Will liberalisation destroy the environment?
PARTICIPANTS: Y K ALAGH PROFESSOR OF ECONOMICS, SARDAR PATEL INSTITUTE OF ECONOMICS T C ANANT READER, DELHI SCHOOL OF ECONOMICS D BANDYOPADHYAY FORMER REVENUE SECRETARY, GOVERNMENT OF INDIA L C JAIN FORMER MEMBER, PLANNING COMMISSION PREM SHANKAR JHA FORMER EDITOR, 'BUSINESS AND POLITICAL OBSERVER' VEENA MAZUMDAR DIRECTOR, CENTRE FOR WOMEN'S DEVELOPMENT STUDIES SUDIPTO MUNDLE PROFESSOR, NATIONAL INSTITUTE OF PUBLIC FINANCE AND POLICY V R PANCHAMUKHI DIRECTOR, RESEARCH & INFORMATION SYSTEM FOR NON-ALIGNED & OTHER DEVELOPING COUNTRIES VINOD RAINA EKLAVYA JAIRAM RAMESH OFFICER-ON-SPECIAL DUTY, PLANNING COMMISSION C H HANUMANTHA RAO PROFESSOR, INSTITUTE OF ECONOMIC GROWTH AVININDER SINGH CHAIRPERSON, ENVIRONMENTAL COMMITTEE, CONFEDERATION OF ENGINEERING INDUSTRIES YASHPAL FORMER CHAIRPER- SON, UNIVERSITY GRANTS COMMISSION ANIL AGARWAL EDITOR, 'DOWN TO EARTH'
Anil Agarwal: What will be the impact of the structural adjustment programme (SAP) on India's environment?
Two issues come to mind: one concerns resource use, the other concerns pollution and toxics. The pressure to generate foreign exchange will definitely have an impact on our land and forests. On the toxics side, liberalisation will mean that technology will come in without adequate checks.
An example is Bichhri village in Rajasthan. Within four months of an H-acid factory being set up here, 40 wells situated up to two C H H-nipni Roo kilometres downstream from the factory were totally pol luted. This has made life hell for the local people. A number of western companies - Ciba. Geigy and others - used to produce H-acid, a dye intermediate, and dump the sludge into the North Sea. In the mid-1970s, the dumping of toxics and other wastes into the North Sea was banned. In the early 1980s, this technology started moving into India and China.
Can more incidents of this kind happen? If so, what do we do about them? Economists tell us that the environment is an externality. The cost of damages is borne by future generations or by the powerless, namely the poor. Therefore, the argument is that we must internalise it. But any price is arrived at through negotiations between a buyer and a seller. In this case, who is the buyer of natural resources and who is the seller? We want more rapid growth. But who is going to control resources? Our bureaucracy, as in the past?
Can we communitise'.resources and let their prices be set by the local communities? Because if the local community has any control over its aquifer in Bichhri, its wells would not have jot polluted.
D Bandyopadhyay: Our economic goals are high output and growth; a lower rate of inflation; self-reliance; and, egalitari4n income distribution. Against these objectives, let us. examine the various policies that are being introduced as part of the SAP.
The austerity measures the government is trying to introduce include cuts in state expenditure; higher pricing for products supplied by the public sector; reducing or abolishing state subsidies on food, fertilisers, educa- tion, etc.; and an increase in tax revenues. However, historically, such measures have caused a slowdown in economic activity and higher inflation. Cutbacks in social welfare programmes hit the poor more; food prices increase as a result, cutting into the real income of urban dwellers as well as non-food producing subsistence peasants, landless workers and artisans.
A tight monetary policy, which restricts credit to the pub- Sudipto Mundle lic sector, reduces private credit limits, abolishes directed credit allocation at reduced interest rates and introduces market-determined interest rates, would generally have a contractionary effect on the economy. The liberalisation policy is a basket of diverse and eterogenous elements which often work at crosspurposes. The easy entry and exit mechanism for foreign investment may induce direct foreign investment but it could also open up possibilities for relocating "dirty" industries from the First World to the Third.
Programmes of eco-maintenance and eco-regeneration are dependent on public Prom Sh-nkar Jha spending and would be seri ously affected by an austeri ty policy. With the credit squeeze, firms would try to optimise their investment by reducing spending on "peripheral" matters like pollution control and waste disposal. With devaluation making our timber cheap in the world market there will be pressure to increase its exports. Besides, the increasing marginalisation of vulnerable groups would force them to exploit their environment aggressively.
L C Jain: Bandyopadhyay has given us an early warning. We are going through a transition in which even those who are convinced that what they are doing is right don't seem entirely sure whether they can control all the consequences. If better care of soil, water and vegetation is an essential part of our environmental defence system, then it's not only a question of policy but also of the kind of institutions that are needed to promote this concern.
The Congress Party manifesto said that within 100 days it would ensure decentralisation. We are supposed to have a cohesive policy of debureacratisation, but in Karnataka 2,600 elected mandal panchayats, who from all accounts were doing a very good job of looking after their area, were superseded by 2,600 administrators. The same people who stand for delicensing, debureacratisation, deregulation seem to be wearing blinkers.
Small-scale industrialists, who do not require to apply for licences, will have their lives harassed by 35 inspectors. And if some deregulation has to be done for them, that's not a matter of interest to anyone. One gets the impression that we want one leg of society to remain tied down, while the other one is free.
Structural adjustments in the textile industry started in 1985, much before the rest of the adjustments. Their consequences by way of starvation deaths are now surfacing. We will have to be concerned about issues like these. If, for instance, the unemployed are let loose on the environment, the effect could be disastrous.
Agarwal: Austerity per se cannot be a bad thing. As somebody was saying, when supply is easy you get plantations and when the money supply is tight then you get natural regeneration.
Y K Alagh: I think frugality, particularly by a government of a poor country, makes good environmental sense. Waste and profligacy always make bad environmental sense. Macro wastages, large government deficits, have an adverse effect on the environment. Sukhomoy Chakravarty once told me that a society which cannot do its sums will never be able to help the poor.
The SAP geally consists of four simple rules: cut down deficits; freely float your currency; reduce or remove all quantitative restrictions and move over to tariffs and then reduce their spread and level; and, do not talk about problems like employmoftt- and regional spread because those by definition are-"41b-optimal. Let's go by these rules and see the extent to which they can provide a framework for discussing some of these issues. Agarwal is quite right in saying that frugality of scarce domestic and external resouces will probably lead to self-reliant local communities provided a number of other changes occur.
But, it's not a question of institu 'tions alone. It's also a question of giving them correct indicators on scarcities and benefits, which is what a budget really does. I am arguing for planning. Planning does not necessarily mean centralised planning but it means knowledgebased indicators and institutional mechanisms which will facilitate decision-making. We should basically work towards an institutional system which takes environmental costs and profits into account.
T C Anant: The SAP is being criticised for not providing a framework to discuss environmental and welfare questions. But that's missing the point because the government's agenda is actually about how the economy should function.
There are apprehensions today because we've been having an identifiable decision-making body and a centralised state. Now we're being asked to consider a situation -where this centralised state gives us some of its powers. There is a real fear over the consequent lack of control. Who will take the decisions? I think this is the wrong question to ask because the state is in any case incapable of answering this question.
If we want to consider the possibility of localised decision-making, the question to ask is how can we hand over power at the grassr oots level?
Alagh: Your mindset is very different from mine. As far as agriculture or rural development is concerned, I would buy the argument that are dependent on if we have more decentralised development, we will need public spending the kind of policies L C Jain and would be was talking about.
Because of the efforts of seriously affectvoluntary agencies we do know the kind of sustainable ed by an austeripolicies for land and water development that we want in this country. But all success stories involve leadership and some inflow of resources. We need something like 15 to 20 per cent of the total investment in land and water. The rest is bankable, provided - there is a community orgamsation.
Our investment in land, water and area-based programmes, has gone down from a height of Rs 10,462 crore to Rs 10,200 crore this year. It is the height of hypocrisy to talk about employment and decentralised development and cut allocations for these things. To say that such measures have a good environmental impact is absolutely wrong.
Theoretically, our industrial policies should help to solve environmental problems in two ways. First, energy inefficient industry should either close down or be forced to become more etticient. Second, if export markets become more profitable, it would probably lead to a larger decentralised investment. But I don't see the kind of liberalisation that we have done leading to a marked increase in energy efficiency in industry and the introduction of eco-friendly products. In fact, a whole lot of dirty industries are being talked about.
This is a logical consequence of the Coca Cola culture. The purpose of this reform is to latch your econoy to the international economy. It's not to.bring about more widespread agricultural development, or promote more eco-friendly products like photovoltaics. Otherwise, the policy reforms will have to be entirely different.
Sudipto Mundle: Everybody agrees that when you go through a stabilisation programme you are going to have adverse effects on growth and, therefore, on employment, Something that ought to be done during the stabilisation programme is the spreading out of a large safety net. The current budget, however, has not done this. In fact, the allocation for employment programmes have been cut back quite substantially in real terms if you allow for 12 to 13 per cent inflation.
If there is no safety net, there will be an increase in the incidence of poverty and that will clearly increase environmental stress. If people are not able to use kerosene and coal, they are obviously going to collect more firewood. That, certainly, is going to happen in the short term.
A more market-oriented system needs less government in some ways but it needs more government in others. The precondition for a market system to function is that we must have a very efficient and effective legal system. And looking at what has just happened to the Bhopal case, the outlook on this is not very promising.
There is certainly a case for taxes and subsidies. I don't share Alagh's view that the whole thing should be done through pricing and so on. Because I think Anant was right in saying that implicit in this conception of things is that there is an arbiter somewhere who knows best and who can therefore judge what the right prices and policies should be. And certainly going by the record of the government, this is not the case.
Agarwal: I just want to comment that the safety net is particularly important from an environmental point of view because a lot of money which goes into socalled employment generation programmes is actually used for environmental regeneration. So, in fact, cutting down on the safety net not only means that we are reducing the nutrition of our people but also that we are not building up the environment. An enormous amount of money for aff6restation and soil and water conservation is actually coming,- from the Jawahar Rozgar Yojna (JRY).
Mundle: As we become more market-oriented, the power relations as they operate in the market are going to increasingly reveal themselves. Whereas the benefits of pollution, environment degradation and so on go to small groups of people, the costs are dispersed over a large number of people who are not organised to resist such projects.
This is where the cost-benefit kind of calculus links up to the institutional question. A lot of the anti-pollution rules and regulations that we have today are at the municipal level and that is where these penalties should be imposed. It is at this level that the government is accountable to ihe people who are immediately and adversely affected by this kind of pollution.
Agarwal: I am not sure the municipal level in India is the right one. The Delhi Municipal Corporation covrs a population almost the size of Norway. The level at which accountability becomes more explicit is much smaller.
Prem Shankar Jha: The dangers that Bandyopadhyay has spelt out fall into three broad cat- egories - that any fiscal correction is going to lead to cuts in social expenditure; the more competitive the economy becomes, the more certain is the prospect of some segments getting marginalised; and, that when there is marginalisation and there are cuts in social expenditure, our natural resources will come under greater pressure.
But, the question I want to ask is, were these pressures not already there? 'First of all, a fiscal correction was coming, given the present state of the economy, whether you had SAP with it or not. Secondly, were the poor not .getting marginalised? Thirdly,what really destroys our natural resources? The Andamans is an ecologically protected area. Because people are struggling to survive, they ring trees and when these trees die they start ploughing that land to eke out a miserable subsistence.
The most environmentally unfriendly development is no development at all. I think it's imperative that we make it a success because to begin to tackle the problems that we have, we first need more rapid and efficient go growth. Certain trends are going to get accentuated. But will they be transitional or permanent?
If they are transitional, can we provide a safety net? I think we can. If the budget position improves and there is less spending on steel plants that work at one-third of the minimum acceptable rate of efficiency, you will have more to spend on social welfare. Speaking of safety nets, we should not be shy of taking loans if necessary to meet social expenditure.
One very important safety net is the social security-cum-unemployment reassurance scheme. Our bureau-crats baulk at the prospect and say it will be too expensive, yet they forget that the British level of industry in 1906, when social security was introduced, was half of ours.
We do need a very posi tive tax-cum-subsidy arrangement to make the shift towards. renewables like solar thermal, solar pho tOvoltaics and biomass gasi fication. You may be able to control pollution at the pro duction point by telling your scooter manufacturers that in five years they will have to phase out the two-stroke engine in this country.
Veena Mazumdar: I'm going to make a couple of very rude remarks. I have been told by women from countries which have gone through this entire process that the two net consequences of SAP is an increase in infant mortality and a rise in prostitution. Even in -tigerish economies like the Philippines, take a look at the prostitution figures. I don't know how many economists here are familiar with these figures.
The one argument which might make an impact on these great multilateral agencies who are dictating policies is a fear of AIDS. Let's tell them that this is one thing we are ready to export!
Vinod Raina: An article in Lancet, written by Maurice King, has recommended that all social welfare measures for the health of women and children should be taken away. This, according to him, may be the only humane way of avoiding the population trap.
No one says that these are conspiracies but fied way assumed that the opening it's interesting that when Lawrence Summers wrote about exporting dirty" industries to the Third World he also related it to health.
Anant: The SAP is a partial programme. Mundle has pointed out two supplementary com ponents. One, decentralisation and, two, a better regulatory system.
What is it that makes for a more informed regulatory process which can help us avoid the trauma that took place over Bhopal? We have to think of now safety nets.
Mazurndar: Everybody . feels that decentralisation and decision-making at the pollution. community level is' the answer. But you cannot ignore what Alagh has been saying: is the community's bargaining power adequate in today's context? You have done the environmental damage and then you expect the community to undo that damage. By dismantling the capacity of the state machinery to provide that back-up support is like getting rid of a responsibility.
Mundle: The point about decentralisation is very important. Wonders have been worked in some particular municipalities in West Bengal. Committed political cadres decided that instead of allowing people to be cynical they'd campaign within the local community and urge people to pay their taxes so that civic services could improve. The results were absolutely remarkable. It is precisely when you subject state power to the control of civil society that you get results.
Mazumdar: While I fully support decentralisation I am questioning the bargaining power of local commu- nities. If the local bodies in West Bengal today have achieved some results, isn't it also because the state has backed them in this?
Alagh: What we are saying is that we must have a system of democratic decentralisation. You can empower people and create the institutions but resources are, at prese'rit, not available. We say we are in a transitional phase where we want to support these communities until they become more self-reliant. You could call this a safety net, but some of us think in slightly different terms. The SAP is very clear-cut Integrated Rural Development Programme and the Rural Landless Employment Guarantee Programme.
C H Hanurnatha Rao: Subsidies and taxes are important to cope with externalities but they are not fundamental. The basic question in the context of environment, particularly in the rural context, is the intersectoral relationship between agriculture and rest of the economy. This is important in our context particularly because it's linked with the rate of inflation and employment.
The new economic policies are totally silent about the agricultural sector. China started with agricultural reform. They built up a very good capital base - like irrigati"on facilities - by using their surplus labour. We have not been able to do this despite the JRY and other schemes. Our capital base is very poor.
We have in a very oversimplified way assumed that the opening up of the economy will automatically bring forth the required supplies. In our situation, non-price factors like technology and investment are going to be far more important than price factors. We A don't have the underutilised capacity that China had. So we are going to face a very big problem because k At through this set of reforms, we have raised pressure on agricultural demand. After the partial convertibility of the rupee, exports have become very attractive. As a result, there will no doubt be pressure on agriculture and rural water and land resources from the demand side to increase exports. If inflation also rises and poverty persists, then there will be pressure on the environment from the poor.
These trends are likely to accentuate, but what is going to be our response to counter that? It is well recognised now that our investment in agriculture has been going down in real terms. This is a very serious development. If the mon soon fails this year, then the impact is going to be far more severe than when similar breakdowns occurred in the past. In a situation like this, this balance between agriculture and rest of the economy becomes far more fundamental.
As far as the environ mental question goes, the connections between inflation, poverty and pressure on natural resources are very important. Last year, the government attempted cutting subsidies on fertilisers and augmenting investible resources. I would have been very happy if this year a sum of Rs 1,000 crore from subsidies had been diverted for minor irrigation schemes by way of grants to the states. We showed heroism last year and total surrender this time. There is a need for fiscal balance. I don't agree that restoring fiscal balance necessarily implies cuts in essential expenditure. It's all a question of fiscal management.
Agarwal: What is going to happen is that we will get a lot of money coming in from outside, especially T C Anant given the international interest in environment, The government is qui likely to take a soft posi tion. instead of developing local institutions and finding our own money to put into, say, afforestation, we are going to take more loans from the World Bank for this.
V R Panchamukhi: Economic reforms should not be based upon the premise that all that we have done so far is totaly wrong. Take the Korean example. The popular perception that Korean growth was the result of unrestrained market forces is wrong. The government played a vital role in shaping the Korean economy. We need to evaluate the SAP -A our own terms. These reforms are likely to increase consumerism, for instance, which will have damaging effects both on the environment and in terms of equity. Jha says that we should borrow further to enhance our educational and health sectors. I think this will be dangerous and a continuing dependence syndrome could emerge.
Yashpal: When we talk about the problems of weavers and of people who are being rendered unemployed, we are thinking of an egalitarian framework. But we've said goodbye to that long ago. Now we are going a step further by saying: let's completely open out to the world. Somehow, the shame over the fact -that we are so indebted is not there. Nobody says if we can't make ends meet, we'll live poorly. Swadeshi has become an anachronism.
Modernisation is no an event; it's a continu ous process. How do we, Avininder Singh ensure that we keep up With the SAP now, there should be a massive call to people: get up and create new goods and services. Do we have the urge to deyelop three or four things in which we will lead the world? We cannot, for heaven's sake, survive by exporting textiles, raw materials and a little bit of wheat.
I see no indication of &t in the policy framework anywhere at the moment. 'All the people in scientific laboratories are completely demoralised. There has to be a conscious interveniiop to create a few industries which work very closely with developing technology.
In Japan, the government and industry put together their resources and their best people to beat the Americans in getting the chip out. Something like this is needed if you want to play the game.
Raina: What will be the effect of the SAP on our energy sector? Roughly, 56 per cent of this country's people are dependent on biomass for their energy requirements. Can we make a shift from biomass energy into other sources?
Will we be able to raise the capital needed? We know that biomass is not an efficient energy to use, but do we have an alternative? And what kind of alternative can the SAP present? It seems to be pushing us in a direction where if we do not invest heavily in developing biomass through community control people will be in deep trouble. Are we going to tell them that you cannot cook your food because you are encroaching on existing forests?
Environment is more than just pollution. Environment is more about natural resources having contending claims. One can use it non-sustainably, another can use it sustainably. Community control becomes necessary not just for conservation but also for the sustainable use of the environment.
I'd also like to comment on certain trends in agricultural exports. Global trade in cane sugar has got reduced to half because of biotechnology substitutes. Sugar exporters are in an absolute mess. We will probably lose our tea exports for the same reasons. So what is the correct path for us to ensure sustainablity?
Jairam Ramesh: One problem is that we have had to unveil the SAP package in the absence of any medium-term economic agenda. We had assumed'that this would be the Eighth Plan. But that didn't work out. We had to get the letter of intent ready before our plan document was. In the next few months, once the medium-term policies are unveiled, we could critique them. I think it would be far more meaningful to critique the plan from an environmental point of view rather than the SAP because obviously the objective of the SAP is entirely different, although it has an impact on the environment.
The simple reason why the SAP has happened is the government was unable to cut revenue expenditure. The time for a hard budget constraint on some social service sectors has come. Today, a constraint on the public sector is accepted. But if you want some financial discipline in JRY or in health, you get the criticism of being anti-poor. The assumption that our plan expenditure is equal to development needs to be re-examined.
Many things are being done for which a broader coalition of interests is needed than has been the case so far. The SAP is trying - not very successfully as yet - to confine public investment to essential areas. You can call it privatisation but I think there is a common cause here between people who advocate more safety nets and what the government is trying to do. The question is not whether we should have interventions or not but what should be the modalities of that intervention.
Raina: Let me say why we need to intervene right now. We are at the stage where the biotechnological expertise in this country is going to be made redundant unless we decide to protect it. Our scientists are not getting a clear message. To me being swadeshi is not merely saying that we will go back to khadi. If a certain expertise exists, how do we sustain it?
Alagh: I think there is one kind of intervention which is not possible with the current policy framework. Suppose we want a policy of developing a few winners - whether in biotechnology, selective breeding or something else - we must have a regime which gives4imited protection for five years and which is also constraint on soine going to be market friendly. If you make a policy change , today that all tariffs will go down to 30 per cent, then such a policy is not possible.
Agarwal: What kind of foreign investments are we going to see ?
Ramesh: The type of investment that would be forthcoming in the immediate future is consumeroriented agro-processing. I think this is very good. But it does introduce a certain pattern of agriculture growth which will affect the environment. A large amount of foreign investment has already come into this sector mainly around Nasik.
Alagh: The total implication of all this is so small in terms of land use. It will be less than one tenth of one per cent of the total cultivated area. But we cannot dodge Hanumantha Rao's problem. We have to build up our rural capital base. But don't knock agro-processing. I think it's a great thing.
Avininder Singh: Indian industry was grossly inefficient. Therefore, we pushed for liberalisation. This does not mean that,there should be a liberalisation of the environment. It doesn't even make sense in terms of profits. One of the things that I have been keen to do is to seek more such interactions to establish pricing mechanisms required to protect the environment.
If Indian industry has to be competitive, it has to be more efficient. Industry is getting more responsive to issues of pollution control, and we want a dialogue with the enviro*ental ministry on this. So far, we have never had a dialogue on pollution standards, and on issues like ground water and access to technology.
Agarwal: This discussion strengthened my own conviction about the issues that we have been talking about long before the SAP came along. These issues rose out of our long-time inequality, environmental degradation, powerlessness of the poor, their resources being destroyed and so on. All these have become even more important today.
We may call it a safety net. But, to me, it is vital to mobilise labour to improve the rural environment and resource base. The financial resources are important. But, simultaneously, we need a new legal system for resource use and management, for the control of pollution and toxics. If we leave regulation to ministries, whether at the state level or at the Centre, it does not work. The state must provide support structures. But we will have to interject a new set of actors, the local communities, which can say sorry, we are not going to let this factory run if it pollutes.
My fear is not that this cannot get fitted into the SAP, theoretically speaking. But if this kind of economic process goes on, will we ever get a powerful enough coalition of political interests to force the government to accede? How does one deal with that political question?