The hidden cost of India's internal race for investment
By Rahul Goswami

Convinced that India's 8-9 percent GDP growth rate can be exceeded regionally, states are locked in a race to swing capital their way by offering ever-newer, more attractive packages of incentives that are in fact, public monies subsidising private commercial enterprises at the cost of social-sector spending.

The proportion of public spending on health by India fell from an already low 1.3 percent of GDP in 1991 (when the economic reforms began) to 0.9 percent by 2005 (Myanmar and Sudan are among the countries that spend more). A study by the Asian Development Bank released in October 2007 found that nearly 40 million Indians previously above the poverty line have fallen below due to healthcare payments.

The country's major states, however, are rolling out new attractions for industry and investment. Karnataka's New Industrial Policy (2006-11) includes a handsome investment subsidy, stamp duty exemption, registration fee concessions, export concessions and "special incentives to mega industries". Its southern neighbour, Tamil Nadu, aids private industrial parks with a sliding scale of capital subsidy based on the size of investment (with 50 percent more subsidy for locating a unit in a government-promoted industrial park). In north-west India, the state of Rajasthan lures companies promoting information technology (software, IT-enabled services or hardware manufacturing) with land purchase rebates of up to 50 percent of the market value.

Indeed, nowhere is the state domestic product race more visible than in the parcelling out of land that has gathered pace since 2005 for specific industry zones, special economic zones and IT-related infrastructure. So far, India has approved 366 special economic zones (SEZs) — in the face of widespread people's opposition that has all too often led to violent government response — that have brought in 477 billion rupees (12 billion US dollars) in investment, according to figures released in October by the trade ministry. Investments to the tune of around 74 billion dollars are expected to flow into SEZs and create up to four million jobs, both directly and indirectly, by 2009.

The 16 major Indian states are increasingly subscribing to an idea of development that closely links incentives and land reallocation to expected growth in state domestic product. In doing so, they have made land an even scarcer resource for occupations like agriculture. However, with the contribution of agriculture to a state's (and the country's) income declining as a percentage of domestic product, using land as bait for investment is seen as an attractive option for state administrations. Such jugglery in turn means that social sector spending often stays unchanged, with the private sector stepping in to fulfill demand, as in healthcare. It also means — particularly for those who have been coerced out of their land, as most recently seen in West Bengal — that resettlement and rehabilitation remain unmet needs and their costs therefore stay off a state's income-expenditure account for as long as politically possible.

Consider the case of Reliance Energy Generation, a company that forms one the country's biggest conglomerates. The state of Uttar Pradesh acquired agricultural land under the Land Acquisition Act of 1894, and discounted nearly 40 percent of the land value to the company as part of its industrial policy to attract new investments. The farmers whose lands were being acquired by the state government were, in turn, told they would receive an amount that was about 30 percent of the reported market value.

Uttar Pradesh is not among the Indian states that exhibit encouraging human-development indices. The 'Hindi-speaking belt' of India — comprising the states of Bihar, Uttar Pradesh, Madhya Pradesh, and Rajasthan — contain the bulk of the 20 percent of Indian districts that are ranked as 'low' by reproductive and child health status, and 29 out of Uttar Pradesh's 68 districts fall into that category. The uneven demographics between Indian states concerns not only health; India's poorest and most populous states (the 'Hindi-speaking belt' included) contain about 40 percent of the country's population but account for only a quarter of organised sector employment.

Where agricultural livelihoods are concerned, their loss as an outcome of the new incentive-rich regimes, and the social costs of those losses, is still an emerging area of enquiry. In general, agricultural commissions have found that states with amended land laws that encourage redistribution of land to labourers have achieved a higher degree of farm cooperation and experienced greater agricultural productivity.