire post reform period (1991-2009) the

pattern of investment has remained highly skewed in favour of the richer states. About 31 percent

of total investment in the post reform period has gone to the three states of Gujarat, Maharashtra

and Orissa. On the other hand, the share of poorest six states excluding Orissa is hardly 20 percent.

Fiscal Transfers to States

There are marked differences in the fiscal capacity of the states. The poorer states are unable to

raise sufficient revenue from their tax and non-tax resources to provide required level of public

services to their people. These fiscal imbalances are also reflected in the differences in per capita

expenditure of the states. Srivastava has found that per capita expenditure level is substantially


below average in Bihar, Uttar Pradesh and Madhya Pradesh, while it is more than 50 per cent of

the average expenditure in Punjab, Maharashtra and Gujarat (Srivastava, 2005, p. 294). Given the

large variations in per capita public expenditure at the state level, differences in the availability

and quality of public services are bound to exist.

The Finance Commissions were expected to address the problem of the vertical and horizontal

imbalances in fiscal system in India. Horizontal equity has been an important consideration in the awards of the successive Finance Commissions. However, a close scrutiny of the devolutions by

the Finance Commissions reveals that they have not been able to do full justice to the issue. In

fact, the post devolution surpluses have been modest in amount in per capita terms. But a more

glaring failure of Finance Commission awards is that the post-devolution surplus shows a strong

positive association with the level of per capita income of the states (Ajit Kumar Singh 2008). As

a perceptive observer of Indian public finances has observed transfers by Finance Commissions

have failed to remove the disparities in the revenue capacities of the states in any substantial

measure (Bagchi 2005, p. 3395). As pointed out by him the capita revenue capacity of richer states

like Punjab, Haryana and Maharashtra is almost double that of the poorer states like Uttar Pradesh

and Bihar.

In short, the generous transfers by the Finance Commissions have failed to remove disparities in

revenue capacities of the states in any substantial measure. This means that not only the quality and level of public services and infrastructure is much better in the richer states, their capacity for

investment expenditure is also higher and they are in a better position to get more funds from the

Planning Commission and are in a better position to attract private investment. It is this situation

that lies at the root of the persistent and growing inter-regional disparities at the state level in the

country. The system of fiscal transfers in the country must address this situation taking into

account the totality of the flows.

What is a more serious matter of concern is that total governmental transfers now constitute a

rather small and declining part of the total financial flows in the economy. The share of gross

fiscal transfers from the Central Government to the states, which amounted to a little less than

one-fourth of the total financial transfers in the early 1990s, has come down to around one-sixth of

the total transfers in the recent years (Ajit Kumar Singh 2008). Thus, in the post reform scenario the inter-governmental fiscal transfers are now completely dwarfed by flows through financial

institutions. The main determinant of economic growth in the changed scenario is private

investment, which tends to go in favour of the richer states as we have shown above. However,

Finance Commissions’ devolutions remain important particularly for the poorer states, which have

a limited resource base of their own and are also unable to attract sufficient resources from other

financial channels.

Trends in Inter State Disparities Since 1991

Given the pattern of skewed investment and resource flow observed during the last two decades,

one would expect that the pattern of growth has been uneven across states. Table 2 shows the

statewise growth rate of GSDP in the pre and post reform period. During the eighties the

differences in growth rates of GSDP in different states were not very marked. However, growth

rates of GSDP in the poorer states decelerated in the 1990s as compared to the 1980s, while the growth rates accelerated in the richer states. All the poor states except Madhya Pradesh witnessed

lower economic growth in the nineties as compared to the eighties. Among richer states, Haryana

and Punjab show a relative slowdown in their rates of growth during this period, though their

growth rates are still fairly high. The main gainers of higher growth in the nineties were the states

of Kerala, West Bengal, Gujarat, Karnataka, Tamil Nadu and Madhya Pradesh. All these states

with the exception of Madhya Pradesh belong to high or medium per capita income category. The

coefficient of correlation between per capita SDP and growth rate of GSDP was 0.5 during the


21

nineties, indicating that the richer states have grown faster than the poorer states during this

period.

During the last decade all the states except Tamil Nadu have witnessed faster growth as compared

to the nineties. The jump in growth rate was quite marked in some of the poor states, e.g., Bihar,

Orissa, Rajasthan and UP. This indicates that there has been some catching up on the part of the

lagging states in the recent years. In fact, the coefficient of correlation between per capita SDP and growth rate of GSDP was -0.19, showing better performance of the poor states during the recent

years.

Table 2

Trend Growth Rate in GSDP during 1980s and 1990s Average Annual Growth Rate % point change

States Per Capita GSDP in `̀̀̀

(1999-2002)

1980-81 to 1989-90

1990-91 to 2001-02

2002-03 to 2008-09

1990s over 1980s

2000s over 1990s

Punjab 28030 5.44 4.66 6.00 -0.78 1.34

Maharashtra 26994 5.64 6.27 7.07 0.63 0.80

Haryana 26256 6.21 4.72 9.09 -1.49 4.37

Kerala 22824 3.16 5.51 8.27 2.35 2.76

Gujarat 22708 5.05 7.2 10.75 2.15 3.55

Tamil Nadu 22587 5.18 6.26 6.12 1.08 -0.14

Karnataka 20703 5.36 7.17 8.63 1.81 1.46

Andhra Pradesh 18869 5.35 5.6 9.09 0.25 3.49

West Bengal 17377 4.70 6.93 7.14 2.23 0.21

Rajasthan 15059 6.01 5.85 10.14 -0.16 4.29

Madhya Pradesh 13340 4.02 4.81 6.16 0.79 1.35

Orissa 11234 5.01 4.21 10.95 -0.8 6.74

Uttar Pradesh 10798 4.80 3.84 6.12 -0.96 2.28

Bihar 6539 4.60 3.79 9.08 -0.81 5.29

India 28030 5.44 4.66 6.00 -0.78 1.34

Note: States are arranged in Descending order of Per Capita GSDP

Source: Column 2, 3 and 4 taken from CSO estimates as reported in the Twelfth Finance

Commission Report, p. 58. Growth rates for 2002-09 have been calculated from CSO

estimates of GSDP. While the growth rate of GSDP has been slower in the poorer states, population growth has been

faster in these states. As a result the increase in per capita income has been slower. Not

surprisingly indicators of inter-state disparities in per capita SDP like minimum-maximum ratio

and coefficient of variation show a clear worsening of the situation in the 1990s as observed by the

Twelfth Finance Corporation in its report. Bihar has remained the poorest state of the country

throughout this period, while Punjab (in some years Maharashtra) had the highest per capita

income. The ratio of minimum to maximum declined from 30.53 percent in 1993-94 to 28.90

percent 1999-00. The coefficient of variation in per capita income jumped in this period from

34.55 percent to 37.42 percent (Table 3).

The trend towards worsening of interstate income disparity continued unabated in the present

decade (Table 4). Haryana emerged as the state with highest per capita income, while Bihar

remained at the bottom. The minimum-maximum ratio declined sharply from 30.0 percent in 2001-02 to 20.4 percent in 2007-08. Coefficient of variation in per capita SDP also maintained the

upward trend throughout the period.


DEMAND FOR CREATION OF NEW STATES

As the above analysis shows, interstate economic disparities have sharply risen in the post reform

period. Thus, the issue of regional disparities has again emerged as a major issue of Indian

political economy. While the Indian economy has moved to a growth path, the pattern of growth

has been regionally concentrated and many regions have been by passed in the race towards

economic growth. The uneven pattern of growth lies behind the demand for creation of separate

states from different regions of the country. These regional pressures led to the creation of three

separate states of Uttarakhand, Chhatisgarh and Jharkhand which were created in 2000 by

bifurcating the erstwhile states of Uttar Pradesh, Madhya Pradesh and Bihar. Similar demands are

emerging from several other regions of the country, e.g. Bundelkhand, Telengana and Vidharbha.

Table 3

Trends in Inter-State Disparity in Per Capita GSDP: 1993-2000

Year State with lowest

per capita

GSDP

State with highest per capita

GSDP

Ratio of Minimum to Maximum per capita

GSDP (%)

Coefficient of variation

(%)

1993-94 Bihar Punjab 30.53 34.55 1994-95 Bihar Punjab 29.70 35.03 1995-96 Bihar Punjab 26.11 37.89 1996-97 Bihar Maharashtra 27.59 36.78 1997-98 Bihar Maharashtra 28.28 35.93

1998-99 Bihar Maharashtra 30.02 35.90

1999-00 Bihar Maharashtra 28.90 37.42

Note: Based on CSO data. Relates to 15 major states only. Source: Twelfth Finance Commission Report, p.59.

A valid question that rises in this context is whether the creation of new and smaller states will be

desirable in the national interest and help in promoting faster development in the lagging regions.

The author is of the view that the feelings of regional identity if channelled into healthy lines can

provide a powerful force to mobilise people of a region for regional and national development. It

would be appropriate to quote the views of the State Reorganisation Commission 1955 on this

issue. The Commission recognized the positive role of regionalism and observed as follows:

“......a regional consciousness, not merely in the sense of a negative awareness of absence

of repression or exploitation but also in the sense of scope for positive expression of the collective personality of a people inhabiting a state or a region may be conducive to the

contentment and well-being of the community” (Report of the State Reorganisation

Commission, 1955, p. 255).

Dr. B.R. Ambedkar commenting on the report of the State Reorganisation Commission supported

the idea of smaller states in the following words:

“As the area of the state increases the proportion of the minority to the majority

(communities/castes) decreases and the position of the minority (castes) becomes

precarious and opportunities for the majority to practise tyranny over the minority

become greater. The States must therefore be small (as reported in Hindustan Times,

New Delhi Feb. 2, 2010, p, 9).”

He gave the following criteria for division of a linguistic state:

“Into how many states a people speaking one language should be cut up, should depend

upon (1) the requirement of efficient administration, (2) the needs of the different areas,

(3) the sentiments of the different areas, and (4) the proportion between the majority and

the minority (as reported in Hindustan Times, New Delhi Feb. 2, 2010, p, 9).”


23

Table 4

Trends in Inter-State Disparity in Per Capita GSDP: 2000-2009

Year State with lowest

per capita GSDP

State with highest per capita

GSDP

Ratio of Minimum to Maximum per capita

GSDP (%)

Coefficient of variation

(%)

2001-02 Bihar Punjab 30.02 34.78 2002-03 Bihar Haryana 28.90 36.06

2003-04 Bihar Haryana 22.71 35.93 2004-05 Bihar Haryana 20.11 36.18 2005-06 Bihar Haryana 20.38 37.13 2006-07 Bihar Haryana 21.89 37.77

2007-08 Bihar Haryana 21.87 38.31

Note: Based on CSO data. Relates to 16 major states only. Source: Calculated from CSO data based on 1999-2000 constant prices..

CONCLUSION

There is a strong case for another reorganisation of the Indian states into smaller units based on objective criteria. The states of U.P., Maharashtra, Rajasthan, Andhra Pradesh are too large

entities to be governed efficiently. Splitting of these states into smaller units will be beneficial for

the people of all the regions. The new states will be politically more stable states as compared to

the present situation with no single party dominating all the districts of the state. The smaller states

will also be administratively more manageable. This will definitely improve the efficiency and

improve the quality of delivery of public services. The smaller states will be able to plan for the

development of their area and people more effectively in the light of region specific resources and

problems. The resources they will get from the centre through Finance Commission devolution or

Planning Commission grants will go directly for the benefit of people residing there, instead of the

present system when allocation of resources to districts largely depends on the discretion of the

state government. They would also be in a better position to attract more private investment for their development, as the experience of the newly created States of Uttaranchal, Chhattisgarh and

Jharkhand has shown. These states have also shown an upsurge in growth rate after their creation.

This was also the experience of reorganisation of erstwhile Punjab into three smaller states of

Punjab, Himachal Pradesh and Haryana.

Political sagacity demands that a rational and objective view of these issues is taken and timely

action initiated instead of waiting till the time when the situation takes a violent turn and goes out

of hand as has happened in Andhra Pradesh recently. It is high time that the Central government

appoints a Second State Reorganisation Commission.

______________________________________

References

Ahluwalia, M.S. (2000), ‘Economic Performance of States in Post Reform Period,’ Economic and Political

Weekly, May 6, Vol. 35, No. 19.

Bhattacharya, B.B. and S. Saktivel (2004), ‘Forecasting Regional Growth and Disparity in India:

Comparison of Pre and Post Reform Decades’, Economic and Political Weekly, Vol. 39,

No. 10.

Bagchi, Amaresh, “Symposium on Report of Twelfth Finance Commission: Introduction and

Overview,” Economic and Political Weekly, Vol. XL, No. 31, 2005.

Government of India (1955), Report of the State Reorganisation Commission, New Delhi.


Gupta, J.R. and Manjit Kalra (2005), Federal Transfers and Inter-State Disparities in India,

Atlantic Publishers & Distributors, New Delhi.

Hindustan Times, New Delhi, February 2, 2010.

Singh, Ajit Kumar (1981), Patterns of Regional Development: A Comparative Study, Sterling

Publishers, New Delhi.

______________(1984), “Trends in Regional Disparities,” Productivity, Vol.35, No.2, July-

September.

______________(1992), “Regional Dualism, Regionalism and Development Process in India,” in

In Search of India’s Renaissance, Centre for Research in Rural and Industrial

Development, Chandigarh.

_____________(1999), “Inter-State Disparities in Per Capita SDP in India : Trends and Causes,”

Arth Vigyan, Vol.51, No.2.

____________(2008), “Finance Commission Devolutions and Regional Imbalances,” in Singh,

Ajit Kumar (ed.), Twelfth Finance Commission Recommendations and Their Implications

for the State Finances, APH, New Delhi.

Srivastava, D.K. (2005), Issues in Indian Public Finance, New Century Publications, New Delhi.


25

AGRICULTURAL GROWTH DECELERATION IN INDIA: A REVIEW OF

EXPLANATIONS

Kiran Kumar Kakarlapudi Since the inception of economic reforms, Indian economy has achieved a remarkable rate of

growth. This fantabulous performance, to a large extent, was driven by service sector and

improvements in the secondary sector. However, this growth process bypassed the agricultural

sector, which showed sharp deceleration in the growth rate (3.62 percent during 1984/85 -

1995/96 to 1.97 percent in 1995/96 – 2004/05). Given the relevance of the sector for employment

and rural development the declining trend in agricultural growth has emerged as a major concern

for researchers and policymakers. A large number of studies have enquired into the growth

process of agricultural sector and has criticised the neo-liberal policy regime for a general

neglect of the sector. The sector has recorded wide variations in yield and productivity and there

was a shift towards cash crop cultivations. Moreover, agricultural indebtedness pushed several

farming households into poverty and some of them resorted to extreme measures like suicides. In

this context, the present paper reviews the performance of the Indian agriculture since reforms

and compares it with pre-reforms conditions. A systematic and critical review of literature is

presented to comprehend the poor performance of Indian agriculture. The review focuses on the

pattern and determinants (price and non-price) of agricultural growth and evaluates the influence

of policy and environmental factors on its performance. This paper exclusively explains the

following objectives. To explain the growth of agriculture in terms of area, yield and cropping

pattern and findings that have taken place in the recent past. To understand the determinants that

contributes to the changes in the sources of growth. To explore the influence of the policy factors

and natural factors, which lead to changes in the growth of agriculture? The study identifies that,

in the post reform period there has been an increase in prices of cash crops and the cropping

pattern changes towards non-food grains have a significant effect on growth. The review also

concludes that much of the slowdown in agriculture is caused due to other pertinent factors such

as infrastructure, technology and environmental factors, lack of political commitment and poor

implementation of policies.

INTRODUCTION

India’s economic growth performance has started taking its pace since after economic reforms and

emerged as one of the fastest growing economies in the world. Annual growth rate in total Gross

Domestic Product (GDP) rose from below 6 per cent during reforms to over 8 per cent during last

couple of years. In the post reform period, the growth was mainly driven by the exceptional

growth in service sector which at present contributes 54 per cent of total GDP. Manufacturing

output, seen as bellwether for the policy stance since 1991, has even registered double-digit

growth in some recent years. On the other hand performance of agriculture in terms of its growth

rates has been disappointing. The growth of agriculture started declining since the reforms and

became worse in the post WTO period. The growth of agriculture has come down from 3.62 in

1990-91 to 1.97 by 2004-05 and the share of agriculture in the gross domestic product has

registered a steady decline from 36.4 per cent in 1982-83 to 18.5 per cent in 2006-07(Chand et al

2007). Yet, this sector continues to support more than half a billion people providing employment

to 52 per cent of the total workforce. Between 1950-51 and 2006-07, production of food grains

increased at an average annual rate of 2.5 per cent compared to the growth of population which


averaged 2.1 per cent during this period. As a result, India almost became self-sufficient in food

grains and there were hardly any imports during 1976-77 to 2005-06, except occasionally the rate

of growth of food grains production, however, decelerated to 1.2 per cent during 1990-2007, lower

than annual rate of growth of population, averaging 1.9 per cent (Economic survey 2007-08). This

is showing agrarian situation during last decade and half.

The government is yet to comprehend the real picture of the current agrarian situation in India.

The agrarian crisis being experienced today is an unprecedented and all encompassing

phenomenon. All sectors in agriculture and sections among the peasantry are affected by the

deepening agrarian crisis. The poorer sections among the peasantry, especially the small and

marginal farmers and the agricultural labourers, who constitute the vast majority of the Indian

population, are the worst sufferers. Indian agriculture is characterized by small farm holdings. The

average farm size is only 1.57 hectares. Around 93 percent of farmers have land holdings smaller

than 4 ha and they cultivate nearly 55 percent of the arable land. On the other hand, only 1.6 of the

farmers has operational land holdings above 10 ha and they utilize 17.4 percent of the total

cultivated land (Pillai 2007). Ministry of Finance, Planning Commission, and office of Prime

Minister are emphasising on concerted measures to address poor growth rate in agriculture, partly

because poor growth rate has serious implications for large percent of India’s population that

depends upon agriculture for livelihood, and partly because poor growth of agriculture affects

growth of overall economy (Chand 2005). While there have been many arguments that reform

process acted against agriculture sector. State intervention has been consciously reduced in order

to make way for the ‘market’, a euphemism for the dominant role for the private players,

especially big business, in all spheres of the economy. It was argued by the proponents of

liberalisation that freeing agricultural markets and liberalising external trade in agricultural

commodities would provide price incentives leading to enhanced investment and output in that

sector, while broader trade liberalisation would shift inter-sectoral terms of trade in favour of

agriculture. A decade and a half later, the hollowness of these claims stand exposed (Pillai 2007

and Patnaik 2005). But this policy option did not become viable rather it worsened further. The

poor performance of agriculture has become a serious matter of concern and this has lead to

initiation of debates about the causes of agrarian crisis among researchers and policy makers in the

country. Recently UPA government came with 4 per cent target growth rate in agriculture during

11th plan.

This chapter is organized as follows. In the section two presents a brief review of literature, where

in this we examine various arguments that have come up in the recent periods explaining growth

crisis in agriculture. In the third section sources of agricultural growth are presented, it mainly

investigates how sources of growth in agriculture have changed in the period by comparing it with

pre reform period. Section four gives the information as to what factors have contributed for the

changes in the sources of growth in the post reform period and it also tries to identify to what

extent economic factors contributed and how much on other factors and final section concludes

REVIEW OF LITERATURE

As it is already mentioned, the recent trends in agricultural growth and development have shown a

sharp deceleration in the agricultural sector despite an overall impressive growth of Indian

economy is a major cause of concern today. Thus, it led to intense debate in the country, both in


27

academic and policymaking circles. In the recent period, many arguments have come up analyzing

the potential impact liberalisation on farming community. There are two groups of people

explained the reasons for poor performance of agriculture in the post reform era. One group of

people, Gulati, Kelly and Narayanan, S. claimed that the slow pace of agricultural liberalization

(domestic and external) is responsible. Another group, Sen and Patnaik blames the withdrawal of

state support to agriculture and the integration of agriculture into global markets, due to

liberalization pressures. The two groups have advocated an increased role for either markets or the

state as the solution. There are many other arguments came up arguing in this line showing multi

dimensions of the crisis.

In the light of above discussion, we now try to look at the reasons addressed by different authors

in explaining crisis. They are variety of reasons put forward in the literature, sum of them are

discussed below. Vakulabharanam (2008, 2005) argues that the state had offered various input

subsidies, especially in the provision of fertilizers, electricity and credit. It had provided

infrastructural support (primarily in irrigation and electricity) and extension services to cultivators.

It had also provided minimum support prices for agricultural output. The policies after 1990,

unevenly withdraw this support to the farming community. The reduction of domestic support in

terms of subsidy and credit on the one hand and drastic price fall of agricultural commodities in

the international market on the other hand led to distress in the farming class. Chand et, al (2007)

and Chand (2005, 2004) argues, the main factors which led to a slowdown in agriculture at

national level after 1996-97 are: (a) decline in the area under cultivation, which seems to be a

result of expanding urbanization and industrialisation, (b) deterioration in the terms of trade for

agriculture, (c) stagnant crop intensity, (d) poor progress of irrigation and fertiliser, (e) Decline in

supply of electricity to agriculture, and (f) slowdown in diversification.Mishra Srijit (2007) and

Reddy and Mishra(2008), Crisis in agriculture was well underway by the 1980s and economic

reforms in the 1990s have only deepened it the major reasons brought out in the light of

agricultural distress are vagaries of nature (primarily, inadequate or excessive water),lack of

irrigation facilities, market related uncertainties such as increasing input costs and output price

shocks mainly commercial and plantation crops due to agricultural trade liberalisation,

unavailability of credit from institutional sources or excessive reliance on informal sources with a

greater interest burden and new technology among other.

Narayanamoorthy (2007) argues that fall in wheat and rice production is not due to technology

fatigue rather due to extensive mono crop cultivation and high use of fertilisers and faulty

agricultural pricing. Lack of allocation of funds to irrigation development after liberalisation

during this period net area irrigated remained constant. This poor growth in surface irrigation has

compelled farmers to rely heavily on groundwater irrigation. The increased dependence on

groundwater irrigation increases the cost of cultivation and depletion of ground water resources

and in addition to this credit unavailability for investment on inputs put farmer in further

crisis.Pillai (2007) in his, study he basically observed major aspects of the crisis and try to find out

the reasons contributed for it. Study came up with the issues liberalisation, price volatility and

weak domestic support in price policies and credit. The single most adverse effect of trade

liberalisation has been the combination of low prices and output volatility for cash crops. While

output volatility increased especially with new seeds and other inputs, the prices of most non-

foodgrain crops weakened, and some prices, such as those of cotton and oilseeds, plummeted for


prolonged periods. This reflected not only domestic demand conditions but also the growing role

played by international prices consequent upon greater integration with world markets. In addition

to that, high volatility of output and lack of proper domestic price support and credit facility to

invest in agriculture worsened the agrarian situation in the last part of 20th century. Suri (2007)

argue that that agrarian distress is the result of the policies pursued by the governments over the

years. Other factors such as changed cropping pattern due to a shift away from light crops to cash

crops; liberalisation policies which prematurely pushed Indian agriculture into the global markets

without a level-playing field; heavy dependence on high-cost paid out inputs; growing costs of

cultivation; volatility of crop output; market vagaries; lack of remunerative prices; indebtedness;

neglect of agriculture by the government; decline of public investment have contributed further to

agrarian crisis. Galab and Reddy (2006), the authors precisely talked about the factors that caused

crises in agriculture. They are technological factors, ecological, socio cultural and policy related

factors. Extensive cultivation has led to decrease in fertility and productivity this is also because of

intensive use of fertilisers, since the input intensity is increased in the marginal farms the

productivity fell down coupled with increasing cost of inputs, these factors ultimately led to

decrease in profit margins. Ecological factors include decreasing quality of land and water

resources due to intensive chemical and fertiliser use. Socio and cultural factors include the effects

of globalisation and urban culture on villages had shown impact on health and education

consciousness in the rural agrarian families, in order to get the access of better facilities farmers

have changed their cropping pattern. Policy related factors like decrease in public investment from

4 per cent of agricultural GDP during 1980’s to 1.86 during early 2000.

Patnaik (2005), tried to identify changing agrarian situation after reforms. This study tries to

explain how neo liberal policies introduced in the 1990’s affected peasant community by

examining the fund allocation to the rural development from the Net National Product. Fund

allocation to the rural development will result in improving irrigation, irrigation and other heads of

agriculture and this fund allocation has come down from 4 per cent of NNP to 1.9 of NNP by

2001-02. The study also explores the impact of liberalisation on food security and found out that

shift in cropping pattern towards non food grains has led to food security problem. Since advanced

country markets were in recession and global primary product prices went into a steep tailspin

with 40-50 per cent decline in unit dollar prices of all crops –cereals, cotton, jute, sugar, tea, coffee

– and up to 80 per cent decline in some oil crops between 1995 and 2001. With a brief spike in

2002 most prices have continued to fall and some prices are today lower than as far back as 1986.

This resulted in distress of farmers which had led to farmers committing suicides. Gulati and

Bathla (2001) and Chand and Kumar P (2004) studied impact of capital formation on Indian

agriculture and it is found that growth in capital formation is significantly related with growth of

agriculture. But capital formation in Indian agriculture has been either stagnating or falling since

the beginning of 1980s but macro economic reforms further squeezed public investment, though

there is rise in private investment that was not rising to meet the requirements.

Rao C H (2001), tried to study the impact of WTO on viability of Indian agriculture in which, he

explain the main rationality of introduction of WTO and whether Indian agriculture reaped the

benefits in the post globalisation period. He argued that India could not exploit the trading

opportunities with comparative cost advantage is due to high domestic support, export subsidies

and denial of market access through various tariff and non-tariff barriers in the developed


29

countries. The major challenge to the viability of agriculture of India is posed by the shortfalls in

public investment and in the provision of agricultural services account for the failure of

agricultural supplies to respond to the favourable incentive framework created by macroeconomic

reforms, including trade liberalisation, in the 1990s. India was major exporter of food grain in the

world but due to the unfavourable terms of trade exports have come down and finally, the price

fall in the international market has significantly affected whole farming community. Vyas and

Reddy (2001) they examined impact on economic reforms on agriculture. They claim that Indian

farmers are mostly consists of small and marginal farmer who mainly depend on agricultural price

policies such as Minimum Support Prices (MSP), subsidies on inputs and irrigation. But after pro

market strategies developed after liberalisation has minimum role in providing them. Withdrawal

of public investment due to structural adjustment is also another reason for poor performance of

agriculture.

SOURCES OF AGRICULTURAL GROWTH IN INDIA

Period 1 – From Independence to Green Revolution

As we know, agricultural growth is very vital in developing countries like India with population

over one billion. The most importantly, it feeds whole nation with its supply of food on the one

hand and on the other hand it provides employment to more than half of work force in the country,

which implies growth of agriculture plays very important role in the growth of economy.

Therefore, it is important to know the growth performance of agricultural sector and what is the

engine of its growth. Principally the main sources of growth are area, yield and cropping pattern

which are affected by various factors. The contributions of these three sources have been changing

over a period with respect to supply and demand factors including some other socio economic and

environmental factors. First one half decade after independence, during so called pre Green

revolution period, area growth land has played significant role in the growth of agricultural output.

Partly because of land reforms though not successfully implemented everywhere, has shown area

expansion due to distribution of surplus land. In the mid 60’s with state intervention in agricultural

development had led to introduction of HYV seeds, improved irrigation facilities. This was done

by creating infrastructure through public investments and by policy changes affecting agricultural

marketing, production, processing and trade (Vaidyanathan 1994). Bhalla and Alagh (1979) in

their state level as well as in district level study found that total agricultural output grew at a

compound rate of 1.95 per cent during 1962-65 and 1970-73, in overall situation. Area under 19

crops increased from 124 mn. hectares to 127 mn. hectares, that is, at a compound rate of 0.30 per

cent. Productivity increased at a much faster rate of 1.66 per cent from Rs 853 per hectare to Rs

973 per hectare. Another study by Singh et al. (1997) examined temporal and spatial performance

of important food grain and non-food grain crops in terms of area, production and yield. They also

examined the factors responsible for determining yield and acreage of important food grain crops

across the states and the country. The study revealed that in case of total food grains as well as for

the individual grain crops, yield witnessed higher growth rates as compared to acreage in the last

two decades. Area effect played a significant role in the pre green revolution while yield effect and

changing cropping pattern played a crucial role in agricultural growth despite the reduction in the

overall area cultivated due to the effective state intervention in creating favourable environment

for agricultural development. Ray (1983) shows that sources of area expansion became less


significant to agricultural growth, at the same time cropping pattern shifts became progressively

important contribution of yield was an important contributor growth during 60’s and 70’s.

Period 2 – 1980 onwards

It is well approved that, agricultural growth performance during 80’s is impressive compare to the

previous periods due to spread of Green revolution technologies to many places backed by huge

investments made on irrigation and infrastructural development. The efforts of state resulted in the

growth of productivity of products. During this period area expansion has shown a decline but

massive increase in the yield compensated the reduction in area and kept agricultural growth in

better place. When we see the trends in area expansion, it is showing decline in trend in the coarse

cereals and increasing trend in the non food grains such as oilseeds and horticultural crops, spices

and sugarcane. Area effect is mainly because of relative price changes among crops, this gave rise

to importance of cropping pattern and crop diversification has become important particularly after

economic reforms. It is found that area and yield accounted for 45 and 48 percent of growth while

cropping pattern accounts for only 8 per cent. During 1980’s growth in production was mainly

contributed by growth in the yield while area expansion and cropping pattern was main source

during 1990’s due to technological slack and weak input delivery system and poor infrastructure

(Joshi et al, 2004). Macro level study on agricultural growth after reforms gives very different

look despite increase in cropping intensity and area expansion which are considered as major

sources of growth. In the Post reform period, agricultural growth is recording a fall mainly is in

food grains in the first phase of reform but growth during this period sustained due to rise growth

rate of commercial crops such as horticulture and oilseeds, cotton and allied sectors like livestock.

But after globalisation agriculture as a whole declined drastically while non agriculture sector is

growing fast, this poor performance of agriculture particularly food grains has become a serious

concern for the policy makers as there is a chance of facing the problem of food security. In this

section we try to explore the causes of poor performance of agriculture by examining the sources

of growth first and its changes over a period of time and finally find out the factors that have

caused deceleration in growth performance in agriculture. Now first let us have a look at the

growth performance of agriculture since 1980’s and how it performed during the post reform

period and then explore the sources of growth and factors contributed for it.

Table 1

Growth Rate of GDP by Sectors (% p.a. at constant prices)

Sector 1980-81 to 1989-90

1990-91 to 1996-97

1996-97 to 2004-05

GDP 5.52 6.01 5.72 GDP non Agriculture 6.88 7.04 7.06 GDP Agriculture and allied 3.12 3.64 1.66 GDP Agriculture 3.29 3.69 1.65

GDP Fishery 5.93 7.41 4.30

Source: Chand et al 2007

Agricultural performance has shown slight 0.5 percentage points increase in its growth rate in the

initial phase of liberalisation at 3.64 per cent during 1990-91 to 1996-97 against 3.12 during the

pre reform decade, which is due to impressive growth rates witnessed in horticulture (5.92 per

cent)and fishery (7.41per cent) in the initial period of reforms but after 1996 growth in agriculture


31

sector as a whole experienced a drastic reduction in the growth rates to 1.66 out of this fishery

fallen from 7.41 to 4.3 and horticulture has fell down from 5.92 to 3.28. We conclude that

agricultural growth in the initial years of reform was led by horticulture crops and fishery due to

the favourable terms of trade during the period. Agricultural sector after WTO period has

experienced growth deceleration due to various factors to which we will come shortly.

Table 2

Growth Rate of Agricultural Sub-sectors (% p.a. at constant prices)

Sector 1980-81 to 1989-90

1990-91 to 1996-97

1996-97 to 2004-05

Crop sector 2.71 3.22 0.79 Live stock 4.84 4.12 3.67 Fruits and Vegetables 2.42 5.92 3.28 Non-Horticulture crops 2.77 2.59 0.05 Cereals 3.15 2.23 0.02

Source: Chand et al 2007

In the post reform period, except for the horticulture which has shown significant growth in the

first phase of reforms, all other sub sectors of agriculture have undergone a growth deceleration

(Table 2). Many scholars have attributed different reasons for the growth deceleration. Now, this

paper will try to look at the sources of growth namely area, yield and cropping pattern and their

changes in the post reform period. By doing so, we will come to know what are the changes that

affected positively in the initial reform period and negatively in the in the post WTO period.

Changes in Sources of Agricultural Growth

It is very important to understand the sources of growth and their changing contribution and

impact on the overall growth of agriculture in order to judge the performance of agriculture as a

whole. As it is discussed earlier, the main drivers of growth are area, yield and cropping pattern.

We will discuss how these sources have changed from pre reform period to post reform period.

Area expansion is mainly affected by the relative prices and other factors like urbanization and

industrialisation, these two are not concerns of our study coming to the area change it can be seen

from the Table 3 that food grains constitute 70 per cent of total cultivated area and non food

grains contribute around 30 per cent but it accounts for 51 per cent of value of output during the

pre reform period. The high value of non food grains has attracted farmers to shift from food

grains to non food grains, in the post reform period acreage area in food grains has come down to

65.44 per cent while area under non food grain increased to 34.56 in the post reform period. This

shows that there is shift in cropping pattern to high value non food grains such as horticulture

crops, oilseeds, cotton and sugarcane as the prices of these high value commodities are high

compare to the food grains. But if we look at the expansion of area in the post reform period, it is

seen that acreage area has come down for many crops in the post reform period (see Table 7). Net

area sown has come down in the post reform period. Net sown area witnessed a decline at the rate

of 0.55 per cent which was not compensated by an increase in cropping intensity. Similar trend

has been observed in gross cropped area. Decline in the area under cultivation, which could be a

result of expanding urbanisation and industrialisation (Chand et al 2007).


Table 3

Share of Foodgrain and Non-Foodgrain in Area and Value of Output Triennium Ending 1981-82 Triennium Ending 1998-99

Foodgrains Non-foodgrains Foodgrains Non-foodgrains Region

Area Value Area Value Area Value Area Value

Eastern 81.6 51.7 18.4 48.3 73.8 43.0 26.2 57.0 Northeastern 70.1 44.4 29.9 55.8 65.1 35.8 34.9 64.2 Northern 77.4 54.9 22.6 45.1 76.9 53.7 23.1 46.3 Southern 62.9 41.8 37.1 58.2 53.1 28.2 46.9 71.8 Western 71.9 44.4 28.1 55.6 61.9 36.1 38.2 63.9 All-India 70.3 48.1 29.7 52.0 65.4 39.9 34.6 60.2

Source: Joshi, 2005

The rate of growth of both gross cultivated area has started coming down from the beginning of

1980’s but it was compensated by the impressive growth in the yield due to the wide spread of

Green revolution technology and improved irrigation system and also changing cropping system

towards more high value crops and yields of these crops helped to sustain agricultural growth

around 3.16 per annum during the decade of eighties despite the reduction in the public

investment. The contribution of growth of area to the total output growth is explained below.

Table 3 essentially to show the main contributors of growth in agriculture during pre and post

reform period. A region wise analysis is made us to better understand the changes in sources of

growth across country during the post reform period as Indian agricultural scenario is diverse due

to different tropical regions so infrastructural and technological advancements vary across states

and hence its sources of growth to total growth vary.

Table 4

Sources of Agricultural Growth in Different Regions of India Sources of Agricultural growth

Region Period Area Yield Prices Diversification Interaction

1980s 1.4 75.4 -6.5 29.7 0.1 Northern

1990s 10.1 16.6 44.0 28.2 1.1

1980s 11.6 36.5 7.3 39.0 5.5 Western

1990s 13.4 24.8 25.7 35.8 0.4

1980s 17.8 49.7 11.8 19.7 1.0 Eastern

1990s -29.7 38.7 45.8 42.6 2.6

1980s 10.4 39.5 16.8 32.1 1.3 Southern

1990s -8.7 36.2 29.3 45.0 -1.8

1980s 10.1 54.0 7.7 26.6 1.6 All-India

1990s 4.0 29.3 35.2 30.7 0.8

Source: Joshi, 2005

From the Table 4 it is clear that yield contributed higher share to the growth of agriculture not

only overall India but all the regions in the country. During 80’s 54 per cent of agricultural growth

was contributed by yield alone while 26 per cent was contributed by crop diversification. Yield

contributed very high share 75 per cent in the growth of output due to wide spread of green

revolution to northern regions. Coming to post reform period, the share of yield growth to total

growth had decreased nearly half from pre reform period to 29.3 per cent. In the post reform

period prices and crop diversification has played crucial role in the growth of agriculture with the

contribution of 35.2 and 30.7 per cent. The same trend witnessed in all regions in the country. We

can conclude that agricultural growth in the post reform period is mainly due to high market prices


33

for the produce and crop diversification towards high value commodities from the food grains as

shown in table 3.

In Table 5 we decomposed the area effect, yield effect, price effect, and diversification on growth

over various food grains and commercial crops.

Each of the above growth sources has implications for future agricultural development policies

(Minot 2003). If the growth stems from the technological change (yield improvements),

investments in research and extension need to be accorded priority. The area-driven growth

implies need for greater extension efforts to make agriculture broad-based, while the price-driven

growth requires an appropriate pricing policy for a balanced growth of the agricultural sector. If

the growth occurs due to crop diversification, there is a need for increasing investments in

development of markets and infrastructure.

Surprisingly, the share of real prices of all cereals, which depicted a declining trend during the

1980s, turned out to be positive during the 1990s, which eventually contributed to agricultural

growth. The prices of a majority of commodities, except oilseeds, increased during the 1990s, with

maximum rise in prices of rice, wheat, and fruits & vegetables. Rice and wheat were, however,

covered under the government policy of ‘Minimum Support Price’ (MSP); consequently their

prices were consistently increased to protect the interests of the farmers. But for fruits &

vegetables, it was the growing demand that pushed up their prices. The yield-effect on agricultural

growth slowed down during the 1990s. A majority of crops depicted either stagnation or

deceleration in their yield levels during the 1990s as compared to values in 1980s. It was a clear

indication of the fatigue in the technology being used for these crops. The improved technologies

were reported inaccessible to the farmers due to various reasons. This indeed is a matter of

concern as the potential yield of most of the crops is yet to be tapped to harness the benefits of

improved technologies. Moreover, with only a limited scope of expansion in the area, increase in

yield through technological innovation is the only viable option as the source of agricultural

growth in the future.

The crop diversification emerged as a prominent source of growth in agriculture both during 1980s

and 1990s. The rise in its share in the growth was an indication of the changing production

portfolio in favor of superior and high-value commodities. It was noted that the areas under most

of the coarse cereals, pulses, and spices had shifted towards fruits & vegetables and other more

remunerative crops. During the 1980s, the area substitution was in favor of oilseeds, while the

trend shifted to wheat and fruits & vegetables in 1990s. The share of fruits & vegetables in crop

diversification went-up to 61 percent during 1990s from about 56 percent during 1980s. Their

share in the total cropped area increased from 2.8 percent in TE 1981-82 to 4.8 percent in TE

1999-2000. Their corresponding share in the gross value of agricultural output moved-up from 8.9

to 17.5 per cent during this period( see table 3).

It was interesting to note that the contribution of output prices and crop diversification

(particularly fruits & vegetables) had gone-up in agricultural growth during the reform period,

whereas during the pre-reform period, it mainly relied on technology and crop diversification

(particularly oilseeds and fruits & vegetables). During the reform period, the focus was on

agricultural prices, particularly of rice and wheat, whose prices depicted a change of 30 and 27

percent, respectively. However, a continuous rise in the output prices is not a sustainable source of


growth in the long-run. Increasing production and globalization could suppress the output prices

and may affect the agricultural growth adversely. Thus, accelerating the pace of crop yields

(through technological change) and crop diversification (in favor of high-value commodities) are

the options to provide sustainable sources of agricultural growth in future.

Table 6

Growth of Area, Production, Yield and Area under Irrigation for Major Crops

Years Rice Wheat Pulses Foodgrains Cotton Oilseeds Sugarcane

Growth in the Area under Crops (% pa)

1989-90 to 2006-07 0.14 0.73 -0.35 -0.26 0.86 -0.02 1.15

1992-93 to 1996-97 0.46 1.51 -0.33 0.17 4.04 0.56 2.6

1997-98 to 2001-02 0.34 -0.15 -1.82 -0.57 -1.26 -3.38 1.77

2002-03 to 2005-06 -0.29 1.09 2.06 0.55 1.26 5.62 -1.67

Growth in Area under Irrigation (% pa)

1989-90 to 2006-07 1.33 1.42 1.85 1.25 0.88 -0.28 1.94

1992-93 to 1996-97 1.97 2.18 3.57 1.74 5.24 2 2.73

1997-98 to 2001-02 1.26 0.34 0.78 0.91 -2.64 -4.8 2.38

2002-03 to 2004-05 -1.86 1.03 5.11 -0.06 -4.43 7.35 -4.7

Growth in Production (% pa)

1989-90 to 2006-07 1.17 1.9 -0.03 1.18 2.04 1.25 1.13

1992-93 to 1996-97 1.73 3.6 0.66 1.88 4.88 3.57 3.74

1997-98 to 2001-02 1.13 1.26 -2.52 0.67 -5.79 -4.68 1.23

2002-03 to 2005-06 1.75 0.42 3.27 1.61 20.22 9.81 -1.23

Growth in Yield (% pa)

1989-90 to 2006-07 1.02 1.16 0.32 1.43 1.17 1.24 -0.04

1992-93 to 1996-97 1.27 2.06 1.01 2.05 0.77 2.96 1.14

1997-98 to 2001-02 0.75 1.41 -0.76 1.23 -4.56 -1.38 -0.53

2002-03 to 2005-06 2.1 -0.66 1.25 1.09 18.48 4.11 0.36

Source: Economic survey, 2007-08

Note: All growth rates are based on moving averages of three years

There has been a considerable decline in the rate of growth of area, production, productivity and

area irrigated for the major crops The area under the production of foodgrains over a 16-year

period witnessed an average annual decline of 0.26 per cent during 1989-90 to 2005- 06, largely

because of a shift in area away from coarse grains. The trend, however, was moderately reversed

during 2002-06, partly because of a low base. Cotton and oilseeds also witnessed an increase in

area during the period. Average annual rate of growth in production and yield varied across crops

and over different time periods. For cotton and oilseeds, the rate of growth in production remained

high during 2002-06, while in case of wheat and sugarcane, annual growth in production peaked

during the initial phase of reform period, that is, 1991-92 1996-97. Rice maintained a positive

growth in yield during this period, but in case of wheat, average annual growth in yield during


35

2002-06 was negative. Growth of productivity in pulses fluctuated over the three Plan periods. It

became negative during 1997-2002 (Ninth Five Year Plan period), but turned positive again

during the Tenth Five Year Plan. Increase in production and productivity of cotton during the

Tenth Five Year Plan may be due to increased use of BT cotton.

Table 7

Growth Parameters before and after Reforms Variable 1980-81 to 1990-91 1990-91 to 1996-97 1996-97 to 2004-05

Gross Cropped Area 0.43 0.43 -0.48

Net Sown Area -0.08 0.04 -0.55

Cropping Intensity 0.51 0.39 0.07

Gross Irrigated Area 2.28 2.62 0.51

NPK use/ha NSA 8.255 2.401 2.044

Electricity consumed in

agriculture/ha NSA 14.162 9.39 -0.159

Area witnessed crop shift 5.6 5.6 4.8

Terms of trade 0.189 0.947 -1.63

Public sector net fixed capital stock/ha NSA 3.939 1.872 1.976

Private sector net fixed capital stock/ha NSA 0.642 2.134 1.721

Total net fixed capital stock/ha NSA 2.085 2.01 1.838

Credit supply/ha NSA 3.81 7.466 15.336

Source: Chand et al (2007)

Note: Growth rates in the area and crop intensity are up to year 2003-04, in % pa

Table 7 gives a broad look about the factors that affect growth in three periods period I represents

the pre reform period 1980-81 to 1990-91, period II represents initial phase of reform s 1990-91 to

1996-97 and third period represents the period after globalisation 1996-97 to 2004-05. Gross area

under cultivation remained constant from pre reform period to period II and declined after

globalisation period. After 1996-97, almost all factors except credit, turned unfavourable for the

growth of agricultural output. Net sown area witnessed a decline at the rate of 0.55 per cent which

was not compensated by an increase in cropping intensity. Gross cropped area also declined on the

trend. The biggest setback to output of the crop sector came from the decline in terms of trade for

agriculture and slowdown in expansion of irrigation. The terms of trade for agriculture after 1996-

97 have declined annually by 1.63 per cent. Liberalisation of trade has led to increased integration

of the domestic market with the international market. Accordingly, a downward trend in

international prices of agricultural commodities after 1997-98 has been transmitted to domestic

prices resulting in deterioration in TOT for agriculture.

FACTORS AFFECTING AGRICULTURAL GROWTH

In the preceding section we have seen what are the main sources of growth and their changes in

the reform period. It is identified that the sources of growth have changed compare to the pre

reform period. The main changes are area reduction both in terms of gross cropped area and net

sown area, reduction in the yield for many crops both food grains and non food grains and hence

its contribution to total growth has declined and finally there is cropping pattern change started

from the 80’s and accelerated in the 1990’s (table 2.3) from food grains particularly coarse cereals

to non food grains high value crops like horticulture crops, cotton, oilseeds and sugarcane which


contributed to growth. It is broadly understood that it is cropping pattern mainly crop

diversification that drive growth with the support of high prices for these commodities. In this

section we will try to explore the underlying factors responsible for the above changes.

Factors affecting Area

Expansion of area under cultivation depends on the prices of crops, but the acreage of cultivable

land was adversely affected by the urbanisation, industrialisation through special economic zones

and marginalization of land holdings resulted mainly in the post reform period. The study of

Parthasarathy et al (2004) shows that in the world of globalisation, with the vast development of

secondary and tertiary sectors, and their spread to the semi urban areas led to the substitution of

cultivable land and also rapid development of special economic zones to some extent played a role

in reducing acreage. In addition to this there is marginalization of land holdings in the post reform

period with the increase in landlessness to 48 per cent in the post reform period compare to 30 per

cent in 1970’s (Reddy and Mishra 2008). A persistent trend in Indian agriculture is the shrinking

farm size. This is a long-term trend and unless addressed can have permanent adverse

consequences for the sector, impinging upon its prospects. At the same time as the smaller farms

have come to predominate, due to the fixity of land, they have come to account for the greater part

of the area operated. In 1960-61 over 60 per cent of the cultivated area was operated by farms

exceeding 4 hectares by 2002-03 the figure is less than 35 percents farm size is reduced while size

marginal farmers increased from 6.9 in 1960 to 22.6 in 2002-03 as marginalization of land

increases the members of the family are driven to look outside the farm to supplement their

income, in turn being forced to neglect production management, thus slowing growth. The decline

in land holdings and area cultivated in a way contributed to the decline in output.

Factors affecting Yield

Agriculture growth after Green revolution period was mainly sustained by the impressive growth

in the yield of all most all crops. As we have seen yield played significant role in the growth of

agriculture during 1980’s. But it turned out very disappointing in the post reform period with the

massive reduction in yield for major principle crops (table 2.6). Analysis of new varieties released

of major crops (rice, wheat, maize, groundnut, mustard and sugarcane) shows significant

deceleration of the growth of yield potential, with negligible increase over the last decade due to

advent of neo liberal policies. There are many supply side factors that have affected yield in the

post reform period in the market led economy such as public investment on irrigation and

infrastructure development, fertiliser, seed varieties, price policies, technological progress,

weather, intensive farming etc. The policies of the Government in the post-liberalisation phase

have had direct and indirect adverse effects on agriculture and the peasantry. In terms of fiscal

policies, the reduced spending of Central and State governments was the most significant feature.

We will enquire the details how the above factors turned adversely with the introduction of market

led policies in the post reform period (Patnaik 2005).

Public Investment in Agriculture

It is well known that fixed capital formation is essential for sustaining the growth of agriculture as

it reduces the transaction cost for private farmers besides reducing the operational cost of

cultivation. However, fixed capital formation by the public sector in agriculture has been

continuously declining both in absolute terms and also in relation to agricultural GDP. It plays a


37

crucial role in the expansion of irrigation and research and technology for improved seeds and

inputs and also infrastructural development in the improvement of yield of crops. The reduction

in the public investment in the post reform period did show a significant effect on yield. The trend

in the public investment has shown a decline from 80’s onwards and it further squeezed in the post

reform period as India had gone for structural adjustment policy which impacted on reduction in

the fiscal deficits though reduction in investment.

Aggregate capital formation appears to collapse with the initiation of reforms remaining depressed

throughout the nineties. The behavior of private capital formation is more volatile, unlike public

capital formation, collapsing with the onset of the reforms and remaining depressed during the

first half of the nineties. However, unlike public capital formation it begins to rise from the mid-

nineties, only to stagnate from around the year 2000. Dhar and Kallumal (2004) suggested that

throughout the 1990s, the share of agriculture in gross capital formation (at constant prices) has

remained in single digits, which explains the slackening of its growth momentum during the past

decade. Gulati and Bathla (2001) observed that there has been an increasing role played by private

sector investment in agriculture over time while there is a decline in public sector capital

formation in the sector. Public sector investment along with terms of trade has an inducement

effect on private sector capital formation. Desai (2002) suggested that government expenditure

should be focused on agricultural R and D, education and extension services, rural electricity,

roads and marketing, irrigation and watershed development, etc. The reduction in capital

formation has witnessed in the less R&D development in agriculture in terms of seeds and

fertilisers which adversely resulted in the decline of yield of crops in the post reform period.

Natural Factors

Agro climatic situation in India is diverse across regions in terms of soil, temperature and rainfall

distribution and hence yields to the crops also different. In India nearly 41 per cent gross cropped

area is under irrigation in 20051 remaining land depends on rainfall hence rainfall and availability

of water resources significantly affects productivity in addition to that monsoons and flood affect

yield in agriculture. Lack of adequate irrigation is another reason for cropping pattern changes

towards cash crops such as horticultural crops which are grown in rain fed areas. Flood prone

mainly Assam, Andhra Pradesh, Tamilnadu and other states. Irrigation is considered to be the

paramount factor that determines the performance of agriculture. Though the net irrigated area has

increased substantially from 20.58 million hectares in 1950-51 to 53 million hectares in 1994-95,

there is no appreciable improvement in it since the mid-1990s because of inadequate allocation of

funds required for completing ongoing projects and poor monitoring of irrigation projects by the

state agency. This poor growth in surface irrigation has compelled farmers to rely heavily on

groundwater irrigation. The increased dependence on groundwater irrigation increases the cost of

cultivation. It also depletes the water level and increases the rate of well failures in many places in

peninsular India. Farmers in most of the regions in India are fed up with crop cultivation because

they have not been able to recover even the cost of cultivation in the past several years now. The

SAS data clearly acknowledges this fact [Narayanamoorthy 2006; Balakrishnan et al 2008].

Factors affecting Cropping Pattern

1 Own calculation based on RBI Hand book of Statistics


From the previous section it is observed that, it is changing cropping pattern towards high value

commodities from food grains that contributed to growth of agricultural sector in the initial phase

of reforms and when there is reduction in both area and yield and. But growth in the post WTO

period is turned out to be very disappointing. There are various factors explaining the growth

crisis such as Economic factors (input and output prices), Technological factors (improved seeds

and irrigation), and Institutional factors (market and road density and access to credit) Policy

induced factors (fertilizer and irrigation subsidy, procurement price and Trade liberalisation)). In

addition to these factors cropping pattern is determined by climate, rainfall, soil type, irrigation

and drainages. Changes cropping pattern takes place according to changing irrigation facilities,

cost of cultivation, and returns from the cultivation, credit and market facilities. Among various

factors irrigation facility is considered as significant factor in rising crop intensity and permits

changes in cropping pattern in favour of more productive crops. So cropping pattern is influenced

by both irrigation facility and rain fed area (Renuka 2003).

Economic factors

Economic factors played equal role in the growth of agriculture in the initial period of reforms and

deceleration of growth in the total growth due to very low remunerative prices for output in the

post WTO period. With the high remunerative prices for the commercial crops during late 80’s

and early 90’s the crop intensity of those high value products which resulted in the growth rate of

horticulture crops, mainly crops of non food grain in the pre globalisation period and same is the

cause for deceleration of growth in the food grains which are considered as less profitable crops

(table 2.2). On the other hand with the reduction of subsidies on fertilisers and other agricultural

inputs and with the entry of foreign players due to the opening up of boundaries among countries

domestic input market has taken a new shape in the production of seeds and inputs had also

affected on rising input prices. Growing reliability on commercial crops have adversely affected

whole peasant class due to the highly volatile output( because most of the commercial crops are

grown in rain fed area) and its prices with high input costs put farmers in distress. High cost of

cultivation of crops with very less remunerative prices for the produce has become a reason for the

slowdown of agricultural growth.

Technological factors

As it is already mentioned in the preceding section due to the reduction public investment the

investment on improving seeds has come down. Application of traditional inputs without proper

irrigation which is a significant source growth of output resulted in the decline in the production in

the post reform period.

Institutional factors

In India, the marketing conditions for agricultural produce were never good. If the farmers are not

aware of market signals about price and demand conditions, they cannot really reap produce the

demanded goods in the country and access to market also play a crucial role in agricultural output.

Another factor which affects agriculture significantly is credit. It has always been maintained that

the availability of concessional credit would help the farmer to adopt new technology, encourage

investment in machinery and irrigation and augment the use of quality inputs to increase

agricultural productivity. After trade openness in agriculture, with the entry of foreign nationals in

the input market, the prices of input have gone up which were not supported by ample credit


39

supply to the farmers. It is observed that there is cropping pattern shift towards cash crops which

need high investments on inputs like fertiliser, seeds and adoption of new and improved

technology etc. to compete in the world market. But Indian farmers are as it is already mentioned

small and marginal who cannot take any investment activity without financial support by the

credit institutions. In India accessibility of formal credit is very low and hence the new production

initiatives are shrinking which is also due to un-remunerative pricing. Finally, these factors

together contribute to the slowdown in agriculture.

Policy induced factors

The policies of the Government in the post-liberalisation phase have had direct and indirect

adverse effects on agriculture and the peasantry. Factors mainly affected by the policy initiatives

are fertiliser and other input subsidy, irrigation and procurement price and trade liberalisation.

Indian economy, before economic reforms was supporting farmers with enormous subsidies on

fertilisers and inputs, assisting peasant community to increase production capacity with low cost

of production. Advent of economic reforms has led to withdrawal of state support on these

subsidies and others. In a market led economy, providing subsidies to farmers is not feasible. The

withdrawal of subsidies in the post reform era has shown its impact on cost of cultivation of crops

and also reduction in yield. Another factor is price supports to the farmers. Peasant agriculture

depends heavily on the support of the state for its survival and growth. There was no proper price

support in terms of MSP by the government. It was argued by the proponents of liberalisation that

freeing agricultural markets and liberalising external trade in agricultural commodities would

provide price incentives leading to enhanced investment and output in that sector, while broader

trade liberalisation would shift inter-sectoral terms of trade in favour of agriculture (Gulati and

Kelli 1999). External trade in agricultural commodities have been liberalised, first through lifting

restrictions on exports of agricultural goods, and then by shifting from quantitative restrictions to

tariffs on imports of agricultural commodities. Trade liberalisation in agriculture accelerated from

the late 1990s, in tune with WTO commitments, and import tariffs were reduced progressively.

The single most adverse effect of trade liberalisation has been the combination of low prices and

output volatility for cash crops. While output volatility increased especially with new seeds and

other inputs, the prices of most non-foodgrain crops weakened, and some prices, such as those of

cotton and oilseeds, plummeted for prolonged periods (Pillai 2006). This reflected not only

domestic demand conditions but also the growing role played by international prices consequent

upon greater integration with world markets. Without ensuring remunerative prices backed by

procurement operations, it is not possible either to increase agricultural production or to make

Indian agriculture internationally competitive.

DIVERSE EXPLANATIONS IN THE LITERATURE: A SYNTHESIS

It has been observed that there are vast range of studies came up explaining the deceleration in the

growth performance in the agriculture in the recent years in which, some of them are cited above.

The fascinating issue is that, each study on poor performance of agriculture came out with diverse

reasons though there are some commonalities in the diversities. So it is essential to have a look at

it to know why so many interrelated factors are explained in each of the study and also to observe

whether all factors explained are equally important in analyzing crisis in agriculture. In the

literature, it is found that many studies have highlighted some common factors like reduction in


public investment, withdrawal of domestic subsidies and trade liberalisation. Giving central

importance to these three factors, many other interrelated factors are explained in the literature. In

this particular study focus has been made to understand how and in what context the explanations

are different from other studies. It is understood that as agrarian crisis is subject to multi

dimension issue, it is viewed in different dimensions with various methodologies to understand the

factors and thus it gave rise to different explanations of crisis. For instance, the studies on farmers

distress by Suri (2006), Mishra and Reddy (2008) Mishra (2008) Vakulabharanam (2005)

Vaidyanathan (2004) Galab and Reddy (2006) showed that heavy dependency on commercial

crops has led to increased cost of cultivation due to use of expensive seeds and fertilisers and

rising input prices which were not backed by favourable output pricing and credit facilities and

also depletion of natural resources and other natural factors. Studies on trade liberalisation by Rao

(2001) Gulati and Kelli (1999) attributed agricultural crisis to the volatile prices in the

international market and lack of competitiveness. Another study on economic liberalisation by

Vyas and Reddy (2001) and Vakulabharanam (2008) Balakrishnan et al (2008) Chand et al (2007)

argued that withdrawal of state intervention has resulted in decline in public investment and

domestic subsidies on irrigation, fertiliser and inputs. Having looked at the broad classification of

literature in terms of explanations, one can derive a conclusion that factors varied according the

dimension of the studies and its methodologies. Coming to the second point, whether all factors

play equal role in the deceleration of agricultural growth? The answer is no. having explained each

and every factor clearly it would be fair to argue that mainly policy induced factors such as price,

domestic support and credit plays important role in growth performance of agriculture. In addition

to this public investment also plays an important role but the trend showing that private investment

is continuously rising and gross investment is also increasing. Many argued that Agriculture has

become unviable in the post reform period. If it is so, there is no explanation as to why private

investment would keep on increasing unless there is a hope profit from the agricultural sector and

by looking at the trend in public investment it is observed that public investment started declining

right from the 80’s on the other hand there was increasing trend in growth in agriculture till mid

1990’s. from the we can derive that more than public investment, some factors play an important

role in agricultural crisis.

SUMMARY AND CONCLUSIONS

To conclude, this paper essentially tried to look into the growth performance of Indian agriculture

and explanations for dismal performance in agriculture by observing its sources of growth mainly

area, yield and cropping pattern in the recent years and tried to explore what mainly contributed

for slow growth by critically examining the literature.

While many arguments say that, during the era of neo liberal period the policies initiated were

acted against agriculture and negligence of agriculture, the growth rate in agriculture during the

first half of 1990’s was recorded better than pre reform period at 3.62 per cent during 1990-91 to

1996-97 from 3.2 per cent during 1980-81 to 1989-90. After agreement with WTO, growth in

agriculture has actually come down to less than 2 per cent. So, we could attribute the crisis in

agriculture to the policies that have come up after trade liberalisation.

Sources of growth of agriculture have been changing right from the independence. Area cultivated

both in term of net sown are and gross sown area has shown a decline in the post reform period


41

due to urbanisation, industrialisation and marginalization of land holdings which had an impact on

growth on agricultural production. Yield which played a significant role in the growth of

agriculture during 80’s due to spread effects of green revolution has come down during 90’s with

the advent of neo liberal policies due to reduction in public investment on irrigation and seeds,

technology and extension has greatly affected yield. The engine of agricultural output during post

reform period is cropping pattern. It is observed that, there is a shift in cropping pattern towards

from food grains to commercial crops due to favourable prices and terms of trade but these factors

turned negative which had significant effect on growth of agriculture.

There are number factors contributed for the slowdown in growth of agriculture in addition to

reduction in public investment. Volatile output prices, reduction of subsidies on inputs,

dependency on high cost inputs increased cost of cultivation which was not backed by adequate

credit supply on the one hand and on the other hand crop failures and faulty remunerative prices

affected whole peasant community and pushed them into debts. The NSS 59th round Survey on

Indebtedness of Farmer Households conducted in 2003 reported that 48.6% of farmer households

were indebted.

Finally, all sectors in agriculture and sections among the peasantry are affected by the deepening

agrarian crisis. The poorer sections among the peasantry, especially the small and marginal

farmers and the agricultural labourers, who constitute the vast majority of the Indian population,

are the worst sufferers.

____________________________

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APPLICATION OF TRAVEL COST METHOD TO ASSESS THE PRICING

POLICY OF PUBLIC PARKS: THE CASE OF KAZIRANGA NATIONAL PARK

Abinash Bharali1 and Ritwik Mazumder

2

National parks are established to preserve wildlife or biodiversity. But conservation often

displaces local communities and has the potential of raising their distress levels. “Ecotourism”

helps in the conservation of natural resources or services and raises the standards of living of the

local people. But unregulated tourism creates problems in preservation of the wildlife of public

parks especially in developing countries. In recent years Kaziranga National Park has faced these

problems and the park authority may possibly use revenue maximizing entry fee as an effective

instrument. In this study the Zonal Travel Cost method is used to estimate the revenue

maximization entry fee. The study is based on primary data collected from 300 visitors during the

winter of 2010-11. The total recreational value of the park is estimated at ` 773.45 million.

Revenue maximization entry is estimated at ` 187.6 per visitor per visit assuming zero entry fees.

By introducing this revenue maximization entry fee the park authority can ease the tourist

pressure to a certain extent. The additional revenues may be used for conservation of the wildlife

and biodiversity. By conducting well-crafted publicity campaign for other parks and sanctuaries

in Assam it is possible to divert a large chunk of visitors towards other national parks. This would

generate additional funds that can be directed towards the preservation of the wildlife and

biodiversity.

INTRODUCTION

National parks and Sanctuaries are established and developed to preserve the unique wildlife or

biodiversity of the local areas. But these efforts often displace the local communities and make

them poorer. For this purpose various efforts were made including legislations to minimize the

human interference in these areas. But these efforts did not prove to be as effective as they were

expected to be. This necessitated the development of novel strategies like “Ecotourism” which has

the potentiality of integrating the conservation of natural resources or services with the

development of the local people. But in some cases unregulated tourism creates various problems

in the preservation of the wildlife of the public parks especially in the developing countries.

Market also fails or the market misprices or under-prices these resources because these are

characterized by non-excludability and externalities, which prevents the market price from

capturing the correct signals about the true economic value. In an economy, the resources are

allocated according to the value of the assets. Without proper estimation of value, resources are

bound to be misallocated. To estimate the true economic value of the public parks non-market

valuation methods are appropriate.

Kaziranga National Park is the home land of Indian one-horned rhinoceros along with many other

species. It is located on the banks of the mighty Brahmaputra River, Assam covering an area of

approximately 430 square kilometers (sq-km). There are proposals of adding an area of 454.50 sq-

1 Research Scholar, Department of Economics, Assam University, Silchar, Assam-788011, India, Email:

[email protected], 09435269117

2 Corresponding Author: Assistant Professor, Department of Economics, Assam University, Silchar, Assam-

788011, India, Email: [email protected] , 09435073899


45

km by including the Brahmaputra River in the north and part of the Miker Hills in the south. With

the passing of the Assam National Park Act of 1968, Kaziranga became a National Park on

January 01, 1971. In 1985 it was notified as World Heritage Site by UNESCO. Kaziranga

National park is not kept open for tourists for the entire part of a year. Its visiting season is mid-

November to early April as because during monsoons, the Brahmaputra River overflows, flooding

the low-lying grasslands of the park. In 2010, there were 497 employees providing services for

the preservation of wildlife in Kaziranga National Park. It is too small staff strength as compared

to the area of the park. The forest guards are not well equipped with arms and moreover they do

not get their wages/salaries regularly. In 2011 many of the home guards who were temporarily

appointed as forest guards left their jobs because they were not paid their salaries for five to six

months in succession.

Tourists come from various part of the world for viewing the unique wildlife and biodiversity of

the national park. In 2005-06 the total tourists flow was 54,326, which increased to 109,606 in

2009-10. On an average 5 percent of the tourists are foreigners. The Kaziranga National Park

(KNP) has been suffering from over-exposure in recent years. In the southern part of the

Kaziranga National Park, almost seventy private and public hotels and lodges (there are only four

Government lodges) have been constructed providing hospitality services to the visitors. However

most of the hotels and lodges are not owned by the local people. The haphazard growth of tourism

related infrastructure, especially unchecked expansion of tourism and hospitality industry on the

southern boundary of the park, is blocking traditional animal corridors. The 54 km stretch of the

National Highway 37 running parallel to the southern boundary of the Kaziranga, divides the park

between the low-lying grasslands in the north and the elevated Karbi Anglong hills in the south.

During rainy season when much of the park is flooded by the Brahmaputra the animals migrate

from the low lying grasslands to the hills using these corridors by crossing National Highway 37.

Many wild animals are killed by vehicles every year while attempting to cross the highway. There

are 23 villages surrounding the park along with four tea gardens. Another 30 villages are located

in the vicinity. The total human population in the immediate surroundings of the park is about

70,000 according to the 2001 census report. The tea gardens located near the park boundaries also

create a threat to the preservation of wild life through pesticide run-off. Hathikuli Tea Estate is a

typical example. During the last 50 years large scale habitat changes in the Karbi plateau include

expansion of tea gardens, human settlement, logging and jhum (shifting agriculture) cultivation.

One impact is that the gap between the park and the plateau is increasing and suitable habitat of

wildlife is being destroyed. In 2010, altogether 68 rhinos, 11 elephants and 5 tigers had died in the

park due to various reasons such as disease, poaching, unregulated tourism infrastructure

expansion, road mishaps, floods, encroachment by tea gardens, shifting cultivation, rising human

settlements and so on.

Unregulated tourism industry in the park has created several problems in pursuing the main

objectives of establishment of KNP – namely conservation of biodiversity. Four National Parks

and nine Sanctuaries have been established in Assam to preserve wildlife and biodiversity of the

region. But the tourist inflow pressure is much higher in KNP as compared to the other National

Parks and Sanctuaries in Assam. The tourist inflow data of the last two years shows that more than

0.1 million visitors visit KNP per year, but in the other parks and sanctuaries the tourists inflow

pressure is less than even 0.05 million per annum. The focus of government and other


organizations should remain on the core aspect of the establishment of the park (to keep KNP as a

safe haven for wild-life) and not on pure commercial aspects like hotel construction to

accommodate more tourists. Thus there is an urgent need for a strategic shift of policy on the part

of the Tourism and Forest departments so that a segment of the tourist inflow can be diverted

towards other parks and sanctuaries to lessen the pressure on KNP. The main objective of this

paper is to examine the role of entry fee in pursuing the prime objective of the establishment of the

park.

Since the 1970s and the 1980s a large number studies have been devoted to developing the

literature on non-market valuation methods and its applications in various fields of environmental

economics studies, especially in valuing environmental goods and services besides environmental

damages and hazards. To measure the recreational value of environmental resources and services

both Travel Cost Method (Rockel and Kealy, 1991; Guha and Ghosh, 2009; Khan, 2004,

Chaudhary and Tewari, 2008; Chopra, 2004) and Contingent Valuation Method (Bowker and

Stoll, 1988; Marawila and Thibbotuwawa, 2010; Cook and Cable, 1990, Kadekodi, 2004) have

been used. On the other hand some studies have used both methods simultaneously to estimate the

monetary value of the same environmental resources (Navrud and Mungatana, 2004; Herath and

Kennedy, 2004; Jabarin and Damhoureyeh, 2006; Chaudhary and Tewari, 2006) and compare the

estimates of these two different methods.

METHODOLOGY FOR ZONAL TRAVEL COST METHOD (ZTCM)

The travel cost model is generally used to estimate the recreational value or use value of

environmental resources, amenity or services. The ZTCM can be applied to the recreational sites

which receive few multiple visits by the same visitor (Tobias and Mendelsohn, 1991; Guha and

Ghosh, 2009). Most of the visitors visit the Kaziranga National Park once in a year or two or three

times during his whole life time, so in this study ZTCM is used. The demand function or Trip-

Generating Function (TGF) which will be estimated in this study can be written as

………………… (1)

where, Visitation rate of i-th zone, which can be calculated by

= Estimated number of visitors of the zone i

= Total population of the zone i

= Average Total Cost of the trip which includes the total travel cost from the place of origin or

the i-th zone to the Kaziranga National Park (KNP), cost of fooding and lodging, other

miscellaneous expenditure.

= Average House Hold Income of visitors of zone i

= Average Age in Years of visitors of zone i

When the total travel cost is calculated in the ZTCM, the opportunity cost of travel time and the

on-site time spent is excluded because the opportunity cost of travel time can be valued at a

fraction (usually between ½ and ¼) of the wage rate [Becker (1965), Cesario (1976)] but the

surveys provide data on household income rather than the hourly wage rate of the visitor; inferring

wage rates by dividing household income by some estimate of hours worked will introduce

measurement error (Freeman, 1993). This can be estimated only for the fixed worked hour’s


47

labors. And according to McConnell (1992), the inclusion of on-site time create problems, as

spending more time at a site should enhance the value of the visit, while simultaneously increasing

the (time) cost. This dual role of on-site time creates a problem for travel cost demand estimation

and therefore various researchers advocate to exclude this time cost (Ward and Beal, 2000;

Whitten and Bennett 2002) from the demand model. In many studies the duration of stay of

different visitors in the site is taken as independent variable because this variable greatly affects

the travel costs of the visitors. But in this study we do not consider it as an independent variable

because 86% of the total sample visitors stay one day in the Kaziranga National park.

The consumer surplus (CS) is the difference between the estimated demand prices and the actual

expenses that the visitor incurs during the whole trip. The aggregate consumer surplus has to be

estimated with the help of the estimated TGF. The TGF takes the form as follows for zone ‘j’

……………………….. (2)

( Assuming )

Or, ………………………………(3)

To estimate the aggregate surplus at first consumer surplus for each zone has to be estimated. For

this purpose, a ‘choke price’ which represents that maximum value of travel cost for which

estimated visitation rate falls to zero can be calculated for each zone using the estimated TGF or

using equation (3). Then the consumer surplus (per 100,000 population) is estimated for zone j as

follows:

The total recreational value of the Kaziranga National Park is measured by summing the total

consumer surplus and the total actual expenses of the visitors on this trip that is the whole area

under the demand curve for visits to the park.

SURVEY DESIGN AND SAMPLING

In this study, both primary and secondary data are used to estimate the value of the park.

Information was collected in three distinct sets. In the Kaziranga National Park, every

visitor/group must produce their entry permits at the checkpoints. These permits contain

information on number of visitors and their respective places of origin (addresses). Firstly the

study uses this secondary data for all visitors of the month of January (2011). This part of the year

is chosen as because it is the peak tourist season for visiting the park. The zonal distribution of the

tourists for this particular period is shown in Table 1. It is assumed that this zonal distribution of

visitors is applicable during the entire year. Using this zonal distribution of tourists all visitors are

divided into 8 zones. The second data set was collected from the Census report, 2001 of India and

it comprises of zonal population of different zones that are assumed in the study.


The third set of data is primary data which comprises of travel cost and other individual household

level information obtained by interviewing a sample of 230 visitors. The survey for this purpose

was conducted simultaneously during the same period. Sampling is a critical issue here as because

tourist’s visitation rate is a flow concept. Moreover there is no certainty regarding the period

during which the park can be kept open for visitors because of the occurrence of frequent floods in

the region. While some researchers have used stratified sampling from total population (Choe,

1996), others prefer random sampling from user group only (Farber, 1988). In order to estimate

the total universe of visitors, visitors entry records in the last three years (i.e., from 2007-08 to

2009-10) were used and it was found that on an average 255 tourists visited the park per day

during the peak season. In the present paper, 300 visitors were selected randomly and interviewed

after their visitation using a well structured pretested survey schedule. A single respondent from

each visiting group or family was chosen for interview. This is just 4% of the average total tourist

flow to the park in a particular winter month (Jan, 2011) during the last three years.

Table 1

Zonal Distribution of the Visitors of the Park Sl

No Place of Origin of the Visitors or Zones

No of

Visitors Percentage

1 Upper Assam (Composition of Tinsukia, Dibrugarh, Sivasagar, Dhemaji, Lakhimpur and Jorhat districts)

2095 22.29%

2 Middle Assam (Composition of Golaghat, Sonitpur, Karbi

Anglong, Nagaon, Marigaon districts) 2708 28.8%

3 Lower Assam (Composition of Darrang, Kamrup, Nalbari,

Barpeta, Bongaigaon, Goalpara, Kokrajhar, Dhubri, Kamrup Metropolitan, Baksa, Udalguri and Chirang districts)

1520 16.17%

4 South Assam (Composition of North Cachar Hills, Cachar,

Hailakandi and Karganj districts) 19 0.2%

5 Other North Eastern States Excluding Assam 268 2.85%

6 West Bengal 1772 18.85%

7 Other States of India Excluding West Bengal and NER states 681 7.24%

8 Other Countries of the World Excluding India 337 3.58%

Total 9400

Source: Forest Department, KNP, 2011

RESULTS

The OLS regression is used to estimate the trip generating function (TGF) in this study. At first in

the TGF various socio-economic variables of the visitors (such as average household income,

average travel cost, average age, educational level, sex family size) are taken as independent

variables, but all these variables are not significant. In the final regression model only those

variables are kept which are significant.

Generally in ZTCM, that functional form is used which gives the most suitable results and here

experiments with different alternative forms have been carried out and found that a double-log

between visitation rate and travel cost as the most suitable to estimate the TGF. The estimates of

three different models are shown in the Table 2. The TGF takes the following form


49

From this equation it can be easily concluded that there is an inverse relationship between the

travel costs of a particular trip and visitation rate (VR), which reflects the law of demand. It also

reflects that average household income of the visitors positively affects the VR and average age

negatively affects it.

Table 2

The OLS Estimation of the TGF Linear Model Log Linear Model Double Log Model Variables

Coefficient t-value Coefficient t-value Coefficient t-value

Constant 16713.0724 5.1223* 24.7186 4.553* 30.3701 30.993*

In TC 0.0212 0.3432 -0.0000246 -0.2387 -2.3208 -11.5069*

HHI -0.0209 -0.6942 -0.0000195 -.3896 0.0000197 4.2769*

AGE -336.1971 -4.8097* -0.4047 -3.4794 -0.1466 -4.8969*

0.87 0.88 0.99

F 9.69 10.28 389.19

Note: *significant at 1% level of significance

Source: Authors’ calculations.

CONSUMER SURPLUS ESTIMATION

The estimated consumer surplus for the different eight zones is shown in the table 3 and sum of

these surpluses is considered as the value of the recreational services of the Kaziranga National

Park by the visitors of the park. The total consumer surplus is estimated to be ` 2.79 million and

this estimate signifies the value of the benefits that the visitors derived from visiting the park. This

surplus also indicates the amount that the visitors are willing to pay over their actual cost to

participate in the recreational activities of the National Park. By summing up the total consumer

surplus and the total actual travel cost of visit, the total recreational value of the park can be

estimated. The total recreational value of the Kaziranga National Park (shown in Table 3) is found

` 773.451 million.

Table 3

Estimation of Consumer Surplus and Recreational Value

Sl. No Zones Consumer Surplus (in `̀̀̀ millions)

Total Recreational Value (in `̀̀̀ millions)

1 Upper Assam 0.637786 61.047

2 Lower Assam 0.927478 78.9

3 Middle Assam 1.06047 33.75

4 South Assam 0.001076 0.849

5 NER States excluding Assam 0.03259 10.787

6 West Bengal 0.111759 165.127

7 Other States of India 0.011233 110.594

8 Foreigners 0.00902 312.397

Total 2.7914 773.451

Source: Same as Table 2.

REVENUE MAXIMIZATION ENTRY FEE ESTIMATION

The park authority of KNP introduced two different types of entry fees for visiting the park at

present and authority collect ` 20.00 from the Indian visitors and from the foreigners ` 250.00. By

introducing these two different levels of entry fee the authority collects ` 3.18 million revenues in

2010-2011, which is suboptimal because the visitor’s willingness to pay is much more than their


actual expenses. With the help of the Travel Cost Method, it is possible to estimate an entry fee for

the Park that can maximize revenue collection for the authority. By changing the per capita travel

cost (representing equal changes in entry fee) in the TGF, we get sets of estimated number of

visitors corresponding to different entry fees and this generates a demand curve. At the middle

point of the demand curve the revenue is maximum. The estimated number of visitors against

various entry fee levels is shown in the Figure 1 assuming that the park authorities have not

introduced any entry fees for visiting the park at present. It is thus found that ` 187.6 per visitor

per day can be increased by the park authorities over and above the current level of entry fee to

maximize the revenue collection. By introducing these new levels of entry fees the authority can

collect ` 24.3 million as revenue which is far higher than the current level of revenue collection.

This additional amount of revenue can be used for the preservation activities of the unique wild

life of the park especially by technological up-gradation and by recruitment of skilled scientists,

ecologists and animal experts. Finally it is evident from the demand schedule that by increasing

the entry fee to the extent mentioned the tourists flow pressure to the park can be reduced to 0.06

million.

Figure 1

Estimation of Revenue Maximization Entry Fee for KNP

Source: Author’s Calculation

CONCLUSIONS

Kaziranga National Park is an eco-tourism destination in the North-East. Keeping in view the

large amount of consumer surplus and the recreational value of the park, the Union Government

and the State Government of Assam should allocate large budgetary resources for the preservation

of the park. By introducing the revenue maximizing entry fee on the visitors of, the park


51

authorities can solve two major problems relating to the park, that is, lack of funds and tourist

inflow pressure. Now, as mentioned in the introductory section the bulk of tourists interested in

wild-life tourism, mainly visit Kaziranga but not other national parks and sanctuaries in Assam.

The other parks and sanctuaries also have their unique wildlife and biodiversity, but these are not

famous among the tourists because of their dearth of knowledge which in turn is due to lack of

publicity. If a well-crafted publicity campaign is conducted for the promotion of these other parks

and sanctuaries, besides introducing the revenue maximization entry fee in Kaziranga, then a large

chunk of visitors would be forced to think beyond Kaziranga and visit other parks and sanctuaries

of Assam. If the Government is successful in doing this, it can generate additional funds that may

be utilized for the preservation of wildlife and biodiversity of not only KNP but other national

parks and sanctuaries of Assam as well. Thus, in final conclusion this paper suggests that the

Government should develop scientifically sound management policy for the preservation of the

park and for this very purpose an optimum level of entry fee should be imposed on the visitors of

the park.

__________________________________

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53

BOOK REVIEW

Development, Displacement and Disparity: India in the last quarter of the twentieth

century; Ed: Nirmala Banerjee and Sugata Marjit; Orient Blackswan, 2005; 317

pages; Price: `̀̀̀ 545.00

The volume under review is a collection of essays on issues related to regional and interpersonal

disparity in India, a topic that is both important and contemporary. The book has three sections –

first section explores theoretical issues related to regional disparities, second section deals with

issues related to interpersonal disparities, and the third section discusses inequalities emerging in

the last two decades out of the structural adjustment program.

The first paper of the first section by Amiya Bagchi provides a historical context on the concepts

of inequality and disparity. While he accepts that inequality is a moral concept, he argues that

ownership of productive assets has been instrumental in creating inequality in the modern world.

According to him, the caste system has been the root cause of inegalitarian society in India and the

affirmative action provide by the constitution have not succeeded to bridge the chasm.

The second paper by Sanjoy Chakravorty explores the issue of theoretical proposition to explain

or predict regional disparities, past and present. Discussing Jeffrey Williamson’s inverted-U

theory, Solow’s model of convergence, Myrdal’s arguments and the Latin American models of

centre-periphery relations, Chakravorty contends that the state in developing countries has never

seriously pursued the objective of balanced regional development. Bringing in a historical

perspective the author narrates the course of regional disparities in the colonial and the nationalist

periods and predicts that the current globalization trends will aggravate interregional disparities.

The third paper by Santanu Gupta examines the conflict between policies that promote equity and

those that encourage efficiency from welfare economy perspective. While egalitarianism should

spread public investment across space evenly, efficiency considerations would require public

investments to be chanellised to areas and activities that provide the highest returns. Gupta argues

that the amount as also the method of devolution of funds by successive Finance Commissions in

India have had significant impact on regional disparity.

The last paper of first section by Rongili Biswas and Sugata Marjit also deals with devolution of

funds from the Centre to the states under discretionary grants. They argue that direction and

amount of these grants are mostly determined by political considerations and influence, rather than

economic ones. Using a ‘Lobbying Index’ for the period 1974-94, they show that actual devolution

of discretionary funds is fairly well related to the lobbying index.

The second section has two papers, starting with a paper by Martreesh Ghatak exploring the issue

of delivery of public goods, especially to the poor. Arguing that governmental institutions have

not succeeded in this task, Ghatak justifies emergence of Non-Governmental Organizations

(NGOs) in this field. A theory for understanding the role of NGOs in provision of public goods

has been developed using various case studies.

The second paper is by Abhijit Banerjee explaining the pattern of industrialization in the

developing countries. Banerjee argues that location of new industrial units in developing world do

not follow the standard locational theories and hence he develops various topologies of industrial

development. Notable among them are the Saving-Driven Industrialisation or SDIs, and the


Savings-Constrained Industrialisation or SCIs. Banerjee provides various examples of community

based neo-industrialisation dirves from India and China and contends that these efforts would be

more efficient if the entrepreneur is an insider and can effectively tap the strengths of the

community.

The third section on post-reform inequalities begins with a paper by Subhash Ray and Kankana

Mukherjee on the impact of ‘Surplus Labour’ on the efficiency of production in Indian industries

between 1986-87 and 1999-2000. They argue that there is a common perception that industrial

productivity in India has been historically low because employment and efficiency never went

together and the reforms were meant to correct this incongruence and promote efficiency in the

industrial sector. Using Data Envelopment Analysis the authors argue that ‘Input Congestion’ due

to production workers has adversely affected productivity in Indian industries. They also infer that

output-oriented technical efficiency has declined and the problem of labour input congestion has

increased after the reforms.

The second paper of this section by Buddhadab Ghosh and Prabir De prepares a infrastructure

development index (IDI) from several components of economic and social using Principal

Component Analysis. To solve the problem of heterogeneity due to varied units of the components

where changes in units may lead to greater value of indices, Ghosh and De have divided the

original values of the individual variables by their Standard Deviation. This, however, makes the

Variance of all the transformed variables equal to unity, thereby loosing their individual

variability. The authors infer that hierarchy of the states remained more or less unchanged over

1971–1981, changing only marginally by 1991. The importance of social infrastructure is

underlined from the good performance of Kerala in terms of PCNSDP. The relation between IDI

and PCNSDP seems to be non-linear.

The third paper is by Abhirup Sarkar and Sukanta Bhattacharya on the effect of trade in foodgrains

on industrial employment, poverty and balance of payments using a two-sector macroeconomic

model and incorporating the fact that land reforms in India have been uneven across regions. They

infer that greater exports of foodgrains would increase the price of food, bring down real income

of an average worker, may raise industrial employment and output subject to the condition that

mid-sized farms cover a large portion of farmland.

The last paper by Saikat Sinha Roy explores the dissimilarity between global trade pattern and

India’s export performance. This is an important issue as any dichotomy between India’s export

pattern and the global consumption trends will hinder India’s export growth. Sinha Roy argues

that growth in exports as seen in the post-reform period is not sustainable because of such

contradiction. He recommends diversification of exports, investment in dynamic export-oriented

sectors, and transformation of the export basket towards high-technology and more value-added

items for future growth of exports.

Overall, this book is an important addition to the library of researchers working on regional issues.

Tanushree De

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