Nos. 36 & 37, March 2004

Nos. 36 & 37
(March 2004):

Introduction: Growth Suppressed, Parasitism to the Fore

Appendix I: The Real Scale of Unemployment

Appendix II: Starving and Stunting the People

The Real State of India's Economy
V. Deepening Regional Inequality

As banks pursue their own profitability over any broader economic goal, bank finance shifts to the most profitable activities and, inevitably, to the regions already most developed. This accentuates the existing inequality between different regions: banks suck up deposits in backward regions and funnel the funds to activities in relatively developed areas. Table 11 shows for different states the ratio of credit disbursed to deposits received. That is, if a bank receives Rs 100 of deposits in a state and lends Rs 55, the credit-deposit ratio will be 55 per cent. (The all-India ratios are less than 100 per cent because a certain proportion is kept as cash, and banks also make large investments in Government debt, shares, bonds, debentures, and so on.)

As can be seen, the ratios were already unequal in 1991, but have since worsened for every state except Maharashtra. In the case of Bihar, for example, the credit-deposit ratio fell steeply, so that whereas in March 1991 out of every Rs 100 in deposits received banks lent Rs 40, this fell by March 2002 to Rs 22 (Rs 31 for Jharkhand, which was carved out of Bihar). The ratio for Uttar Pradesh fell from Rs 48 to Rs 34; for Orissa, from Rs 72 to Rs 51; and so on. Only in the case of Maharashtra did the ratio improve from Rs 68 to Rs 78.

Table 11: Credit-Deposit Ratio of Scheduled Commercial Banks
in Selected States (per cent)
March 1991
March 2002
West Bengal
Tamil Nadu
All India

-- RBI, Trend and Progress of Banking in India, 1992-93 and 2002-03

Maharashtra accounts for one-fifth of the country's bank deposits (June 2002); but its share in gross credit is rather higher, at one-third. The per capita deposit of banks in the state was more than double the all-India figure, but their per capita credit in the state was three and a half times the all-India figure. No doubt, the fact that a bank office in Maharashtra sanctions a loan does not necessarily mean that all the funds will be spent in that state alone. However, it is appalling that bank credit to industry in Maharashtra was nearly 68 times more than the figure for Bihar (see Table 12). While the Shiv Sena has been whipping up hatred of impoverished Biharis who migrate to Mumbai in search of jobs, it suppresses the fact that capital is also migrating from Bihar to Mumbai. It is the overall economic policy, that has slashed public sector investment drastically as well as directed the banks to pursue profit at the cost of economic development, which is responsible for worsening regional inequalities.

Table 12: Outstanding Bank Credit to Industry, March 2002,
Selected States (Rs. billion)
West Bengal
Madhya Pradesh
Uttar Pradesh
Andhra Pradesh
Tamil Nadu

Source: RBI, Basic Statistical Returns


These regional inequalities translate into deeper poverty in the country's poorest regions. However, they should not be interpreted as the favouring of one region over another; rather, they are an indicator of distorted growth (stunted growth of agriculture, low growth of manufacturing, and rapid growth of all sorts of parasitic 'service sector' activities) and the growing inequality between classes. The latter interpretation of regional inequalities is the only one that makes sense. For the former leads to imagining that the people of one region are significantly better off than the others — which is anything but true.

Regional inequality sharpened by foreign capital: the case of Maharashtra
Indeed, Maharashtra itself presents the most extreme case of regional inequality: while its capital city Mumbai is home to some of the most obnoxious conspicuous consumption among the rich in the country, the rest of the state, particularly in the rural areas, is poorer than the all-India averages.

Bank credit reflects this schism. (The following data are largely taken from the Economic Survey of Maharashtra, 2002-03.) The capital city Mumbai alone accounted for 77 per cent of the state's deposits and 87 per cent of its credit. Agriculture and allied activities accounted for just 3.5 per cent of credit by scheduled commercial banks in the state. Minus Mumbai, the per capita deposit and credit for the state are just half of the corresponding all-India figures.

This regional inequality (in relation to other states and within the state) is in fact the reflection of an extremely distorted pattern of development. The productive sectors of the economy are hardly growing at all.

First, the state's agriculture is in an appalling state. It accounted for some 61 per cent of the workforce (1991 data), but just 13 per cent of the state GDP (compared to about 25 per cent nationwide). There has been a massive famine of investment in the state's agriculture. The net irrigated area has fallen from 3.1 million hectares in 1996-97 to under 3 million hectares in 2001-02; thus it fell from 17.3 per cent of net sown area to just 16.9 per cent, the lowest in the country.19 The net sown area itself has declined steadily from 18.6 million hectares in 1990-91 to 17.8 million hectares in 1996-97 to 17.6 million hectares in 2002-03, and only a fourth of this area is sown more than once.

Within Maharashtra's agriculture imbalances are huge. More than 70 per cent of the state's irrigation water is used by the cash crop sugarcane, which covers just three per cent of the irrigated area. The water used to irrigate a hectare of sugarcane could irrigate 10 hectares of the coarse cereals grown in Maharashtra. But it is the sugar lobby, not the bajra-growing peasants, who wield power in the state.

Unsurprisingly, Maharashtra's agricultural GDP in 2002-03 is estimated to be 13.3 per cent less than in 1996-97. In 2001-02, output of cereals was one-fourth lower than in 1996-97, and was the same as the average for 1979-82. In 2002-03, a drought year, it has fallen dramatically further, by 19 per cent compared to 2001-02. Such is the condition of the sector employing three-fifths of the state's workforce.

But nor has Maharashtra's industry, which employs one in six workers in the state, grown rapidly: industrial GDP grew at just 1.8 per cent a year between 1996-97 and 2002-03. Factory employment fell six per cent between 1996 and 2001. Indeed, a wave of industrial closures is gutting this supposedly 'advanced' state: between March 1998 and December 2002, more than 27,000 small scale units and 1,215 medium and large units closed, rendering 1.35 lakh (Rs 135,000) and 1.4 lakh (Rs 140,000), respectively, unemployed.

It is the services sector that accounts for 57 per cent of the state's GDP, and is growing at the rate of 7-8 per cent. Of course the service sector includes a wide range of activities, including such humble callings as tailoring, domestic help, repairing goods, and running small shops or hawkers' stalls. However, the fact is that the fate of such activities is tied to growth in agriculture and industry, since these services cater to those working in the latter two sectors. As the textile mills in Mumbai closed down, small shopkeepers throughout the mill areas suffered heavily. The segments of the service sector that are growing rapidly are the high profit segments — banking, merchant banking, trading in shares, insurance, telecommunications, expensive restaurants, hotels, travel agencies, spas and fitness centres, beauty parlours, shopping malls, and so on. These are concentrated in the state's capital, Mumbai, where, for example, 22 shopping malls are coming up by 2005.

Mumbai is being re-shaped from the industrial city it was 25 years ago to a financial centre to serve the needs of global speculative capital. For this foreign investors and the Maharashtra government are moving at a hectic pace. The World Bank has been funding a series of projects in this connection, such as the current Rs 4,500 crore (Rs 45 billion) Mumbai Urban Transport Project and the Rs 2,000 crore (Rs 20 billion) Mumbai Urban Infrastructure Project. The Congress regime has continued the earlier Shiv Sena-BJP government's massive programme of flyover construction (50 flyovers, Rs 1500 crore [Rs 15 billion]) to smooth traffic flow for the elite nine per cent of the city that use private cars. Many more flyovers and pedestrian subways (not for pedestrians' benefit, but so that they do not get in the way of cars) are in store, at huge expense; among the proposals being seriously discussed are elevated roads, and even an underground metro rail system (the latter to be built by 2021 at an estimated cost of Rs 20,000 crore [Rs 200 billion] in 2003 rupees). An oversea bridge, being constructed from the posh suburb of Bandra to Worli, is a separate project, to cost some Rs 1,500 crore [Rs 15 billion] by one reckoning.

Perhaps the massive influx of foreign institutional investment (FII) in India's share markets, for which Mumbai is the capital, has lent a special urgency to the current drive. The leading American consulting firm McKinsey presented a plan, titled 'Vision Mumbai', for quite literally re-making the city into what it calls a "world-class city". It calls for the existing city to be demolished and reconstructed block by block. McKinsey puts the cost at Rs 200,000 crore (Rs two trillion), of which Rs 50,000 crore (Rs 500 billion)are to come from public funds and the rest from private investors. The public funds are to be generated by higher taxes, tolls, water rates, and 'user charges', all blatantly anti-poor measures.

The report places great emphasis on giant transport projects — an "inner ring rail" project, an "express ring freeway" ("All world-class cities have express ring freeways — 6-8 lane roads with no signals — around the city such that a freeway can be accessed from any point in the city in less than ten minutes"), an "inner ring freeway", a Mumbai trans-harbour rail and road link leading to an outer ring rail and freeway, and so on. Nowhere is there a whisper about tackling the main cause of the city's transport and pollution problems: the explosion of private automobiles owned by the city's well-off.

The report is a builder's dream, calling for discarding regulations that protect the environment (regarding construction in the Coastal Regulatory Zone), the city's overloaded infrastructure (regarding the floor space index of buildings), and the rights of slumdwellers. At present the bulk of post-1995 slums enjoy some limited security from eviction, and any re-development of the slum by a builder must obtain the approval of 70 per cent of the slumdwellers. The McKinsey report proposes scrapping this requirement, saying merely that among different re-development proposals the one that gets the maximum number of votes should be implemented. The re-housed slumdwellers would have to shell out Rs 750 to 1,500 a month as a 'user charge' on their new rooms, or pay a lump sum; the new houses would of course also be subject to property tax and water charges. The report demands further that "no new slums should be allowed" in the city. (In fact, the urban poor live in slums because they cannot afford proper housing; a policy of "not allowing slums" is merely a continuing policy of demolition and harrassment of the poor.)

The world-class city would not include workers, as McKinsey declares that the city must develop itself as a major international financial centre, with industry to be consigned to Special Economic Zones in the "hinterland", where "labour reforms" must be applied — read: scrapping of labour laws. (Recently the state's labour commissioner explicitly stated that, in line with changed government policy, permission was now readily being granted to managements for closure of industrial units in Mumbai.20 Indeed, between 1981 and 1996 formal sector employment in the city has been falling at the rate of 0.6 per cent a year.)

Economic growth of 8-10 per cent is required, says 'Vision Mumbai'. How is it to be brought about? Six immediate objectives ("selected quick wins") are set out for bringing about economic growth:

" 1. Improve airport ambience and emigration/immigration clearance.
" 2. Set up 2-3 healthcare 'centres of excellence' through public-private partnership.
" 3. Set up modern format 'retail park' through public-private partnership and kick-start Special Economic Zones in the hinterlands.
" 4. Upgrade current zoo, aquarium, waterfront to world-class levels to boost tourism.
" 5. Convert Bandra-Kurla into a world-class commercial district (ie, restaurants, cafes, international building standards".

By 'economic growth' Vision Mumbai means small islands of service sector activity integrated with foreign capital and foreign demand.

To implement all these measures and steamroller opposition from any quarter, the McKinsey report suggests the creation of the post of a "Managing Director" (as in corporate bodies) for the city, and "increased training for the police force in riot management and law enforcement.

This McKinsey 'Vision' is actually no more than a trashy collection of sweeping statements in a 32-page booklet, entirely unsubstantiated with calculations. But far from ridiculing it, the state government and the opposition have treated it as gospel. A meeting of 15 secretaries to the state government was called to implement the Vision. The state government declared its intention to begin the phase-wise overhauling of the city: "The immediate measures would be to notify certain roads and arterial networks, like the one heading to Sahar airport, and take up a beautification drive. The plan is not merely to bring the roads up to par with the ones abroad, but to beautify the surroundings, like the buildings on both sides of the road."

In fact the McKinsey 'report' has little to do with the gigantic figures of investment it chalked out, particularly its projections of private investment. Its real purpose is propaganda to quicken the pace of measures in the interest of speculative capital. Spurred by McKinsey, an all-party delegation met the Prime Minister in August 2003 to ask him for Rs 6,000 crore (Rs 60 billion) for the "tackling" of the city's traffic and slums, to which the state government assured it would make a further contribution of Rs 12,000 crore (Rs 120 billion). Shortly thereafter, Vajpayee declared in Mumbai that he was granting Rs 500 crore (Rs five billion) for the 're-development' of Dharavi, the giant slum that sits uncomfortably close to the new glass-fronted business area of the Bandra-Kurla complex. The state government responded by declaring a Rs 5,600 crore (Rs 56 billion) plan for Dharavi, relaxing regulations to allow high-rises to come up in the area (at great strain to municipal infrastructure). Significantly, it also lowered the percentage of slumdwellers whose consent would be required for the demolition of their slum and its reconstruction, hinting at what is to come.

These grandiose plans are being chalked out by a bankrupt state government, which has a debt of Rs 94,000 crore (Rs 940 billion), has slashed its plan expenditure by nearly half this year for lack of funds, and has had to beg the Life Insurance Corporation for a loan to prevent its ongoing irrigation projects from coming to a complete halt. It has attempted to wind up its cotton procurement scheme, on which millions of peasants in its eastern division depend, pleading lack of funds. In August, even as the all-party delegation was petitioning Vajpayee for Rs 6,000 crore (Rs 60 billion) for speeding up traffic in Mumbai, the state government was approaching the Centre for Rs 1,000 crore (Rs 10 billion) to tackle the acute drought situation situation in 73 talukas spread over 10 districts of the state and affecting some 20 million people in the countryside (nearly twice the population of Mumbai). The request was later raised to Rs 1,700 crore (Rs 17 billion) as conditions became more dire. The mere provision of drinking water and fodder was beyond the government's means. The Centre for its part agreed to provide only some Rs 170 crore (Rs 1.7 billion) in cash and some Rs 200 crore (Rs two billion) worth of foodgrains.

The regional inequalities, then, are only seemingly between regions. Workers and other slumdwellers in Mumbai, peasants in Maharashtra, and peasants in Bihar are all at the same receiving end of the current processes. (A recent study by Neeraj Hatekar, a Mumbai University economist, found Mumbai slums had malnutrition levels comparable to tribal areas of Thane district.) A section of the middle classes have hiked their consumption sharply with the help of cheap and readily available bank credit — the effect of which may correspondingly depress their consumption at some point later as their debts pile up. The landlords, usurers and other rural elite now have less 'rural development funds' to skim off, but they are compensated with greater opportunities than before to exploit marginal peasants and agricultural labourers, and to alienate land, as we shall see below. And the class directly tied to foreign capital's activities is flourishing beyond one's imagination. The State, through its pattern of taxation and expenditure, sharpens these inequalities. The banks, in pursuit of profit, funnel capital away from backward regions and from productive activities, toward more developed regions and consumption by the better-off. As all these processes concentrate more and more income in the hands of a narrow section of the population, this section constitutes a more and more attractive market for the goods and services of multinational corporations. The patterns of consumption and investment that flow from all this are also expressed in the form of growing regional inequalities.

It is important to note that this situation in turn gives a handle to reactionary political forces to divert attention from the economic processes which cause backwardness and unemployment, and to pose the issue in terms of regions rather than classes.


19. "Net sown area" refers to the physical area sown; net sown area plus area sown more than once equals gross cropped area. (back)

20. Economic Times, 12/8/03. (back)


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