Sunday, July 10, 2011

Incentives for Industrialization

India is transitioning from an agriculture based economy and livelihood to an industrial economy. Today, many villages of India lack basic infrastructure and means of employment generation needed to satisfy the growing the population and its aspirations. The agriculture accounts for less than a quarter of our GDP and yet ends up employing about two -thirds of our population. This statistic can explain the low incomes of many Indians and the huge rich poor divide in the nation. Given these facts one must think that the villages would embrace industry with open arms. Quite to the contrary, there are agitations from various corners of the country against  acquisition of land for industry.

Industry and industrialists are not very respectable words in the country side. There general perception of an industrialist is that of a greedy person who would not think twice before cheating the locals to make an extra buck. Rarely is an industry seen as a boon for the neighborhood. Even the respected industrial houses like Tata face the cynicism of the locals as in case of Singur. This is so in stark contrast to the perception of industries in the western world. The local governments rejoice on the news of industrial houses coming to their town. Why is there such a difference between the reactions of the two? Closer home, while the state governments vie with each other to lure the industries to their state, the local people see them as a bane. Why is there such a disconnect between the reaction of the two tiers of the government?

The answer lies in the incentives the state government and the local government have in attracting industry to their locale. Industries are usually set up in places, far off from urban centers, where the land is cheap and plenty, and also the land acquisition doesnt attract hordes of media persons. Land acquisition itself is a problematic issue as the landowners are not compensated properly. Farmers' land is usually branded as agricultural land which cannot be bought or sold very easily for put to any other use. This depresses the market price of land. At the time of acquisition the land status is changed to normal land and due to the interest shown by the industry the land prices shoot up. The farmers end up getting the price of land when it was an agricultural land and hence feel cheated. If they dont sell their land voluntarily, the state government acts to forcible take their land. A better land land acquisition bill is currently being discussed and it may bring the much needed relief and make the persons who sell land stakeholders in the industry being setup, with promised annual payments for the next 33 years. This will definitely make setting up industries more expensive but with less hassles and at a quicker pace.

This takes care of one aspect of the problem, but there is a lot more to it. The state governments love industries as they are a source of revenue for them through taxation. The middle classes are all for industries as they are the source for high paying jobs. This leaves out the landless people in the villages who had no land to sell but through the land acquisition they lost their livelihood of working in the fields. The local community and the local governments see industry as a new menace which will compete with them for water and other resources. The pollution from the industries is another headache for the locals. They see no upside from setting up of an industry which disrupts their style of living. While the state government coffers get full with taxes from these industrial units, the local government doesnt get a penny. The revenue from the industrial units is not shared with the local governments and they have little power to tax these industries. Thus there is little in terms of development of the neighborhood around the industrial units and too many problems for the locals to deal with. The government realizes this problem in at least in the area of mining.

Agitations against mining firms have taken a very violent turn. The Maoist groups feed on the resentment in locals against the mining industry and the government which almost connives with these industrialists to drive out the tribal people. To tackle the problem the government has proposed a new mining law which directs all the mining firms to share at least 26% of their profit with the locals. The hope is that it will improve the lives of the local people and subsequently reduce their opposition to mining in their area. This seems like a great idea except that it would be better to call it a tax on the the profits of mining firms which goes to the local community and it should be applied to all industries though at a more rational rate. This will ensure that the local people see the benefit of setting up industrial houses and be more welcoming to them. It is also high time that the local governments get enough authority and revenue to develop their township or village. Indian establishment remains a very centralized one with the central and state governments usurping all the authority. It is time to democratize and decentralize our governance further. Though many may argue that the local governments are inept and would not efficiently handle the revenue at their disposal, the state and central governments have done no better. We would need to invest more in the local governments to make them more efficient and ensure that they take the lead in urbanizing India just like in China. Standards and restrictions can be put on the way the money can be spent by local government but it is important to share the benefits of industrialization with the very communities that make sacrifices to accommodate them.