The ‘Other Indias’: Two Analytical Narratives ... · an India of Darkness. The ocean brings light to my country. Every place on the map of India near the ocean is well-off. But

CHAPTER

The ‘Other Indias’: Two Analytical Narratives (Redistributive and Natural Resources) on States’ Development

13

1 Theconceptof a'SpecialCategory'state,firstintroducedin1969,soughttoprovidedisadvantagedstates(those,duetoseveralfactors,wereunabletogenerateenoughresourcesfordevelopment)withpreferentialtreatmentintheformof centralassistanceandtaxbreaks.Thestatesof Assam,NagalandArunachalPradesh,HimachalPradesh,Manipur,Meghalaya,Mizoram,Sikkim,Tripura,Uttarakhand and Jammu&Kashmirwere given special status.Majorfactorsthatdeterminedthegrantforspecialstatushavebeen:(i)hillyanddifficultterrain;(ii)lowpopulationdensity/sizeableshareof tribalpopulation;(iii)strategiclocationalonginternationalborders;(iv)economicandinfrastructuralbackwardness;and(v)non-viablestatefinances.

“Please understand, Your Excellency that India is two countries: an India of Light, and an India of Darkness. The ocean brings light to my country. Every place on the map of India near the ocean is well-off. But the river brings darkness to India.”

– “The White Tiger” by Aravind Adiga

This chapter examines whether the pathologies associated with foreign aid and natural resources internationally also afflict the Indian states. It calculates redistributive resource transfers (RRT) from the Centre and revenue from natural resources for Indian states. There is no evidence of a positive relationship between these transfers and various state outcomes, including per capita consumption, GDP growth, development of manufacturing, own tax revenue effort, and institutional quality. In the case of RRT, there is even suggestive evidence of a negative relationship. The question is whether RRT can be tied more strictly to fiscal and governance efforts on the part of the states as provided for by the Thirteenth Finance Commission. Another idea that merits discussion is providing a universal basic income (UBI) directly to households in states receiving large RRT and reliant on natural resource revenues.

I. IntroductIon

13.1 The Indian growth take-off since1980isassociatedwithPeninsularIndia,thestates that the narrator in "The White Tiger" astutely associates with better geography--beingclosetotheocean--whichdevelopmentexperiencehaslongconfirmedasconferringspecial advantages (Sachs and Warner[1997]).Thesestates—Gujarat,Maharashtra,TamilNadu,Karnataka,Kerala,andAndhra

Pradesh—have indeed grown faster andadvancedmorerapidlyeconomically.

13.2 As a result, they have also been agreaterfocusof policyandresearchattentionincomparisontootherstates-thesocalled‘OtherIndias’.ThesestatesincludenotjusthinterlandIndia(theIndiaof rivers)butalsotheIndiaof forests,of naturalresources,andof ‘SpecialCategory’status1.Thischapterisdevoted to those states that havenot been

286 Economic Survey 2016-17

at the mainstream of India’s developmentnarrative. But the analysis is conductedthrough the lens of broader developmentexperience.

13.3 SuccessfulPeninsularIndiahasofferedthree interesting and different models ofdevelopment: the traditional East Asianmodeof escapefromdevelopmentbasedonmanufacturing (Gujarat and Tamil Nadu);theremittance-reliantmodeof developmentexemplified by Kerala; and the distinctive,“Precocious India” model based onspecializing in skilled services (Karnataka,AndhraPradeshandTamilNadustudiedbyKochharet.al.[2006]).

13.4 Other states have been relativelyless successful, and perhaps because ofthat have received less attention. But theyare interesting in their own right becausethey have conformed to other models ofdevelopment.Thischapterstudiestwosuchmodels of development: those based on“aid”or special status, and thosebasedonnatural resources.Thedefinitionof naturalresources includes coal, onshore oil andnatural gas, major and minor minerals butexcludes forest cover. Large forest coverscanalso lead toa“forest curse”but isnotanalysedinthischapter.

13.5 The“aid”modelismostapplicabletothe erstwhile ‘Special Category’ states thatincludes North-eastern states and Jammuand Kashmir; the natural resources modeltoJharkhand,Chhattisgarh,Odisha,GujaratandRajasthan.Thischapterexaminesinananalytical manner the experience of thesestates.

II. Impact of redIstrIbutIve resources

13.6 At the time of India’s independence,mosteconomistsheldastraightforwardviewof development. According to this view,

developing countries were poor becausetheylackedcapital.Andtheywereunabletoovercomethisproblemthemselves,becausetheir peoplewere toopoor to save. So thekey to development, the onlyway to solvetheconundrum,wasforeignaid.Therewasonly one possible exception to this rule.Countries with vast amounts of mineralresourcesmine and sell them, allowing theproceedstobeinvestedinphysicalorhumancapital.But all othersweredoomed to relyonaid.

13.7 Indiawasnevercompletelyconvincedof thisparadigm.Formanyyears,itacceptedaid,buttriedtorelyonitsresourcesasmuchaspossible,withtheaimof windingdownitsaiddependenceasquicklyaspossible.Thisstrategyhasprovedsuccessful,andovertimemanyinternationaleconomists,startingwithEasterly(2003)andRajanandSubramanian(2007) have begun to realise the virtues ofthisapproach.Onereasonforthechangeofheart is that research has found it difficultto identify a robust positive relationshipbetweenaidandgrowth.

13.8 Why so? Several theories have beenadvanced. One hypothesis is that aidperpetuatesresourcedependency,inthesensethat since revenues flow in from outside,recipientcountriesmayfailtodeveloptheirown tax bases or their institutions moregenerally.Anditisinstitutions,taxrevenues,and incentives that have been found to becriticalforgrowth,muchmorethanoverallresource availability. Many economists,including Brautigam and Knack (2004),Azam, Devarajan, and O’Connell (1997),andAdamandO’Connell(1999)documentsucheffects.

13.9 Another potential downside of aid isthatitcouldtrigger“Dutchdisease”,namedafter the impact that discovery of naturalgas in theNorth Sea had on the domestic

287The ‘Other Indias’: Two Analytical Narratives (Redistributive and

Natural Resources) on States’ Development

economy in theNetherlands. Thiswindfallcaused the real exchange rate to appreciateastheextra incomewasspentdomestically,pushingupthepriceof nontradeables,suchas services geared to the local economy.The higher prices for services then erodedprofitabilityinexportandimport-competingindustries, de-industrialising the economy,with the share of manufacturing in theeconomyfalling(CordenandNeary[1982]).Similar effects have occurred in Canada,Australia,Russia,andAfrica.

13.10 Despite these internationalexamples and the lessons of India’s ownexperiencewith foreignaid,when it comesto development within India, the countryhasfollowedthepathprescribedbythefirstdevelopment economists. It has providedextensive transfers to certain poorer statesin an attempt to spur their development.Has this strategy succeeded where othershave failed? Could it be that the originaldevelopmentconsensuswasactuallycorrect?If not,whatarethealternatives?

13.11 This section examines the recordof Indianstates, totrytofindananswer–inpartsothat itcaninformtheprocessofreformingthearchitectureof funddisbursalbytheCentre.

III. redIstrIbutIve resource transfers: evIdence from IndIan states

13.12 Thefirsttaskistodefineaconceptakinto“aid”intheIndianinternalcontext.StategovernmentsuptonowhavereceivedfundsfromtheCentreviadifferentchannels:(i) a shareof central taxes, as stipulatedbyFinance Commissions; (ii) plan and non-

plangrants;and(iii)planandnon-planloansandadvances.Thesefundsconstitute“grossdevolutiontostates”andtheentireamountisnot“aid”.2

13.13 Gross devolution entails a strongredistributiveelement.Certainstate-specificcharacteristics (captured in the ‘SpecialCategory’ status) have determined whethersome states are more dependent on suchtransfers, and particularly concessionalassistance (grants). The 'Special Category'stateshavebeenheavilydependentonsuchflowsfortheirdevelopmentalneedsvis-à-visotherstates.However,redistributedresourcesfrom the Centre differ from traditional“aid” in two importantaspects.First, theseare intra-country transfers and do notaugmentoverallnationaldisposableincomelike foreign aid does; second, the donor-recipient relationship is also very differentbecause states benefiting from transfersare part of national governance structuresthat determine them. The objective of thechapterisnottoargueforthereplacementofsuchtransfers,but toexaminetheireffects.Theperspectiveutilizedinthischapterdoesrecognizethattransferof resourcestostatesare done to avert regional inequalities andcorrect fiscal imbalances and are thereforeextremelycrucial.

13.14 In this light, this chapter utilizesthe concept of ‘Redistributive ResourceTransfers’ (RRT).RRTtoastate isdefinedasgrossdevolution3tothestateadjustedfortherespectivestate’sshareinaggregategrossdomesticproduct(definitionD1).ThusRRTis not identical to gross devolution. Thisadjustment ismade toensure thatonly theportionof resourcesdevolvedtothestates

2 SometransfersareforschemesdevisedbytheCentre;someareforthosedesignedandimplementedbythestatesthemselves;whileothersareaimedtoaddressspecificissuesviz.regionalbackwardnessorreconstructionfollowinganaturalcalamity.

3 FiscaldataonstatesisfromtheReserveBankof India’s“StateFinances:AStudyof Budgets”,2016.


Figure 1. Gross Devolution & RRT per capita (Rs. thousand, annual 2015)

overandabovetheircontributiontoGrossDomestic Product is included as RRT. Analternative definition (gross devolution netof theamountthestatewouldhavereceivedas per its contribution in the country-widefiscaleffortmeasuredbythestate’sshareinaggregateowntaxrevenue)isalsoconsideredtocheckwhetherresultsobtainedusingthefirstdefinitionarerobustornot.

13.15 Thedefinitionof RRTexcludestheimpactsuchtransfershaveonexpendituresundertakenby stategovernments. It is alsoessentialtonotethatanyredistributionthatmightoccurdirectlybytheCentre’sspendingis also excluded4. Thus, RRT is one specific measureof transfers,andisnotadefinitivemetric of redistribution. Gross devolutionand RRT as share of GSDP for variousstatesisplottedintheAppendix.

Figure 3b. Per-capita Consumption (MPCE) and per-capita RRT

4 This chapter excludes those transfers between 2005-06 to 2013-14, that went from the Centre directly toimplementingagencies(district)forschemeslikeMGNREGA,SSA,etc.

*: Robust to outliers. Chart 2a excludes Goa and Sikkim. Downward slope in chart 3b is preserved if Goa is excluded.

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13.16 Figure1showstherankingof states,in 2015, in the descending order of RRTreceivedinper capita termsandalsoper-capitagross devolution. The top 10 recipientsare: Sikkim, Arunachal Pradesh, Mizoram,Nagaland, Manipur, Meghalaya, Tripura,JammuandKashmir,HimachalPradeshandAssam (all 'SpecialCategory' states).Grossdevolution per-capita per annum is at Rs.32000onaverageforthetop10recipientsofwhichRs.26000(81percent)isestimatedasRRTin2015.

13.17 The yellow and green dotted linesinfigure1showtheall-Indiaruralandurbanannualisedper-capitapovertylinesfor2015

respectively5. Annual per capita RRTflowsfor all the north-eastern states (exceptAssam) and Jammu and Kashmir haveexceededtheannualper-capitaconsumptionexpenditurethatdefinestheall-Indiapovertylines,especiallytherural.

13.18 Figures3aand3bplotthelevelsofpercapitaGSDP(for2013-14)andmonthlyper capita expenditure (as reported in the68th roundof theNationalSampleSurveyOffice [NSSO],2011-12) against RRT percapita(for2013-14and2011-12respectively).Anegative relationship is obtained, slightlystronger in case of the level of per capitaGSDP.Inotherwords,poorerstatesreceive

5 TheerstwhilePlanningCommissioncalculatedthesepoverty linesfor2011-12.Thepoverty linefor2011-12isadjustedbythechangeinCPI(IW)andCPI(RL)forurbanandruralrespectivelytobringthemto2015prices.

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*: Robust to outliers. Excludes Uttarakhand and Sikkim.


6 ThesestatesareJharkhand,ChhattisgarhandUttarakhand.7 Theshareof manufacturingtoGSDPistheaverageovertheyears2011-12to2014-15asperthe2011-12seriesoftheCSO.ThenegativerelationshipisrobusttotheaverageRRTtoGSDPratiotakenexcludingthelasttenyears(2005to2015).

8 Theindexisdefinedasi=100-[ATCloss]toensurethatahighervalueof theindexindicatesbettergovernance.

the highest transfers, exactly as one wouldexpect. However, despite such flows overthepastfewdecadesmostof thehighRRTrecipientstates(excludingHimachalPradeshandUttarakhand)areat lower levelsof per-capita GSDP. Some of these states havesignificantcatch-uptodovis-à-vistheaverage(denoted by the red line). These states alsospendlessonaverageonconsumption.Thereare some notable exceptions.Nagaland andMizoram, in particular, have significantlylarger-than-average per-capita GSDP andconsumption. Also, Jammu and Kashmirhas relatively high consumption for a statereceivingsignificantRRT.

13.19 Has RRT helped states performbetter?Figures4a-4cplotsRRTagainstpercapitaGSDPgrowth,shareof manufacturinginGSDP,andfiscaleffort(definedasashareof owntaxrevenue[OTR]inGSDP).Allofthisdata are shownas averagesover 1993-94 to 2014-15 for states in existence priorto2000-01,and2000-01to2014-15forthestatescreatedin2000-01.6

13.20 Theresultsarestriking.ThehighertheRRT:

• Theslowerisgrowth.

• Thesmalleristheshareof manufacturinginGSDP.7

• Thelowerisowntaxrevenues.

13.21 What about the quality of overallgovernance? This can be seen by relatingRRT flows to a suitable indicator of thequality of governance. As Kochhar et. al. (2006) argue, transmission and distribution(T&D) losses in the distribution of powercanbetakenasareasonablyrobustindicator

of governance.Suchlossesreflectthequalityof both infrastructure and institutionsin a given state. In this section, a slightlybroader concept - the aggregate technicaland commercial (ATC) losses (capturingcommerciallossesoverandabovetechnicallossesandpower theft thatgetcaptured inT&Dlossesaspercentof netpowerinputenergy)-istakentodefinetheindex8.Figure4d plots this index against RRT. Again itemergesthatthehighestRRTrecipientstateshave lagged behind on overall governance.In the northeast Mizoram stands out as asignificantlybetterperformer.

13.22 Allof thissuggeststheremightbean“RRTcurse”.Butsuggestionisfarfromproof. To go from one to the other, thereisaneedtoexaminewhetherthetrendsarerobust to alternative definitions of RRT.Indeed,theyare.Theyholdevenif RRTisdefinedasthegrossdevolutiontothestatenetof theamountitwouldhavereceivedifthe state was given its share in aggregatedstates’own tax revenue. Interestingly, thesetrendsarepreservedevenif grossdevolutionof thecentretostatesisconsideredwithoutanyadjustments.

13.23 The next issue that needs tobe addressed is causality. After all, poorperformance is not necessarily theconsequence of RRT.The causation couldgo the other way round, with greatertransfersgiveninresponsetotheobservationthat performance has been lagging. Thisissue needs to be addressed before formalstatistical tests (regressions) are performed,sinceotherwisetheestimatedimpactof RRTwillbebiased.



9 This is important as being landlocked implies that additional transaction costswill be incurred for conductinginternationaltrade,whichwilldamagetheprospectsfordevelopingmanufacturingandgeneratinggrowth.AsSachsandWarner(1997)estimated-alandlockedcountry’sgrowthislikelytobelowerby0.58percentagepointsvis-à-visonewithaccesstothesea.

13.24 To get a reliable estimate of theeffect of RRT, one needs to separate outthatpartof thesetransfersthatisunrelatedto economic outcomes considered in thischapter(growth,manufacturingshare,fiscaleffort)andgovernance.Onewayaddressthisissue is to identify an instrumental variable(IV) for the explanatoryvariable (i.e.RRT)which is strongly correlated with RRT butnotwitheconomicoutcomesorgovernance.Theimpactof RRToneachof thevariables

of interestcanthenbeestimatedusingtheIVregression.TheIVmethodologyisoutlinedintheAppendix.

13.25 The trendsemerging fromthenewregressionsseemtoreinforcetherelationshipsreportedearlier.Figures5a-5dplotthefindings.Controllingforwhetherastateislandlockedor not9,largerRRTinflowsseemtohavenopositiveimpactonpercapitaGSDPgrowth,and may negatively impact manufacturingshare,fiscaleffortandgovernance.

Figure 5a. Per-capita GSDP growth and per-capita RRT controlling for landlocked nature

Figure 5b. Manufacturing share and per-capita RRT controlling for landlocked nature

Figure 5c. Fiscal effort and per-capita RRT controlling for landlocked nature

Figure 5d. Governance index and per-capita RRT controlling for landlocked nature

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Iv. Impact of natural resources

13.26 Thereisanotherwaythattheoriginaldevelopment view has been overturned.Initially, economists saw natural resourcesas away out of the low saving-low capitaldevelopment trap. But with the benefit ofhindsightithasbecomeclearthateconomieswithabundantnaturalresourceshaveactuallytended to grow less rapidly than resource-scarce economies. Economic geographerRichard Auty coined the phrase “resourcecurse”in1993todescribethisphenomenon;sincethen,ithasbeenanalysedinanumberof studies such as Sachs and Warner(1995,1999),Sala-i-MartinandSubramanian(2003)andRoss(2014).

13.27 As with foreign aid, the negativeassociation between resource abundanceand growth poses a conceptual puzzle. Inthe literature, three possible channels ofcausation have been identified. First, theexploitation of natural resources generatesrents, which lead to rapacious rent-seeking(thevoracityeffect)andincreasedcorruption.Second,naturalresourceownershipexposescountries to commodity price volatility,whichcandestabiliseGDPgrowth.Finally,natural resource ownership – like foreignaid--makescountriessusceptibleto“Dutch

Disease”.

13.28 While most of the researchconcerningresourcecurseeffectsispursuedinacross-country setup, it is intriguing toemploytheframeworkforthestatesof India,which are heterogeneous in terms of theirnatural resource endowments, especiallymineral wealth. This approach seemsparticularlyfruitful,sincesomeIndianstateswerebifurcatedin2000–Chhattisgarhwassplitoff fromMadhyaPradesh,Uttarakhandfrom Uttar Pradesh, and Jharkhand fromBihar. In this process, mineral wealth wasreallocated in favour of the newly createdstates (nearly all of Bihar’s mineral wealthgoing to Jharkhand, for example), creatinga natural experiment that can be studiedprofitably.

v. natural resources and evIdence from IndIan states

13.29 Mindful of this bifurcation, theanalysisutilizestwotimeperiods(1981-2000and2001-2014),todiscerntheimpact,if any,of the "resource curse" on the new states(Jharkhand,ChhattisgarhandUttarakhand).For this analysis the key variables are thesame as identified in the earlier section onRRT.Figure6showstheshareof minerals(invalueterms)per capitain2014.Thevalueof

Figure 6. Per-capita value of minerals (Rs. Thousand, 2014)



mineralsisthesumtotalof fuels(coal,lignite,crudepetroleum[onshoreonly]andnaturalgas)10, all metallic minerals, non-metallicmineralsaswellasotherminorminerals.Asperthisdefinitionthemineralresourcerichstatesare:Jharkhand,Chhattisgarh,Odisha,RajasthanandsurprisinglyGujarat11.

13.30 One way to motivate the impactof naturalresourceavailabilityistoestimatewhether populations in mineral rich areashave emerged out of poverty better thanother areas. To this end, poverty trends12 for themineral-richstateswithotherstatesis contrasted between 1993-94 and 2011-12, the latest year forwhichNSSOdata isavailable(Table1).Atfirstblush,themineral-rich states seem relatively successful. Theirpoverty ratio fell by around 31 percentagepoints over nearly two decades, comparedwith 28.5 percentage points in the otherstates.

Table 1. Comparison of poverty decline

1993-94 2011-12ST All ST All

Mineral Rich states

70.5 48.0 53.7 17.1

Other states 57.6 39.5 35.1 11.0

Source: Calculated from NSSO unit level data. Poverty line from erstwhile Planning Commission and Tendulkar Committee Report.

13.31 Viewedfromadifferentperspective,however, the mineral states seem lesssuccessful. Table 1 shows the gains werenotpassedonequallytoallsectionsof thepopulation. In particular, the ScheduledTribes (ST) population of themineral-richstates,whichactuallyformsthepredominantpopulation in these areas, saw only a 17percentagepointdeclineinpoverty,smallerthan the 22 percentage points fall in theotherstates.

Figure 7a. Per capita GSDP and per capita mineral value (2014)*

Figure 7b. MPCE and per capita mineral value (2012)*

10 Thedatahavebeencollatedfrom‘StatisticalAbstractIndia”publishedbytheCSOforvariousyears.Datainfigure6excludesMeghalaya.

11 ItmayseemsurprisingthatRajasthanandGujarathaveahigherpercapitamineralvalueascomparedtoamineralrichstatelikeMadhyaPradesh.However,thisresultisbecauseGujarathasaveryhighvalueof on-shorepetroleum(crude), natural gas and lignite.Rajasthan, on theother hand, has very high value for natural gas andmetallicmineralslikecopperore,leadandzinc.

12 Definedasproportionof peoplebelowpovertylinetototalpopulation;forpovertyanalysisthemineralrichstatesincludeMadhyaPradesh,Chhattisgarh,Jharkhand,OdishaandWestBengal.

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13.32 Thesame“two-handed”assessmentisevidentwhenresourcevaluesarecorrelatedwith economic outcomes. On the onehand,Figures7aand7bsuggestanegativecorrelation. They plot per capita mineralvalueagainstthelevelsof monthlypercapitaexpenditure(for2012)andpercapitaGSDP(2014). It is clear that resource-rich states,especially Jharkhand, Chhattisgarh andOdisha (with theexceptionof Gujarat)areat low levelsof per-capitaGSDP,with lowlevels of monthly per-capita expenditure.Asfigure7ashows,thenegativerelationshipisbeingdrivenbythetopfourmineralrich

states Jharkhand,Odisha,Chhattisgarh andRajasthan.

13.33 On theotherhand,figures8a and8bshowthisrelationshiphasnotheldmorerecently. In these figures, the time periodis divided in two, in order to capture thebifurcation of Madhya Pradesh, Bihar andUttarPradeshin2000.Figure8ashowsthatthe relationshipbetweenpercapitamineralproduction and average per capita GSDPgrowth(CAGR)13wasnegativeduring1981-2000. But the relationship for the period2001-2014(Figure8b)isinconclusive.

13.34 If the development experienceof the resource-rich Indian states is reallycharacterised by a "resource curse", animportant indicator of the same will bea decline in the share of manufacturingin GSDP (the “Dutch disease”). Figure 9shows the relationship between the valueof resources and the average share ofmanufacturingtoGSDP.14Itisobservedthattherelationshipis,onceagain,ratherweak.

13.35 Another indicatorthatcan identifyresource curse is the extentof fiscal effortmade by respective states (captured by the

13 GoaandMeghalayawhichturnouttobeanoutlierinthisregression,havebeendropped.14 Theshareof manufacturingtoGSDPistheaveragefor2011-12to2013-14asperthe2011-12seriesof CSO.

Figure 8a. Per-capita GSDP growth and per-capita mineral value(1981-2000)*

*Robust to outliers; excludes Goa and Meghalaya.

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40M

anuf

. sha

re (

%)

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Figure 8b. Per-capita GSDP growth and per-capita mineral value(2001-2014)

AP

AR

AS

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CH

GJ

HPHR

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MHOD

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apita

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gro

wth

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AG

R %

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14)

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Figure 9. Share of Manufacturing and per-capita mineral value (2001-14)



share of OTR in GSDP as in the earliersection), which is expected to decline overtime in the wake of excess reliance onnon-tax revenue from natural resources.As expected, figure 10a shows that for theperiod1981-2000,therelationship ismildlynegative.Onceagain,theresultbreaksdowninthemorerecentperiod(2001-14).

13.36 Finally,figure11plotstheindexofgovernance defined in the earlier section,showingnoevidencethatresourcevaluehasanegative impact. Interestingly, a resource-rich state, viz. Chhattisgarh (apart from

Gujarat), seems to be doing above averageongovernance.

13.37 Based on the above, there seemstobenoconcreteevidenceeitherinfavouroragainsta"resourcecurse"inthecontextof Indian states. The results are, however,relatively strong for levels of per capitaGSDP and consumption. With regards tomanufacturing share and governance, eventhough there is no negative correlation, itmust be emphasized that there is no strong positive relation either. This implies that theresourcerichstatesneedtobolstereffortsto

Figure 10a. Fiscal effort and per-capita mineral value (1981-2000)

Figure 10b. Fiscal effort and per-capita mineral value (2001-2014)

Figure 11. Governance index and per-capita mineral value (2013-14)

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ASBH

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46

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)

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counteranypossibledownsidesof a"resourcecurse"thatmayemergeinthefuture.Asisclearfromthediagramsabove,despite significantresource endowments, some states, mostprominently Gujarat, has performed betterthanaverageonmanyindicators.

vI. conclusIon

13.38 Infrastructure and Connectivity: It is, of course, possible, that the "RRTcurse" and "natural resource curse", to theextent they are valid, could be a result ofpoor connectivity in particular and poorinfrastructure-physical,financial,anddigital-in general that most of these states suffer


from.This is clearly trueof thenorth-eastbutalsotrueof manypartsof resource-richIndia.Enhancingconnectivity-financialandphysical-onawarfooting(asthegovernmenthasattemptedforfinancialinclusionwiththePradhanMantriJanDhanYojana(PMJDY),expeditingtheopticalfibrenetwork,etc.)willhaveamoderatingeffect.However,despitethe above observations some simple butimportant policy recommendations can beconsidered.

A. Redistributive Resource Transfers

13.39 Insum,itseemsasif thenewviewof development economics may be right.There may well be some version of thephenomenon referred to internationally asthe“aidcurse”.

13.40 If so, how should this viewinform policy? Clearly, the answer cannotbe to dispense with RRT altogether, sincein a federal system theCentremust play aredistributive role: it will always have toredirectresourcestounder-developedstates.Rather,theCentrewillneedtofindwaysofensuring that the resources it redistributesareusedmoreproductively.

13.41 There are, in fact, a number offactorsthatcanbetakenintheaccountwhiledetermining the quantum and architectureof redistributiveresourceflowstothestates.Inthespiritof cooperativefederalismtheseproposalscanbesuitablymodifiedtoaddresstheprioritiesandconcernsof variousstates.Forexample:

Redirecting flows to households: One possibility would be to redirect a certainportionof RRTandchannel the resourcesdirectlytohouseholdsaspartof aUniversalBasic Income (UBI) scheme. As chapter9 shows, targeting issues plague existingdevelopment interventions and transfersdirectlytohouseholdscouldeliminatesomeof theseproblems.

Conditioning transfers on fiscal performance:Anotherpossibilitywouldtofindwaystooffsetthefiscalbiasuncoveredbytheaboveanalysis,inwhichhigherresourceflowleadsstatestorelaxtheirowntaxeffort.PerhapsfutureFinanceCommissionscouldrevert to the practice of the 13th FC ofconditioning transfers on the tax effort ofstates; in fact theweightage could be evengreaterthansuggestedbythe13thFC.

Making governance- contingent transfers: Given that some high RRTrecipient stateshaveperformedbetter thanothers,itispossiblethatthecapacityof statestoutilizefundsoptimallyplaysanimportantrole. To encourage better governance andsound institutional practices, the fundtransfermechanismcould explicitly includeafewmonitorableinstitutionalindicatorsascriteriaforreceivingtransfers.

B. Natural Resource Revenues

13.42 Based on the assessment in thischapter, there is little evidence to suggestthata"resourcecurse"existsinIndia,of thekind that economists have found in othercountries. Indeed, the fact that negativecorrelations tend tobreakdownafter2000implies that the new mineral-dependentstatescreatedpostbifurcationhavemanagednaturalresourceslessinefficientlythantheirforbears.

13.43 Butequallythereisnoevidencetosuggestthatmineralwealthhasbeenaboon,astheearliestdevelopmenteconomistshadhoped. This suggests that there is a needto improve governance, to ensure a moreproductiveuseof theresources,especiallyinthestatesthatarerelyingsoheavilyonthem.

13.44 The structure of revenueadministration as it stands today is suchthat the government receives royalty fromtheminingof mineral resources.However,inthepresentsystemthereisfurtherscope



to bolster citizen engagement in sharingthe fruits of resource extraction. Robustmechanismsof citizenengagementwill actasaconstraintonlargescalecorruptionandover-exploitationof resources.

13.45 Withtheintentionof ensuringthattherevenuefrommineralsareutilizedforthedevelopmentandwelfareof thecitizensoftheconcernedstates,theMinesandMinerals(DevelopmentandRegulation)AmendmentAct,2015includedthefollowingintheAct:

• Establishment of a trust, to be calledtheDistrictMineralFoundation(DMF)for districts affected by mining relatedoperations.

• Thecompositionandfunctionsof DMFare to be prescribed by the respectiveState governments. The foundationshall work for the benefit and interestof persons affected by mining relatedoperations.

13.46 One way to increase citizens’participation is via creation of a dedicatedFund to which all mining revenue mustaccrue.Theassumptionhereisthatmineralsare part of the commons, owned by thestate as trustee for the people – including

Box 1: Supreme Court of India Judgement on Goa MiningThejudgmentof theSupremeCourtof IndiainWP435/2012(Goa Foundation vs UoI & Ors,theGoaminingcase),wastheculminationof aseriesof landmarkjudgementsonthesubjectof managingnaturalresourcesinpublicdomain.Inthiscase,theapexcourtorderedacaponminingaswellasthecreationof aGoanIronOrePermanentFundtomeettheendsof inter-generationalequityandsustainabledevelopment.WhenconsideredalongwithearlierSCjudgmentsonthepublictrustdoctrine,notablyCA4154/2000(Fomento Resorts & Anr vs Minguel Martins & Ors),andonthedisposalof naturalresources,notablyWP423/2010(CPIL & Ors vs UoI & Ors, the 2G spectrum case),anewpictureemergesforminerals.

WhatimplicationsdoestheSCjudgmentcarryfornaturalresourcemanagement?

Naturalresources,includingminerals,areasharedinheritancethatneedstobepreservedforfuturegenerations.Assub-soilmineralsarelargelyownedbytheStates,andoffshoremineralsbytheCentre,thestatesarethetrusteesonbehalf of thepeople.ThecaponmininginGoaistoensuretheavailabilityof mineralsoverseveralgenerationsaswellastolimittheenvironmentaldamagefrompermittedextraction.

Theproposalforexploringthecreationof aGoanIronOrePermanentFundisnotableforbeingthefirstthathaspotentialtobeestablishedbyjudicialaction.Norwayandover50othercountries/sub-nationshavecreatedPermanentFundsbasedonextractingeconomicrentfromoilorothernaturalresources.Theoldestof thesefunds,inTexas,datesbackto1876.

future generations. Therefore, the revenuefromthenatural resourcesshouldbesavedin a non-wasting asset- in a PermanentFund.TherealincomeaccruedbytheFundcan be redistributed to citizens affected byandhavinga stake in theextractionof theresource.(Box 1)13.47 TheproposaltocreateaFundatthedistrictlevelinlaudableandisarecognitionof thestatebeingcognizantof thepossibleill-effects of a "resource curse" at somepoint in future. There are however otherapproachesthatmaybeconsideredtoensuremore integrated and active participation ofthe citizens who are directly affected byminingoperations.

13.48 An alternative structure would betoredistributethegainsfromresourceusedirectlyintotheaccountsof theconcernedcitizensaspartof aUBI.However,tomakethis income transfer effective and tomakethecitizensfeelinvestedinthemanagementof the resources, the state could impose anominal tax on the post - UBI disposableincomeof citizensandusethisrevenuefordevelopment purposes. Correspondingly,it is also likely that this arrangement (UBI


andtax)mayleadtocitizenshavingamorebenignviewof taxation,sincetheywillseethesocialcontractastangiblyaffirmingtheirwellbeing.13.49 These measures have never beentriedinIndia.Butpermanentfundshavebeenutilised effectively inmanyother countries,while pilot projects forUBI are beginning.Introducing these mechanisms in Indiacouldbecontemplated,if onlybecausetheirrisks seem small compared with the coststhat would accrue if the "natural resourcecurse"materialisedonIndiansoil,asithasinsomanyothercountriesaroundtheworld.

13.50 Insum,largebounties-eitherintheform of redistributed resources or naturalresources-cancreatesurprisingpathologies,even in democratic India. Recognizingand responding to them creatively will beimportant to avoid making the errors ofhistory.

references

1. Kochhar,K.et.al.(2006),”India’sPatternof Development: What Happened,What Follows?”, Journal of MonetaryEconomics,53(5).

2. Easterly, William (2003), “Can ForeignAid Buy Growth?”, The Journal ofEconomicPerspectives,17(3).

3. Rajan, Raghuram & A. Subramanian(2007),“DoesAidAffectGovernance?”,TheAmericanEconomicReviewAEA

PapersandProceedings,97(2).

4. Bräutigam, D. A. & Stephen Knack(2004), “Foreign Aid, Institutions, andGovernance in Sub-Saharan Africa”,Economic Development and CulturalChange,52(2).

5. Azam, Jean-Paul, S.Devarajan& S. A.O’Connell (1999), “Aid DependenceReconsidered”,WorldBankPolicyPaperNo.2144.

6. Adam,C.S.&S.A.O’Connell (1999),“Aid, Taxation and Development inSub-Saharan Africa”, Economics andPolitics,II(3).

7. Max Corden, W. & J.P. Neary(1982), “Booming Sector and De-industrialization in a Small OpenEconomy”,EconomicJournal,92.

8. Ross, M. L. (2014), “What have weLearned about the Resource curse?”available at https://ssrn.com/abstract=2342668.

9. Sachs, J. D. and Andrew M. Warner(1995), “Natural Resource Abundanceand Economic Growth”, NBERWorkingPaper5398.

10. Sala-i-Martin, X. and ArvindSubramanian (2003), “Addressing theNaturalResourceCurse:AnIllustrationfrom Nigeria”, Journal of AfricanEconomies,22(4).



appendIx

1. ThefigurebelowshowsgrossdevolutionandRRTflows(asperthefirstdefinition), ineachcaseasshareof GSDPof thestateconcerned(averagesovertheperiod1993-94to2014-15).UndertheD1definition10stateshavenearzeroornegativeRRT(WestBengal,AP,Goa,Kerala,Karnataka,TamilNadu,Punjab,Gujarat,HaryanaandMaharashtra).

Figure A1. Gross Devolution & RRT as percent of GSDP

2. Instrumental Variable (IV) Regression:FortheregressiontwoIVsareproposed:

(i) the distance of the state capital from New Delhi,and

(ii) the distance of the state capital from the nearest international border.

Thesemeasuresshouldnotbeinterpretedliterally.Rather,theyproxyfornon-economicfactorsthatmightinfluenceresourcetransfers.Forexample,distancefrominternationalbordersproxiesforanystrategicconsiderationsunderlyingresourcetransfers.Arethesegoodproxies?FiguresA2andA3plot theRRTagainst these IVs (this is the so-calledfirststageof theIVregression).Thefiguresshowaverystrong,statisticallysignificantrelationshipandwiththeexpectedsign: thefurtherawayfromthenearest internationalborderthelowertheRRT(FigureA2).AlltheregressionsexcludeSikkim.

Madhya PradeshUttarakhandChattisgarhRajasthanWest BengalAndhra PradeshGoaKeralaKarnatakaTamil NaduPunjabGujaratHaryanaMaharashtra

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Gross devolution RRT

Figure A2. RRT and distance from international border

Figure A3. RRT and distance from New Delhi

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