Cities as development clusters

BW Opinion

The end of the year is an opportunity to ask a question that has been asked at the end of each of the past three years: will the high growth be sustained over the New Year? It is a question that would engage the government as well, in view of the fact that the general elections are getting ever closer, and may well have to be held in 2008. Not surprisingly, therefore, it was taken up in the finance ministry’s Mid-term Review. The answer it gave was not definitive, but was no less interesting for that.

According to the anonymous economist who wrote the Review, the economy entered a phase of high growth following the reforms of the early 1990s. This is a surprising view. For many years after the reforms, there was a succession of articles from economists of the left that the reforms had been bad for growth – that growth had been lower in the 1990s, after the reforms, than it had been in the 1980s before the reforms. It was de rigueur in this line of argument to ignore all other factors than reforms. In particular, the preachers of disaster ignored the special conditions that had raised the growth rate in the 1980s, especially the coming into production of Bombay High, which transformed India’s energy economy and the balance of payments, the sudden rise in agricultural growth rate and the delicensing of large industrial investments up to Rs 1,000 crore. The impact of these stimuli ended just about as the 1990s began. Import dependence for oil resumed, agricultural growth fell back to its long-term average, and industrial growth raised imports to an unsustainable level.

The Mid-Term Review does not go into the figures and so will not convince sceptics. But it takes the view that the reforms led to a structural break in the growth rate, and were followed by a cycle. Imports of capital goods and industrial inputs were liberalised before those of consumer goods. This led a boom in the early 1990s, led by consumer goods. Consumer goods imports were liberalised from 1997 onwards, just as the new capacity came into production; this caused a slump. But the downturn was only temporary, for the economy was on a rising growth path, which was resumed after 2003. Now the trend rate of growth is supposed to be rising from 8-8.5 per cent to 8.5-9.5 per cent. As growth accelerates, it is running into sectoral bottlenecks.

In particular, two sectors – agricultural and real estate – present bottlenecks; and the balance of payments presents a delicate problem of policy mix – how much of currency appreciation to have and how much of reserve buildup and sterilisation. The practicable mix depends on the flexibility of the labour market: the more easily labour flows from industries adversely affected by appreciation to growing industries, the greater the affordable appreciation, which raises GDP by making imports cheaper. After this perceptive analysis, the Review retreats into platitudes.

This view perhaps explains the government’s sudden interest in handing over its Indian Technical Institutes to the private sector and in persuading it to start more. The government sees the problem of labour market inflexibility as soluble by retraining. At an elementary level this is true. But surely, the training will be required where labour is going to be rendered surplus; and it will be for employment in industries that can absorb it. The problem of redeployment and retraining cannot be tackled by redeveloping the existing 1,396 Industrial Training Institutes. It must be tackled in the old industrial centres such as Coimbatore, Rajkot and Ludhiana, and training programmes must emerge from the industries that would grow.


This implies that the present organisation is inappropriate. At the moment, the central government coordinates and gives out money to state governments; they in turn spend it in places and ways that they find politically profitable. The reality is, however, that the country — or at least the more developed parts of it — is divided into industrial clusters, and each of them requires its own autonomous planning. The boundaries between the states were drawn up half a century ago on the basis of language. Those boundaries have nothing to do with economic connections or development potential. Backward area incentives have only made things worse by making industrialists move opportunistically from place to place.

It is too much to expect another reorganisation of states. But surely, clustering development is not beyond governments’ capacity. They have been thinking in terms of regions, advanced and backward. Instead, they should think in terms of cities that would form foci of development, and divide the hinterland between them.

Cities as Financial Centers