January 26, 2009EconomyPublic Policy

By Invitation: Post post-Godhra investments in Gujarat

It’s wrong to deny Gujarat’s economic achievements under Narendra Modi

This is an archived blog post from The Acorn.

By V Anantha Nageswaran

(In his recent Mint column, Salil Tripathi argued that it is odd…to credit Modi with Gujarat’s vibrancy” and that the colossal failure to protect civilians during the anti-Muslim violence in 2002” disqualifies him from holding office. Now, Mr Tripathi is by no means a Leftist in denial mode, so the points he makes are worthy of debate and discussion, not least because Narendra Modi is perhaps the only unabashed champion of centre-right economic policies today. In his guest post V Anantha Nageswaran disputes Mr Tripathi’s conclusions. On this topic see my November 2007 series on Gujarat’s record under Modi, Mukul Asher’s article in the March 2008 issue of Pragati on the Gujarat development model, and Asher & Bali’s recent piece on the Vibrant Gujarat summit in DNA. -Ed)

The comments made by some businessmen that they would like to see Mr. Narendra Modi, the present Chief Minister of Gujarat, as India’s Prime Minister, have caused severe palpitations in some quarters. Reactions have been mostly emotional. The risk with such emotional reactions is that reason is lost and the protagonists find that their arguments suffer from intellectual sloppiness.

The contention is that post-post-Godhra (for many, Godhra begins with post-Godhra and not with Godhra itself), Mr Modi’s Gujarat (they are already conceding a point here) has suffered from a decline in investment projects under implementation.

There is an attempt to carefully pick one variable that they think has declined in Gujarat since 2002. Now, those who put forward this thesis have not cared to indicate the source of their data and its calculation.

A layperson like me wonders whether a State that drags its feet on implementing a project will always end up showing more investment projects under implementation than one that completes them. Delays in implementation have another advantage under this yardstick. The project cost swells. Investments under implementation would thus become larger. Even better. Therefore, it is not clear if this metric penalises those States that allow investments to be completed on time and within cost. We shall leave it at that.

The second fallacy is that there is a causality attributed to the post-Godhra riots and the drop in so-called Projects under implementation”. A riot is a law and order situation. It is a qualitative variable. Investment under implementation is a quantitative variable. Now, it is not easy to attribute causality from a qualitative variable to a quantitative variable casually. There has to be some valid and robust survey methodology with statistically large sample size and whose responses—checked for consistency—point to a clear causal linkage between the riots and investment intentions and actual projects committed on ground in Gujarat. It is not clear if such a robust qualitative survey has led the proponents of the argument to reach a conclusion on causality.

At this stage, it is important for readers to remember that it has not even been established if the metric chosen is the correct one. We will return to that topic shortly. For now, we will accept their contention at face value.

Even then, to zero in on the riots as the potential cause for the decline in investments, they must control for other factors. That is, there were no other factors such a general decline in investment in other States due to other factors such as a temporary plateau in corporate profits or growth slowdown or a drought, etc. Supposing investment declined in all States in 2002 and in 2003, it will be difficult to attribute the decline in investment in Gujarat to post-Godhra riots.

Normally, serious researchers will develop a model of investment spending that is a function of profits, interest rates, national (or State) economic growth, etc. Depending on the exogenous values of these explanatory variables, they will try to arrive at an estimate of the investment spending in a State in a given year. If the actual investment spending turns out to be far less than what the model indicates, say, in Gujarat, and if investment spending in other States turns out to be in line with what the model indicates, then there is a preliminary case to be made that the riots have affected investment activity in the State.

This preliminary case gets stronger if it can also be proven that there is a structural break’ in the investment flows before and after 2002 in Gujarat—one that does not occur in other States, according to the investment model so developed.

If such a case is made, then it will be possible to at least debate the contention that Gujarat suffered a decline in investment because of the riots.

Instead, a hasty rush to conclude that investments declines and that it was due to the riots creates the impression that the proponents have decided to discredit or dismiss the call by the businessmen for Mr. Modi to be the Prime Minister of the nation and looked around for arguments to bolster their prejudice.

Now, let us look at some objective facts. We go by the State of the States report published by India Today every year in September. The statements made below are based on the reports for 2006, 2007 and 2008. This analysis is done by Laveesh Bhandari and Bibek Debroy for India Today every year.

By 2006, over 85% of Gujarat’s villages are connected with all-weather roads — just four years ago, only 72% of the villages had such connectivity. This improved to 99% by the time the 2007 survey was done. When it comes to quality of roads, Gujarat ranks the best with 59% of the villages having roads with a width of 18 ft. or more.

A more ingenious achievement has been the Jyotirgram scheme under which every village in the State is to get 24-hour domestic power supply. Notwithstanding the government’s claim, the actual power supply is only for about 20 hours a day, which too is a boon for most people. Over 17,000 villages have been covered under the scheme.

The availability of power has triggered reversal of rural-urban migration. People are returning to villages from cities –many of them start their own small businesses. At 46.5 mega kilowatt per hour per one lakh population, Gujarat’s rural power consumption is next only to Punjab.

The State has done extremely well in port sector too. It has the maximum number of minor ports — 40 along the 1600 km coast.

At 3.91%, the annual average percentage growth in physical capital in the 1990s was the highest in Gujarat. Unsurprisingly, the % growth in the State attributable to physical capital growth (4.99%) was the highest in Gujarat among all the big States. [Physical capital index includes % growth in households electrified and % growth in road length and % growth in fixed capital spending].

At 2.66%, Gujarat was the last among big States in the annual average growth rate recorded in human potential in the 1990s. [Human capital index includes % growth in share of graduates in total population and % growth in share of 26-40 year old in population].

In the category called Investment environment”, Gujarat held the first spot for three consecutive years from 2005 to 2007. It conceded the first place to Himachal Pradesh in the 2008 survey but the difference was marginal. [The investment environment” category measures % of State GDP spent on administration, per capita capital expenditure, commercial bank credit, capital formation, number of factories and industrial disputes, sick small scale industries, number of industrial workers per urban population in 15-59 group].

In a category called Infrastructure”, Gujarat was ranked 9th among 20 big States in 2006 and 2007, improving slightly to 8th position in 2008. This category measures % of households with electricity, % of villages connected with pucca roads (surfaced + unsurfaced), road length/population, no. of bank branches/population, no. of domestic LPG consumers/total households, no. of post offices/population, no. of telephone connections/population

Under a category called Budget and Prosperity”, re-christened Macro economy” in 2008, Gujarat was ranked no. 3 behind Punjab and Himachal Pradesh in 2007. It captured the first position in 2008. This category is based on urbanisation, 100-head count ratio (I do not know what this means), capital expenditure/population, GDP deflator (current GSDP/constant GSDP), per capita GSDP, total population/total debt, GSDP for electricity, gas and water supply (at current price)/population.

Finally and perhaps, most importantly, the annual average GDP growth in the decade of 1999-2008 in Gujarat was 8.8%, bettered only by the small States of Chandigarh (UT), Nagaland and Manipur. The comparable figure for the nation is 7.3%.

[According to the authors, these are trend growth estimates derived from the latest Central Statistical Organisation data]Regardless of what the pundits think, the fact that businessmen who actually put money behind their mouths voice their preference. That should be more indicative of investment intentions than anything else. Ratan Tata moved his Nano factory to Gujarat when Mamata Banerjee forced him out of West Bengal. That is a powerful qualitative and yet substantive indicator.

I had a long chat with my friend Laveesh Bhandari. He said that on any quantitative parameter, it is hard to fault Mr Modi’s Gujarat. Enough said.

(These are Dr Anantha Nageswaran’s personal views)

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