New Delhi: The World Bank has in a new report questioned one of the most fondly held beliefs of Indian economic policy—promoting balanced regional development.
India’s policy of providing incentives such as tax breaks to the private sector to start industries in economically backward regions is flawed, and the money would be better spent providing uniform basic needs, it said in a report.
Underlying logic: World Bank president Robert Zoellick. India’s policy of providing incentives to the private sector to start industries in economically backward regions is flawed, says new World Bank report. Jochen Eckel / Bloomberg
“Relying mainly on targeted incentives for industry—as India did for decades—will not help the lagging states improve living standards to levels in leading states,” said the World Development Report 2009: Reshaping Economic Geography.
According to the report, economic activity tends to be concentrated in a few regions, and state intervention to spread it geographically is not the best way to fight poverty. Instead, it is “far better for markets to pick the place (and) far better for government to push the pace,” Indermit S. Gill, director, World Development Report 2009, said at a media briefing on the report.
The broad premise of the World Bank’s suggestion found support among some economists. “The way they (government) have been intervening is not optimal. It hasn’t paid dividends in the past,” D.K. Joshi, principal economist and director, Crisil Ltd, said.
Both the World Development Report and Joshi also pointed out that governments continue to have an important role to play in guiding an economy towards prosperity. The report said governments should provide basic and social services everywhere, and lay the foundation of a sound land development market.
The challenge for the government is to encourage “unbalanced” economic growth, while ensuring inclusive development, the report said.
The underlying logic of the report’s conclusion is that a generation of economic research has showed as countries develop, economic activity becomes more concentrated. This, in turn, leads to tighter concentration of people around clusters of high economic activity.
“Concentration is a natural tendency,” Somik V. Lall, senior economist at World Bank who worked on the report, said.
Incidentally, Paul Krugman of Princeton University won the 2008 Nobel Prize in Economics for his explanation of why economic activity gets concentrated in certain parts of a country.
When governments try to stem the move towards concentration, and provide incentives to companies to spread geographically, it does not make economic sense, the World Bank report said.
India’s economic policies have long tried to design fiscal and other economic incentives to evenly spread industrial activity in all regions of the country. According to the Union government’s Receipts Budget 2008-09, about 2.25% of the gross tax revenue of Rs5.93 trillion in 2007-08 was “foregone” to encourage the private sector to start industries in Jammu and Kashmir, the north-eastern states, Uttarakhand, Himachal Pradesh and Gujarat’s Kutch district.
The new World Development Report said it would make more economic sense to replace this kind of incentivization with policies to create social and physical infrastructure to facilitate migration. Targeted incentives for India should be designed to work in tandem with institutional reform and investments in infrastructure, it added.
According to the report, in the second half of the 1990s, about three million people moved from economically laggard states of Bihar and Uttar Pradesh to states such as Maharashtra and Punjab, where the level of economic activity was higher.
Migration within India has led to social tensions, particularly in Mumbai, in the recent past. Gill pointed out that as education was an aspiration which cut across all regions, migration towards centres of economic concentration would follow. “You can’t be for more education and against more migration,” he said in response to a question on the social fallout of large-scale internal migration.