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.


  1. Industrialization is no answer to India's village problems, so to speak. Even if it partially is, the whole dynamics will have to change. You just can not put an industry anywhere and everywhere to keep your product's cost to the lowest possible price!

    Talking of people, we have to listen to them as to what they are saying. By default we just can not assume that they are against Industry, or that they are too dumb to understand things. There is no proper channel of communication between people and the government. Politicians are people's representatives, not owners. They just can't take crucial decisions on their own. (Assuming a belief in Democracy, more so "Participatory Democracy"). Ask people. Discuss with them. At least do a referendum.

    Coming back to the original point, I personally think putting more and more industries is no solution for villages. Self-employment is. Agriculture is. How much attention/importance to agriculture is given in our country? Tell me one newspaper who covers Agriculture on a regular basis, properly? Probably not even The Hindu! One almost feels ashamed to tell that his/her family does agriculture, or more so that "my father is a farmer"! Why?

    We need to believe that there is a good life possible in villages, even without industries. They (the village people) need to believe this. And we, the city birds, the Government, and the media, everyone has a role to play in it. We need to stop advertising that a good life is possible only in the city. We need to improve the condition of agriculture and farmers in the country. And the village people need to believe that there is nothing wrong in their "lifestyle", and there is no shame in being a farmer.


  2. I agree with you on the point that we need to hear people out and they should be the ultimate decision makers about their lives and property. That is why I argue that the incentives for people to welcome industrial projects in their locale and on their land must be there. I also agree that mindlessly putting industries in villages is not the solution, but I do not support the argument that villages can be sustained on agriculture and traditional means of livelihood alone. There has to be a balance of agriculture, industry and services in our economy. Right now the services dominate in terms of the GDP and the agriculture has too much supply of labor. Industry needs to be promoted so that people have other avenues to work in and there is no over abundance of labor in one area leading to exploitation. Agriculture cannot be sustained on 2 hectares of land and hence there is a need to consolidate the land holdings via cooperative farming and or increasing the land holdings of the farmers by providing others the incentive to sell their land and join the industry. That way industry, agriculture and labor will thrive. Lastly I wont say that everyone in the villages are leading a good life especially the landless or small farmers, that is why there is so much migration to the towns. Its mostly the landed gentry and rich which lead a good life there. Need to bring the urban amenities to villages to promote better living conditions.

  3. Good Article . I totally agree with u ArbitThinker.