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Gujarat: Low labour costs, high tax concessions, incentives to corporates

By Rajiv Shah 

“Growth or Development: Which Way is Gujarat Going”, edited by Indira Hirway, Amita Shah and Ghanshyam Shah, Oxford University Press, 604 pages, Price: Rs 1,395.00

Edited by three senior Gujarat-based experts, the book is an exceptional commentary on the view taken by three well-known scholars – Jagdish Bhagwati, Arvind Panagariya and Bibek Debroy – who in the recent past were instrumental in creating a web around Gujarat “model”. The introduction “Growth and Development in Gujarat”, by the three editors makes its theme amply clear: “We believe that those who call the growth experience of Gujarat a great ‘success story’ have overlooked certain critical dimensions of growth. They appear to be either unaware of or wish to ignore certain ground realities in the state.” Debroy, for instance, in his book “Gujarat: Governance for Growth and Development” (2012), “discusses accelerated reduction in rural poverty, but does not mention the almost stagnant level of urban poverty during 2004–2010; it discusses the improved governance and infrastructure in the state, but does not mention that this holds mainly for the corporate sector, while there are many gaps in the infrastructure for the masses.”
This is the second serious book by senior professors and other experts in respective fields which takes a critical view of the much-publicized model, but the first one “from within”, i.e. from those who are based in Gujarat and experienced the model from within. The first one, “Poverty Amidst Prosperity: Essays on the Trajectory of Development in Gujarat” (2012), was edited by Atul Sood of the Jawaharlal Nehru University, New Delhi, and authored by scholars who are not from Gujarat.
The chapter by Sebastian Morris of the Indian Institute of Management-Ahmedabad, may be considered an exception for showering praise on Gujarat’s high growth. But as YK Alagh notes in his preface, Morris’ chapter “puts to test whether some states are exceptional” and have been able to create a different model, and the answer is a big no. Morris says in his chapter, “A Comparative Analysis of Gujarat’s Economic Growth”: “Growth of regions since the reforms of 1991-03 can be considered in two phases: 1992-04 to 2002-03 and 2003-04 onwards. The very growth achieved in the latter period is mirrored at the regional level with particularly the services sector growth rate moving upwards in the second period. Gujarat like many other states is no exception.”
Morris adds, “The race to being the productive leader is yet to be decided between Maharashtra and Gujarat. While Gujarat has maintained its advantage in manufacturing and agriculture, Maharashtra has maintained it in manufacturing and services. Land and infrastructure may be Gujarat’s forte, but Maharashtra has the benefit of larger and cosmopolitan cities attracting FDI and tradable service industries, besides ample local availability of skills and skill-intensive industries.”
Rest of the book, presumably taking this as the overall context, seeks to give the impression that reason for Gujarat’s high rate of growth is mainly due to “low labour costs in the state (on account of repressed wages and poor quality of employment), the higher rate of savings (given high income inequality), high tax concessions and other incentives to corporate investments, vast migrations to Gujarat, and the increasing use of capital-intensive machinery in Gujarat—all of these factors may have allowed it hold on to its advantage” (Introduction). The growth rate accelerated in agriculture because of the “Narmada project, and particularly ample rainfall.”
Indira Hirway’s chapter, “Assessing the Inclusiveness of Growth in Gujarat”, argues against Bhagwati and Panagariya who recommend the Gujarat ‘model’ for India to follow, saying, “The limited availability of socio-economic infrastructure for the masses at the bottom is indeed very striking. The 2011 Census of India shows that 67 per cent of the rural population and 12.3 per cent of the urban population do not have access to toilets and they defecate in the open; 83.3 per cent of the rural population and 32 per cent of the urban population do not get treated tapped drinking water. The state ranks very low in these facilities as well as in the progress made in these facilities (during 2001–11) among the major 20 states in the country (Census of India 2011)”.
Hirway adds, “Keeping wages low is another major policy for allowing high rates of profits and thereby raising the rate of savings and investment in the economy. This undermines the interests of labour. The state ranks very low among the major 20 states in casual and regular wage rates for male and female workers in both rural and urban areas. In 2009–10, the daily wage rates of male regular workers were Rs 187 and Rs 306.58 in rural and urban Gujarat respectively, and Gujarat ranked 18th and 20th respectively in these rates among the major 20 states in India. It ranked 9th and 20th in 2004-5.” There was failure to reduce poverty through the state-sponsored Gharib Kalyan melas: “Incidence of tribal poverty in Gujarat has increased from 31.2 in 1999-2000 to 34.7 in 2004-5 and to 35 in 2009-10. The state ranks 14th among the major states (lowest is rank one) in terms of poverty among the ST population. The incidence of poverty among OBCs is again 45.4 as against 9.4 among the others”.
The chapter, “Political Economy of Subsidies and Incentives to Industries in Gujarat”, jointly authored by Indira Hirway, Neha Shah and Rajeev Sharma, suggests that it is the social sector which has suffered because of the policy of helping industries. Thus, at “Rs 764 per capita state expenditure on education in 2000–1, Gujarat ranked sixth among the major 20 states in India”, but in 2010–11, “it ranked 17th with Rs 1,148 per capita expenditure on education.” Similarly, “the state ranked sixth in per capita expenditure on health (Rs 163) in 2000-1, but ranked 16th in 2010-11 with per capita expenditure of Rs 293.” Coming to the rates and patterns of subsidies and incentives to industry and infrastructural projects in Gujarat during the past decade and a half, the scholars says, they are “oriented towards promoting increasingly larger industrial units— prestigious, premier, and mega units, with state-of-the-art technology to make Gujarat the most attractive destination for investment in the world. Subsidies are provided through facilitating land and water supply to such industries”.
Sunil R Parekh in the chapter, “Some Facets of Industrialization in Gujarat Industrial”, points towards how, despite loud Gujarat government claims, the state’s employment rate has suffered. To quote, “The period 2000-10 could be considered as most significant in terms of the flow of investment to industry”. But while employment grew from 3.5 lakh to 11.5 lakh — “a compound annual growth rate (CAGR) of just 3 per cent, the gross output registered a CARG of 22 per cent”. In absolute numbers, “the state witnessed new job opportunities of 4,70,353 during the first four decades as against 3,36,355 in the last decade. As compared to the degree of industrialization, this does not represent a significant figure, as more and more industries in Gujarat have now become technology-driven with the introduction of automation”, with the gross output going up “from Rs 365 crore to Rs 6,42,000 crore”. He adds, “One can state that the benefits of rapid growth of industries have not been passed over to labour either in terms of increased employment opportunities or in terms of higher wages or in terms of quality employment.”
Parikh further says, “Gujarat is one of the most industrialized states in India”, but the value added tax (VAT) collected to Annual Survey of Industries (ASI) output ratio is “one of the lowest in the state… In fact, at 3 per cent, it is the lowest among the six major states in India. That is, in spite of Gujarat contributing 17 per cent of the industrial output in the country, its ratio of VAT to output is only 3 per cent, one-third that of Maharashtra. This is really remarkable because Gujarat has one of the highest rates of VAT, 14 per cent as against 12.5 per cent in other states.”
Pointing towards “several reasons for this”, he says, “First, the state government in Gujarat is not keen to tax medium and large industries, as it is more interested in giving them subsidies as an incentive to invest in the state. Second, industrial growth in Gujarat has poor value added, as in many cases it produces raw material for outside industries rather than undertake value addition within the state. For example, Gujarat exports plastic polymers and imports plastic toys and plastic value added goods; Gujarat exports half of its cotton and manufactured yarn and yet imports almost its entire requirement of readymade garments. It is clear that growth alone will not result in a buoyancy of tax collection; it needs willingness of the government to tax as well as more value addition within the state.”
In the chapter “High Growth Agriculture in Gujarat: An Enquiry into Inclusiveness and Sustainability”, Amita Shah and Itishree Pathak suggest how the benefits of better irrigation facilities have failed to reach the poorer sections. Giving the example of a spot study, the scholars says, “Benefits of watershed projects were found to be confined mainly to landed households (despite a clear emphasis to include the landless as project beneficiaries). Among the landed households, those with medium and large landholdings had a larger proportion of beneficiaries as compared to marginal and small farmers within a village. This was vindicated by the fact that identifying beneficiaries from the farmers with marginal–small landholdings was often difficult as a majority of the project beneficiaries were found to be in the medium–large landholding category.” They add, “A substantially large proportion of the beneficiary farmers (that is, about 40 per cent) did not have access to irrigation, especially from groundwater sources even after completion of the project.”
Other chapters also tell an almost similar story. Jeemol Unni and Ravikiran Naik in the chapter “Gujarat’s Employment Story Growth with Informality”, say the male employment during the last decade increased by 2 per cent per year, while the female employment declined by 4.1 per cent per year, and the “overall employment increased by only 0.1 per cent per year”. Darshini Mahadevia in “Dynamics of Urbanization in Gujarat” argues that In spite of having a higher per capita income than India, “urban Gujarat’s average monthly per capita expenditure (MPCE) is not higher than that of urban India.” What is particularly striking, according to her, is that “in metro Gujarat, the MPCE has always been lower than that in metro India.” She adds, “In 2009–10, MPCE in metros of Maharashtra, Tamil Nadu, and Rajasthan was higher than that in metro Gujarat—this could be due to the poor quality of employment and high normalization in metro Gujarat.”
PK Viswanathan and Jharna Pathan in “Economic Growth and the State of Natural Resources and the Environment in Gujarat: A Critical Assessment” say that “a major challenge facing the state’s natural resources (including land and water) is the emerging conflicts between industrial and agricultural sub-sectors to access land and water for expansion of activities in their respective contexts. While the conflicts in accessing and holding the rights over landed resources are most likely to get proper solutions (through state as well as legislature mediated processes), the access and control rights over water resources are going to be highly contested, especially in a water-starved state like Gujarat.”
Sudarshan Iyengar in “Education in Gujarat: A Review” points towards how “Muslims are reported to have less scope to get into matriculation and higher levels as compared to other communities”, which is “a matter of concern because the state’s performance in economic progress has caught the attention of the world”. Leela Visaria in “The Health Situation in Gujarat” argues that “the level of crude death rate of Gujarat, being similar to that of all India, suggests that in spite of the fact that Gujarat is far ahead of most of the other major states on many of the economic indicators, its performance in the health sector is not better compared to the average for the country.”
Ghanshyam Shah in “Governance of Gujarat: Good Governance for Whom and for What?” gives the example of how the government-launched Mukhyamantri Amrutum (MA) Yojana of April 2012, which sought to provide to the below poverty line (BPL) persons medical and surgical care for the treatment of identified diseases such as cancer, cardiovascular surgeries, burns, and neonatal diseases involving hospitalization , empanelled 54 hospitals, half of which are private. “Though the government announced that the scheme would be managed through a corporation or registered trust, so far this has not been done”, he points out, adding, “The government admits that the government institutions are inadequate to provide specialized services, especially for obstetric care, due ‘to the shortage of skilled staff, the poor facilities at government hospitals, poorly trained personnel with indifferent and unwelcoming attitudes’ (Central Bureau of Health Intelligence). This was the reason, according to the government, for its inability to reduce the maternal mortality rate (MMR) rate in Gujarat.”

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