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India's Northeast
Rejuvenating a Conflict-riven Economy
Gulshan Sachdeva*

presents an appropriate case study to assess the main reasons for the failure of India's existing policy framework for the uplift of economically backward and isolated regions. The failure of this framework has been frequently cited as one of the main reasons for the emergence of insurgency and its continuation in the region. This failure, however, is generally discussed in the context of the 'economic neglect' of the region. It is also frequently suggested that to end this neglect, massive developmental assistance from the Centre is required, which in due course would also end discontent, insurgency and terrorism in the region.

This paper argues, instead, that the failure is not because of any so-called 'economic neglect', but because of an inappropriate economic policy framework which has created an unbalanced and unsustainable economy and destroyed the basis for institutions of a modern market economy in the region.


The Region


India's Northeast, also known as the land of the seven sisters, comprises the States of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland and Tripura, which collectively account for about 8 per cent of the country's geographical area and roughly 4 per cent of its population. The region is known for its ethnic, linguistic, cultural, religious and physiographical diversity. [1]

Historically, successive legal and administrative decisions taken between 1874 and 1935 gave the areas of the Northeast their distinct identity. The British administration initially treated the hill areas as 'Non-Regulated Areas', then declared them a 'Backward Tract' and, eventually categorised them as 'Excluded Areas' and 'Partially Excluded Areas'.

Statistics are available in plenty about the number of races, tribes and their sub-groups, ethnic groups, cultures, religions, languages and dialects spoken in this region, but broadly speaking there are three distinct groups of people - the hill tribes, the plains tribes and the non-tribal population of the plains. The majority of those living in the plains are Hindus and Muslims while a substantial proportion of hill tribes in Meghalaya, Mizoram and Nagaland are Christians. Geographically, apart from Brahmaputra, Barak (Assam) and Imphal (Manipur) valleys and some flat lands in between the hills of Meghalaya and Tripura, two-thirds of the area of the region consists of hilly terrain. Most of this hilly portion is either owned, controlled or managed by tribes, clans or village communities. The most populous part is the Brahmaputra Valley, which constitutes about 22 per cent of the region.

The pace of development in the hill areas and plains differs considerably. The valleys are economically active areas, the Brahmaputra Valley being the most active. Tribal populations constitute only about one-fourth of the population of the Northeast, even though in four States — Mizoram, Meghalaya, Nagaland and Arunachal Pradesh — tribals are in a majority. In Mizoram, which has one of the highest literacy levels (82 per cent) in the country, second only to Kerala (90 per cent), they constitute as much as 95 per cent of the population.

On the one hand, the region is diverse and heterogeneous. On the other, it is quite homogeneous; the social stratification found in other parts of the country is not present in the Northeast. The tribal societies in the hill areas are egalitarian. As a result, the type of poverty found in many other parts of India does not exist in most of the hilly States of the region.


The Present Economic Policy Framework

Due to the special constitutional arrangements for, and the historical background as well as the geographical location of the region, [2] the central government has long been trying to integrate the Northeast with the national economy. The present policy framework has accepted the right of tribals to retain their way of life and identity and has sought to integrate them through democratic means into the federal frame of the Constitution of India. The policy framework for the region has so far been guided by a combination of approaches impacting on its political economy and culture. The main focus of the political economy approach is on the relations between the state and the economy. In this approach, consequently, the role of bureaucratic state arrangements is strongly emphasised. The cultural approach, however, focuses on the socially constructed character of economic organisation, where the economic system is conceived of as a product of the social order.

While the combined approach has been influential, the importance of bureaucratic arrangements in the process of economic development has been unduly exaggerated. Nevertheless, wherever possible, an attempt has been made by policy makers to work through the unique social and cultural institutions existing in the region, instead of imposing new institutions. [3] This special approach has been adjusted with the central government's policies of a regional planning development model. The major assumption of regional planning is that it would permit the transfer of surplus generated in one region to another. This mechanism was expected to increase aggregate national efficiency through optimum resource allocation.

Under the influence of this policy, various schemes for the development of infrastructure and economy of the Northeast region have been formulated. The schemes include the formation of the Northeast Council, Hill Area Development Projects and Sub-plans, Tribal Area Sub-plan, and Tribal Development Agency Projects to name only a few. In addition, these seven States have been declared as Special Category States; this entitles them to get 90 per cent of Central Assistance as a grant and just 10 per cent as loan. Some public sector units have also been set up in the region. The policies of industrial licensing, concessional finance and investment subsidy, growth centres, as well as freight equalisation of some major industrial inputs have also been used to promote economic development.

Further, to protect tribal interests, policies of minimal interference with the cultural traditions and customs of the tribal people are being followed and additional political and administrative mechanisms have been provided for the region. Under the Sixth Schedule of the Constitution, the concept of Autonomous District Councils has been applied. [4] The Councils are responsible for looking after the social, economic and minor criminal and civil matters of the tribal people. More specifically, these Councils are empowered to make laws with respect to: a) Land; b) Forest; c) Water course; d) Shifting cultivation; e) Establishment of village and town and its administration; f) Appointment of, or succession to, chiefs or headmen; g) Inheritance of property; h) Marriage and divorce and matters relating to any other social customs.

Restrictions have been imposed on the rights of Indian nationals to acquire landed property in these areas. The regulation of the Inner Line Permit System prohibits entry of outsiders into Arunachal Pradesh, Mizoram and Nagaland without a permit, and debars a non-native from acquiring any interest in land or the produce of land. Tribal belts and blocks have been constituted in the plains areas to prevent land alienation from tribals there.

It has to be honestly acknowledged, however, that the development strategy implemented so far, mainly through the Planning Commission and North East Council, has failed to produce the desired results. The State and sectoral plans of the Planning Commission have not been able to provide enough impetus for local development, or to generate processes of self-sustained growth. Instead of creating an efficiency-oriented economic process, this policy framework resulted in the creation of a politically-led distribution-oriented process. The result is that natural resources, profits, savings and the like are, in fact, moving away from the region to other high productivity regions. Besides, the almost total dependence on Central funds and planned direction has promoted a trait of passiveness towards development and encouraged patronage and corruption. It has also created a government monopoly in employment, which has destroyed the work ethic necessary to build a modern economy. Expectations were raised high, and they could not be fulfilled through centrally sponsored schemes.

Moreover, contrary to popular perceptions, the lack of development in the past has not been the consequence of any shortage of funds. In fact, sufficient resources were always provided to the region, but a substantial portion of the funds earmarked for various schemes has not really gone into those schemes. Some scholars have pointed out that the regime of corruption in India, even under normal circumstances, severely limits the actual impact of development expenditure on target groups. In situations of widespread breakdown of law and order, as in the case of many parts of the Northeast, the impact of government sponsored development projects is negligible. [5]

It can, therefore, be argued that, although some developmental changes have taken place in the region, [6] yet the present policy framework has not been able to provide the basis for a dynamic process of development, including good transport and other infrastructural facilities. The region remains isolated from the rest of the country. It has not been able to attract investors or to produce skilled labour and entrepreneurial resources, and has failed to transform the primitive agricultural practices of the region into modern commercial agriculture. More importantly, the existing policy framework has also become one of the important factors that has contributed to the emergence and continuance of insurgency in the region. In a nutshell, this complete policy framework has outlived its utility. The political economy approach has inordinately relied on the capacity of the state (read Central government) and its bureaucratic arrangements for economic development, and the approach has manifestly failed.

Changes have taken place over time on the cultural side as well. In today's Northeast, tribals are not the 'head hunters' they are widely misconceived to be; on the contrary, a large number of them are highly educated and have adopted modern values, fashions and modes of living. In the new social and economic environment, to depend once again on the very same institutional mechanisms such as the Planning Commission (whose own future remains uncertain) does not appear to be the right approach.

In a liberalised economy, any new policy has to be based on some kind of a market-oriented approach. The new policy framework should, consequently, concentrate more on economic factors and less on political and cultural factors (although these cannot be ignored altogether). The economic factors include labour cost, comparative advantages, technology, efficiency and returns on investment. Inefficient economic processes and barriers to market entry make a critical economic difference and will define the distinctions between success and failure. The market approach generally assumes economic rationality, and the atomised individual, whether firm or person, as the crucial economic actor. In this approach, the economic system is an aggregated outcome of the production, exchange and consumption of goods and services, and social order is premised to emerge from the self-interested rational actions of individuals.

In the area of regional economic development, the neo-classical theory asserts that regional disparities would be reduced on the basis of factor movements across regions. Assuming that all regions possess similar technology and similar preferences, and there are no institutional barriers to the flow of capital and labour across State borders, The Solow-Swan neoclassical growth model would predict that States would have similar levels of per capita incomes in the long run. This model also predicts that poor regions will grow faster than rich ones; in other words, regions with lower starting values of capital-labour ratio will have higher per capita income growth rates. [7] Therefore, instead of regional planning, this approach suggests greater concentration on free flow of goods and productive factors among regions. Ideally a uniform legal and governmental framework would be important for the free movement of factors of production. Perhaps this would be sufficient to ensure static efficiency. The equalisation of returns to factors is believed to be accomplished through trade and mobility of factors other than natural resources. These trade and factor movements between regions are expected to achieve self-adjusted equalisation of their income and employment levels. However, regions differ in their ability to respond to external stimuli, due partly to differences in elasticities of supply.

In the Northeast region, even the stimulus to expansion at the national level is likely to run up against supply bottlenecks due to insufficient infrastructure, entrepreneurship, business-supporting institutions as well as the insurgency which prevails in large parts of the region. This is where the state would have to play a role, and more importantly, the State governments. In a liberalised economy, development will not be a boon from the Centre. On the contrary, development of a particular State will depend on the actions of the government of that State. Later in this paper, some of the areas where policy action needs to be initiated by State governments have been identified. The Central government can, of course, also help the Northeast; but it must be clearly understood that in a market-oriented economy the vast powers of the Centre, acquired under the auspices of the Planning Commission and a huge public sector, will be curtailed. [8] Therefore, there is an urgent need to reappraise the role of the Central government in developing the region with the right degree and intensity in the context of a decentralised liberal economy. The Central government will play the role of a facilitator rather than a promoter of development. [9]



The Unbalanced Economy


The development strategy followed by the Centre and the State governments of the region has created a totally unbalanced economy in the Northeast. There are differences among the seven States of the region with respect to their resource endowments, levels of industrialisation as well as infrastructral facilities. On the whole, all these economies are underdeveloped agrarian societies with very weak industrial sectors and inflated service sectors. The industrial sector has mainly developed around tea, oil and timber (TOT) in Assam, and mining, saw mills and plywood factories in other parts of the region. The tea plantation industry employs a large labour force. In Assam alone it accounts for more than 500,000 workers. [10] State-sponsored industrialisation — whether sugar mills, jute mills, paper mills or food processing units — has not been successful. Small-scale industries have also not been viable and there is widespread industrial sickness in this sector. The economy of the region remains primarily agricultural, and the full potential of this sector has also not been tapped. Primitive farm practices of slash and burn (jhum) shifting cultivation in many of the hill areas, and mainly single crop traditional farming in the plains, continue. As a result, the region is not even able to produce adequate food grain to feed its own population. The States of the region import food items worth about Rs 2,000 to Rs 2,500 crores annually from other parts of the country. [11] Since neither agriculture nor industry has taken off, the pressure for employment is on the service sector. As a result, this sector has expanded disproportionately. Because of low economic activity, the States of the region have wide resource deficits. Of these limited resources, a large portion is spent mainly to maintain the service sector. While the national economy is growing fast after an initial contraction, the economies of the region are slowing down. Assam, the largest economy in the region, is in a very critical state, both in agriculture and industry. However, improved agricultural production and productivity in some pockets of the Northeast indicate that there is a large untapped potential in agriculture.



Hard and Soft Infrastructure


Almost all the writings concerning the Northeast have mentioned infrastructural problems faced by the region. A close look at the infrastructural situation reveals that the region has a mixed level of infrastructure. Assam, the biggest economy of the region, is not far behind the national average. The region has about 6 per cent of the national roads and about 13 per cent of the National Highway. Unfortunately, as a result of the poor maintenance, the quality of these roads is not very good. Barring Assam, railways are almost non-existent in other parts of the region. The position of persons per bed in hospitals is better in the region than the national average, except for Assam and Tripura. The number of bank offices has increased in the region, but the credit/deposit ratio is low, particularly in urban areas. In telecommunications, some States have made good progress. For example, Mizoram has more telephone connections per 100,000 population than the national average. Arunachal is also not very far behind. Tripura and Assam have more schools per 100 square kilometres than the national average, and Meghalaya is fast approaching this level, but the remaining States are far behind. As for the number of teachers per 100 students, all the states are far ahead of the national average. Nagaland and Manipur have three times as many teachers per 100 students than the national average.

Clearly, despite a severe infrastructural backlog, the region has relatively reasonable infrastructure in certain pockets. The Brahmaputra Valley qualifies as an area with moderate infrastructure. For industrial development to be more effective, it would be useful if efforts were concentrated in this area, rather than to thinly spread the limited resources across all the seven States.

In the area of human resources, the region scores well over most other States in the country in its relatively high literacy rates. With the exception of Arunachal Pradesh and Meghalaya, all other States of the region have literacy rates above the average national literacy rate. Only Arunachal Pradesh is below the national level for female literacy.

The region has done well in education because of many socio-historical factors but the importance of the literacy factor should not be overemphasised. Although Mizoram, Nagaland and Manipur have higher literacy rates, the largest State — Assam — is only at the average national level. The combined literacy rate of the region is 54.41 per cent, which is slightly above the all-India figure of 52.21 per cent but below its neighbour, West Bengal, which has 57.7 per cent literacy. However, the female literacy rate for the region, at 44.84 per cent, is significantly higher than the national figure of 39.29 per cent and almost equal to that of West Bengal. In addition, compared to the general population, Scheduled Castes are better educated in Arunachal Pradesh and Assam, and Scheduled Tribes in Mizoram. Literacy rates among scheduled tribes are also significantly high in all the north-eastern States.

It should be noted, further, that despite having a large educational infrastructure and better literacy rates in some of the States, the levels of education may not be very high. There are enough teachers in the Northeast, but many of them are not trained. Out of a total of 2,66,057 school teachers at all stages in the region, only 45 per cent of them are trained teachers. The corresponding figure for the national level is about 87 per cent. The situation is particularly bad in Assam and Nagaland, where only about 30 per cent teachers at the higher secondary levels are trained. [12] The large educational infrastructure, both for lower as well as for higher education, is a strength that should be maximised by improving its quality. In-service training of teachers should be a priority area.


State Government Finances


While discussing finances of the Northeast, it has to be kept in mind that many of the States in the region were created mainly to fulfil the ethnic, political and cultural aspirations of the people. During the reorganisation of the States in the Northeast, a pertinent criterion — that the territory in question must have revenue resources to meet its administrative and other non-development expenditure — was ignored. It was perhaps thought that, with their potentials, particularly in the areas of agriculture, hydro-electric power, handicrafts, etc., these States would be able to achieve financial viability after help and protection in the initial years. But any form of protection or subsidy has the tendency to be perceived by economic agents as a permanent feature of the system. In due course of time, it creates its own network of beneficiaries and any change in the existing set of rules evokes strong resistance.

Creation of smaller states in the region might have been a sensible policy from a larger national perspective. But how and when these States would become financially viable was not clear either to the Central planners or to the State governments. Decades have passed and the economies of the region continue to suffer. It seems that both the Centre and the State governments of the region have accepted the status quo. The Planning Commission holds routine general discussions with these States year after year. Because Central assistance has been assured, they have not made much effort to develop their internal financial resources. [13] Since the States do not have to raise internal resources to meet their non-development expenditure, there has been a tendency to multiply administrative units and employees beyond reasonable requirements. Their main task seems to be simply to find ways to utilise Central funds in a routine manner. This sort of financial situation is neither desirable nor sustainable.

Three major points about government finances in the region are worth noting. First, an overwhelming portion of the overall receipts comes from the Centre. Second, the States' own tax revenues are very low, even negligible in some cases. Third, non-Plan revenue expenditure is high in most of the States.

The share of gross transfers from the Centre to aggregate disbursements is the highest in Mizoram where the average for the last 14 years has been about 88 per cent. The figure for Arunachal Pradesh is about 83 per cent, and in Assam, 69 per cent. In the other States of the region, the share of gross transfers is around 80 per cent of total disbursements. The All India average is around 42 per cent. [14]


Devolution and Transfer of Resources


The transfer and devolution of resources from the Centre to the States is essentially via three channels. First, there are statutory transfers (comprising tax sharing and grants-in-aid) through Finance Commission recommendations. Second, there are Plan grants through the Planning Commission guidelines. The Planning Commission fixes the assistance to States to carry out their Plans, while the Finance Commission determines the assistance required for current account budgetary support. There are also 'discretionary' grants through central ministries, primarily for centrally sponsored schemes. There are also some indirect channels, such as loans from the central government and allocation of credit by financial institutions controlled by the central government.

Between 1990-91 to 1998-99, Assam received about Rs. 250 billion from the Centre. Both Arunachal and Manipur received about Rs 55 billion each. Meghalaya received about Rs. 50 billion, and Tripura's share exceeded Rs. 70 billion. Similarly, figures for the same period for Nagaland and Mizoram are about Rs. 66 billion and 48 billion respectively. The total figure for the region for these nine years is about Rs 600 billion. Orissa, which has almost the same population as the Northeast and is economically even more backward, received only about Rs. 250 billion from the Centre for the same period.

These are gross figures. A portion of that money is also returned to the Central government as repayment on loans and interest payments. Thus the cumulative net devolution from the Centre to the Northeast for the period between 1990-91 and 1998-99 is actually about Rs. 510 billion. [15]

Similarly, while looking at the per capita Central assistance during the Eighth Plan, Arunachal Pradesh tops the list. Against the national average of Rs. 1,080, total per capita assistance to the State was more than Rs. 36,000. Mizoram and Nagaland received Rs. 32,567 and Rs. 23,177 respectively. This was much more even compared to other special category States like Himachal Pradesh, Jammu & Kashmir and Assam, which received Rs. 5,921 and Rs 9,754 and Rs 3,161, respectively. Per capita assistance to the economically poorest State of India, Bihar, was only Rs. 876. [16]

Another area where Central assistance needs to be examined is in public sector activities. The gross block of Central Public Sector Enterprises (CPSE) worth Rs. 133.18 billion is in the region, mostly in Assam. This is about 5 per cent of total CPSE assets as well as more than 5 per cent of its employment in India. [17]

As mentioned earlier, the State governments in the region have failed to develop their own financial resources. The potential areas to broaden their tax base are sales tax, revenues from irrigation and better realisation of taxes from power and transport. The growth of non-plan revenue expenditure has been high in the region, but recently there has been an effort by some of the States to keep it under control. It seems that the present financial situation of many Northeast States is not sustainable even in the medium run. Consequently, either central funding will have to be increased, which in present circumstances is neither possible nor desirable; or State expenditures will have to be reduced, even as greater efforts are made to raise internal resources. This needs prudent financial management by the States of the region. Moreover, the time has perhaps come when income tax could be introduced for tribals in the region.


New Challenges


The need for a balanced, multi-level planning system has always been felt in systems for planned regional development. The decentralisation of power and funds to the States and then to local bodies has long been on the agenda. Central and State governments have relied on the rhetoric of decentralisation, but have, in reality, resisted it and undermined any real measures for effective decentralisation.

In the prevailing climate, however, the logical imperatives of economic liberalisation are decentralisation at the political level and greater autonomy to investors. Under the new economic policy regime, the States of the Northeast will be in a better position to manage their own affairs. They will also have the flexibility to attract investment and improve their supply responses. However, the States of the Northeast will have to compete with relatively advanced States that are also undergoing the same process. The region will have to do a lot of homework, even as it demonstrates more openness and transparency, as well as accelerated efforts to attract private investment. Many new opportunities are opening up, and the crucial question is whether the region will be able to take advantage of these. Is the Northeast preparing itself for the new challenges?

There are some positive attitudinal changes both at the Centre as well in the States. But a great deal remains to be done. It is evident that, with its existing infrastructure, the region will not be able to support any major economic activity. To attract international financing for major infrastructural projects, a radically different approach will be required. Proposals for such projects need to be formulated according to criteria that are widely divergent from those submitted in the past to the Planning Commission. Such proposals would now need to specify the end user, the maintenance costs and user charges. But implementation of projects based on market principles is not an easy task. This is evident from an example in Assam, where farmers are showing a reluctance to accept a World Bank funded irrigation rehabilitation project, which requires a part of the cost to be borne by them. [18]


The Role of Private Investment


It must be understood that private capital is a critical component for progress in the Northeast. [19] Although private capital is no panacea it is a critical component for economic progress and dynamism. Higher levels of private investment are essential to generate productive employment, raise productivity and improve technology and the work culture.

Despite announcements and the appointment of many Commissions, the Centre is less likely, or has been less able, to increase public expenditure in order to remove infrastructural bottlenecks. The bulk of capital that will be required to improve supply responses in the region will ultimately have to come from private rather than government sources. Therefore, attracting private capital should be given the highest priority. Compared to what has been done so far, at least as much effort should be devoted to this task as is devoted to securing aid from the Centre.

Fortunately, the general perception that the industry is not keen to invest in the region is gradually changing. Recent initiatives taken by the Confederation of Indian Industry (CII), the Bengal Chamber of Commerce & Industry (BCCI) and the Federation of Indian Chambers of Commerce & Industry (FICCI) show that the private sector is interested in the region. BCCI has set up a new Guwahati Chapter [20] and, in 1997, it organised EXPO-Northeast. FICCI had organised a round table on economic development of the Northeast. CII earlier suggested a new initiative called SUNRISE (Summit of NE States for Regional Initiative and Shared Enterprise) to address challenges of development in the region. [21] It recommended a three dimensional initiative for overall development of the region. Cultural integration (SUN safaris, SUN academy, SUN sport), geographical integration (SUN port, SUN route, SUN river, SUN air); and industrial integration (SUN farms, SUN crafts, and SUN ventures). Some large industrial houses such as Reliance Industries have committed major projects, for example the Rs. 40 billion Tengakhat Gas Cracker Plant, as well as telecommunications projects in the region. These developments indicate that Indian industry is willing to move into the Northeast provided attitudes towards business (read 'outsiders') changed. Certain other fundamental changes would also be necessary in order to attract private investment and capital to the region. These are mainly in the areas of land policy, labour laws, and infrastructure - both hard and soft -, besides the general law and order situation in the States.


Land Policy


Apart from limited industrial activity in Assam, the region is primarily agricultural. The initial economic activity, consequently, has to start from this sector. The present agricultural techniques are very destructive and relatively unproductive. For a start, the agriculture of the region must be commercialised. There is a tremendous scope for tea plantations, horticulture, rubber plantations, floriculture, sericulture, etc. As it is, the share of cash crops in the total agriculture production in the region is quite substantial.

With the exception of the Rubber Board, the government departments that promote such activities have more or less failed in all the States. These are all highly capital intensive and technical activities and there is now no choice but to invite private capital into these areas. However, the present land tenure system in the region is very complex. [22] Apart from Assam, it is difficult to get land in other Northeast States either on ownership or on lease. In order to attract private capital, there is an urgent need to look into land policies.

Any market based economy cannot grow in a place where there is no genuine market for the basic factor of production — land. There is a realisation now in the region that the land tenure system among the tribals is responsible for the slow growth in agriculture. It was also observed in Manipur that private lands are more developed compared to the community land; even hill lands under private ownership or management are prosperous. [23] Therefore, major policy actions in the area of land policy have to be taken by almost all the States. In any new system, land should be made available to investors for industrial or agricultural purposes in a transparent manner, either on lease or on ownership. This would be an important step to remove an important hurdle in the way of the economic development of the region. Even in the case of Assam, the issue of non-availability of suitable land (in terms of size and location) for setting up industries has been pointed out repeatedly by the Dinesh Goswami Report (1988), L.C. Jain Report (1990) and Cooper & Lybrand Report (1995). [24]


Labour Policy


Another important issue related to economic development in the region is labour. It has to be understood that the Northeastern region is a labour scarce economy rather than a labour surplus economy. This is perhaps one of the main reasons for the failure of the various labour intensive government schemes in the areas of animal husbandry, fisheries, the Jawahar Rozgar Yojana, etc. Despite all the talk of outsider invasion, labour (both skilled and unskilled) is a big problem in the region with the possible exception of the Brahmaputra Valley and Tripura. Already outside labour (mainly from Bangladesh, Myanmar and other parts of India) is a crucial factor in both agricultural as well as non-agricultural activities of the region.

Discussions with local entrepreneurs revealed that, with an increase in economic activities, the problem of labour shortage is expected to be aggravated. Unless the region is opened up for outside labour, economic development is going to suffer. Labour, however, is a highly sensitive issue; the States are afraid of a repeat of what happened in Tripura, where tribals have become a minority. For the economic development of the region, it is imperative to evolve a tolerant labour policy. Policy makers of the region are aware of the problem but do not accept it officially for obvious reasons. Unofficially, however, some States have already started an exercise to deal with the problem and are considering a control mechanism to allay tribal apprehensions of an influx of outsiders. [25] It is clear, however, that the labour policy has to become more open if the Northeast really wishes to take advantage of new opportunities.


Infrastructural Improvement - The Necessity of Power


Another major problem in the region is infrastructure, particularly power. Every study on the Northeast has highlighted the problem of infrastructure in the region. The S.P. Shukla Commission, which was set up mainly to look into infrastructural gaps in the region, averred that infrastructural requirements for the region are in the tune of Rs 936 billion. The Commission estimated the requirements for the Ninth Plan period at about Rs 180 billion. [26] However, of the total estimates, more than Rs 600 billion are for the power sector alone. This is the critical sector. All the States in the region except Meghalaya face a shortage of power. Ironically, the north east region has a huge reserve hydro-electric potential — estimated to be between 30,000 and 40,0000 MW. Arunachal Pradesh claims that it alone has a potential of about 30,000 MW, of which only 25 MW has been harnessed so far. If only a portion of the hydro electric potential is realised, the region can become attractive to investors. Obviously, this is one area where foreign investment can be readily attracted. Today more than fifteen new power projects, including those in the private sector, are at different stages of implementation. Project reports for the Lower Kopili and Tipaimukh projects are also ready. Twenty-seven other projects are under investigation. All these projects would require an investment of about Rs 400 billion. Ogden Energy of the US has signed a letter of understanding with the Assam government for exploring various possibilities of setting up power projects in the State. The company has also shown interest in taking the Bongaigaon Thermal power Station on lease for its renovation and upgradation. [27]

If things go as planned, the power situation is likely to be eased. But for the next five to ten years, power will remain a major problem in the region, a factor that no investor can ignore. Radical changes in the thinking of different Central ministries as well as local politicians are required to remedy this situation. Otherwise the region will, in the foreseeable future, have to import power from Bangladesh or elsewhere, even to meet its domestic consumption. [28]

Law and order


The Northeast is the land of the oldest insurgency in independent India. The last few decades have seen the emergence of a number of new insurgent movements. Many of these have faded out, but several groups are still active and continue to spill blood. [29] Frequent bandhs and economic blockades by various groups are another critical irritant. A project report on bandhs in Assam reveals that 73 bandhs were called by different organisations between June 1997 and May 1998. [30] Bandhs are not only called by insurgent organisations, but also by all political parties including the ruling Asom Gana Parisad (AGP), the Bharatiya Janata Party (BJP) and the Congress (I). A bandh call for twelve hours was the most common, called 36 times during the period June 1997 to May 1998. However, longer duration bandhs — for 36 or 48 hours — were also frequent. An estimated loss in State domestic product due to bandhs amounts to as much as Rs. 447.9 million per day. The total loss due to bandhs between June 1997 and May 1998 was Rs. 12.55 billion. [31]

Another aspect of the unrest in the region relates to the fear of extortion, kidnapping and killings of businessmen, who have lived under such threats for decades now. To survive, almost every industry or business, big or small, in most parts of the Northeast, makes regular contributions to different underground groups — call it extortion, ransom or protection money. There are reports that even public sector units and government employees in many of the States also pay. The episode of allegations and eventual legal action against the tea industry for funding militants [32] acted as a further deterrent to possible investors for two reasons. First, it has made the fact widely known to potential investors that payment to militants is the rule in the region. If large, respected companies like the Tatas could not operate without paying some kind of protection money, no other company is likely to have any faith in the governments' announcements that they would provide a safe and secure environment to investors. Second, it has made the task much more difficult for the companies that are already operating in the region. Multinational companies that were planning to enter the region, particularly in the power sector and oil exploration, may now think twice, since they find it much more difficult to 'buy peace' with the militants.

The Central and State governments in the region have announced many tax incentives. However, the 'insurgency tax' is one of the biggest disincentives to investment in the region. Serious efforts to end the insurgencies in the region are, consequently, critical to an economic transformation, and would be much more meaningful than the announcements of numerous schemes and incentives for economic development.


Geographical Advantage


Another area where radical policy action is needed is the external sector. For long, it has been argued that the disadvantageous geographical situation of the Northeast region is one of the main stumbling blocks for its economic development. This isolated, landlocked region shares less than 2 per cent of its borders with the rest of the country, and the rest with Bhutan, Bangladesh, Myanmar and the Tibetan region of China. For the most part, this international border has been artificially created. The result has been the elimination of the region's trade, commerce and other linkages that existed in pre-Partition days. Using the region's two per cent perimeter as a major linkage point with the rest of India, and at the same time checking the inflow of goods and people from across the remaining 98 per cent, has been both a gigantic task and quite counter-productive.

Lately, there has been talk of converting this locational disadvantage into a boon because of an increasingly integrated world economy. This is particularly so when all the seven States of the region are on international borders. In addition, these States are very close to the dynamic Southeast and East Asian economies.

Most policy makers in the region are excited and optimistic about the idea of linking their economies with dynamic Asia. There are even suggestions that if, for security reasons, the Government of India is reluctant to open up the natural trade routes, the Northeast States should ask the Central government to compensate them for the loss of trade. [33]

It is imperative to develop a coherent policy perspective on this issue. The current situation not only represents a failure of the economic policy framework in the region, but also a weakness of country's foreign policy, which has ignored Southeast Asia for a long time. As a result, the Northeast region was not only cut off from its natural economic partners [34] but also encircled by unfriendly countries.

So far the major border trade activity of the region with Bangladesh and Myanmar is 'unauthorised trade'. The State authorities are fully aware of these activities, which function smoothly through unofficial channels. China is an important player in the border trade even though its trading activities are mainly through Myanmar.

The major policy issue, therefore, would be to synchronise these realities with Indian trade policies. In fact, to transform this low economic activity area into a dynamic region in the next ten to fifteen years, a co-ordinated effort by different Central ministries — mainly External Affairs, Home, Finance and Commerce — as well as a strong commitment from each of the Northeast States is needed. With a well thought-out long-term policy, this region has the potential to emerge as a strategic base for domestic and foreign investors to tap the potential of contiguous markets of China, Myanmar, Bangladesh, Laos, Thailand, Vietnam, Cambodia as well as Malaysia, Indonesia and beyond.

To begin with, the emphasis should be on creating conditions, both at the policy level and at the ground level, on converting the unauthorised trade into authorised trade. This is not a simple task. The genuine trader will have many practical problems. Unauthorised trade works on the basis of a strong network which involves traders, the police, forest departments and, of course, many underground groups - and each has its own share in the pie. Apart from infrastructural problems at Moreh, the large number of checkposts on National Highways 39 and 53 would create a problem in switching over from illegal to legal trade. Traders claim that the expenditure on transportation from Moreh to Dimapur is about Rs 50,000 per truck, which includes hire charges, payments to various underground groups, and money paid to almost every police and forest checkpost. [35] Similarly, transport expenditure from Imphal to Guwahati is more than Rs 35,000 per truck. The main reason is that the commodities that are coming from the border are not legal. The list of items agreed by the governments of India and Myanmar is not of much use to traders. However, even if the products were legal, the usual 'tax' would still need to be paid at every checkpoint.

In most cases, the State governments turn a blind eye to the border trade in illegal items because it creates a lot of economic activity in the region. But, since these commodities are not officially declared legal, there is corruption at every turn. It would be a good idea to declare certain areas in the region as Free Trade Areas officially since, for all practical purposes, they are free trade areas anyway.

After designating these areas as Free Trade Areas and creating a minimum infrastructure, the second major step could be to devise an aggressive strategy to form a Growth Triangle or Quadrangle involving neighbouring regions. Some scholars had previously emphasised the idea of the "Bay of Bengal Growth Triangle". [36] It was proposed to have joint studies and co-ordinated investment plans to tap the natural resources of the region that includes the eastern and north eastern States of India, Bangladesh, Nepal, Bhutan and possibly Myanmar. But, with the signing of the Bangladesh-India-Myanmar-Sri Lanka-Thailand Economic Co-operation (BIMST-EC) agreement, the focus has shifted to this forum.

While keeping the interests of India's Northeast in mind, some inter-related steps could also be taken to create a growth quadrangle involving Northeastern India, northern Myanamar, south-west China, [37] northern Thailand and Bangladesh. [38] In August 1999, the "Kunming Initiative" to promote a growth quadrangle between India, China, Myanmar and Bangladesh was launched at an international conference in Kunming, the Capital of the Yunnan province of China. The conference resolved to establish a Forum for Regional Co-operation between China, India, Myanmar and Bangladesh through interaction among academics, governments and leaders of business and industry. The basic objective of the conference was to strengthen regional economic co-operation among contiguous regions of eastern / north eastern India, Bangladesh, China and Myanmar. [39] It was agreed that regional co-operation "should be guided by the Five Principles of Peaceful Coexistence, emphasising equality and mutual benefit, sustainable development, comparative advantages, adoption of international standards, and infrastructure development in order to enhance connectivity and facilitate the widest possible economic co-operation". [40] In this way, in the long run, the vision of making India's Northeast a partner in a wider cross-border Brahmaputra-Yangtze-Mekong quadrant can be realised. [41]




The present economic policy framework for the Northeast region is based on its political economy and a cultural approach, adjusted with a regional planning model. It is implemented mainly through the Planning Commission and the Northeast Council. Despite huge financial investments, this has failed to produce desired results. Further, this is an inappropriate structure to deal with the challenges created by the process of liberalisation/globalisation of the economy. A new policy framework for the region will have to be based on the market approach (although certain political and cultural factors cannot be ignored altogether). If the correct policies are pursued, the region will be able to improve its economy. Under a new economic strategy, private investment should be viewed as the critical component. But, first of all, the region has to become investor-friendly. To encourage private investment, policy makers have to focus on infrastructure (both hard and soft), land and labour policies and substantial improvements in the law and order situation. Secondly, the geographical proximity of the region to the dynamic Southeast Asian economies can be utilised if bold policies are initiated both by the Centre as well as by the State governments. These policies can include:

       converting unauthorised trade activities into authorised trade, both at the policy level and at the ground level;

       declaring certain areas of the Northeast Region as Free Trade Areas officially; and an aggressive strategy for creating a growth quadrangle involving India's Northeast, Myanmar, south west China, northern Thailand and Bangladesh.

       Removal of Restricted Area Permit and Inner Line Regulations would also help in the integration of the Northeast with the Indian and global economy. With Myanmar becoming a member of the Association of South East Asian Nations (ASEAN), a common market of 500 million consumers is at the doorstep of the Northeast.

       Assam is the key to the development of the Northeast; within Assam, priority should be given to modernise its agriculture. Given the rich natural resource base there is considerable scope for increasing agricultural growth. This could be done by improving the cropping intensity, extending dry season farming through irrigation and diversifying into other areas like horticulture, fisheries, and dairy production.

* Dr Gulshan Sachdeva did his Ph.D. in Economic Science from the Hungarian Academy of Sciences, Budapest, and is Assistant Professor at the School of International Studies, Jawaharlal Nehru University, New Delhi. Earlier he was Assistant Research Professor at the Centre for Policy Research, New Delhi. He has written many research papers in national and international journals as well as in several edited compilations, and is the author of the book, The Economy of the Northeast: Policy, Present Conditions and Future Possibilities, New Delhi: Konark Publishers, 2000.

[1] . For a detailed description of the region's ethnic, cultural and religious diversity see mainly R. Gopalakrishnan, The Northeast India: Land, Economy and People, New Delhi: Vikas, 1991; and B.G. Verghese, India's Northeast Resurgent: Ethnicity, Insurgency, Governance and Development, New Delhi: Konark, 1996.

[2] . These special historical and geographical aspects of the region as well as background of special constitutional arrangements are summarized by L. P. Singh, "Problem The Northeast: A Symposium on the Problem of Neglected People and Region", Seminar, New Delhi, No.366, February 1990, pp.12-18.

[3] . In his “Foreword” to the second edition of Elwin Verrier’s A Philosophy for Nefa, Shillong, 1959, Prime Minister Jawaharlal Nehru wrote that "avenues of development (for tribal areas) should be pursued within the broad framework of the following five fundamental principles:

            i.             People should develop along the lines of their own genius and we should avoid imposing anything on them. We should try to encourage in every way their own traditional art and culture.

          ii.             Tribal rights in land and forests should be respected

         iii.             We should try to train and build up a team of their own people to do the work of administration and development. Some technical personnel from outside will,no doubt, be needed, especially in the beginning. But we should avoid introducing too many outsiders into tribal territory.

         iv.             We should not over-administer these areas or overwhelm them with a multiplicity of schemes. We should rather work through, and not in rivalry to, their own social and cultural institutions.

           v.             We should judge results, not by statistics or the amount of money spent, but the quality of human character that is evolved."

[4] . See Arvind K. Sharma, "District Councils in the Northeast", in T. N. Chaturvedi, ed., Fifty Years of Indian Administration: Retrospect and Prospect, New Delhi: Indian Institute of Public Administration, 1998.

[5] . See, Ajai Sahni, “The Terrorist Economy in India's Northeast: Preliminary Explorations”, Paper presented at the ICSSR Seminar, Terrorism: An Unending Malaise, New Delhi, March 2-3, 2000.

[6] . For major changes which have taken place in the region see, B. P. Singh, The Problem of Change: A Study of Northeast India, Delhi: Oxford, 1987.

[7] . See Paul Cashin and Ratna Sahay, "Regional Economic Growth and Convergence in India" Finance and Development, March 1996.

[8] . See Chapter 2, "Liberalisation and the Changing Roles of Centre and the States" in, Raja J. Chelliah, Towards Sustainable Growth Essays in Fiscal and Financial Sector Reforms in India, New Delhi: Oxford, 1996, pp.19-45.

[9] . The recommendations of the conference of the Ministers of Industries of the Northeastern States held at Guwahati on 30 November 1996 the region, however, looks the problem in a different way. They mainly argued for a 'promotional approach, with substantial grants from the central government'.

[10] . Government of Assam, Directorate of Economics and Statistics, Statistical Hand Book of Assam 1994,Guwahati, 1994, p.120.

[11] . This is according to the Report of the Committee for Educated Unemployed in the Northeastern Region, 1997, p.11.

[12] . NCERT, Sixth All India Educational Survey, Vol. VII, New Delhi, 1998.

[13] . These points are also raised by L. P. Singh, "National Policy for the Northeast", in Upendra Baxi, Alice Jacob and Tarlok Singh, eds, Reconstructing the Republic, New Delhi: Har-Anand, 1999.

[14] . Author's calculations based on various Reserve Bank of India Publications.

[15] . For details see, Gulshan Sachdeva, Economy of the Northeast: Policy, Present Conditions and Future Possibilities, New Delhi: Konark, 2000.

[16] . Parliament Questions, February 21, 1997.

[17] . Public Enterprise Survey, 1995-96.

[18] . Assam Tribune, Guwahati, June 6,1997.

[19] . While inaugurating a Round Table on economic development of Northeastern states, the then Finance Minister, Dr. Manmohan Singh, also stressed the need to involve the private sector in the process of development of this region. See Press Release by FICCI, 4 July 1995. Atul Sarma, however, is skeptical about the role the private sector can play in the region. See, Atul Sarma, Development Strategy in the Northeast in the Context of Globalisation, mimeo. He argues that "having lagged behind in terms of the level and quality of administrative, social and economic infrastructure, these States are not likely to benefit immediately from private investment flows in the new regime. Being placed as they are, the role of the public sector in these economies has to be much greater." p.15.

[20] . Bengal Chamber of Commerce and Industry, News Letter, January 13, 1997.

[21] . Confederation of Indian Industries, SUNRISE: Heralding A New Dawn, A Presentation to North Eastern States, Guwahati: CII, August 1995.

[22] . For details see Table 7.2, in Sachdeva, Economy of the Northeast, op. cit, pp. 213-14.

[23] . See Foundation for Environment and Economic Services (FEEDS) and Institute of People's Action (IPA), Shifting Cultivation: Tea Cultivation As An Alternative: A Report, Imphal: FEEDS–IPA, 1997.

[24] . Cf. Report of the Advisory Committee on Industry, Vol 1, Dispur: Government of Assam. p. 9. Jayanta Madhab headed the Committee.

[25] . See “Appendix 1”, in Meghalaya Economic Development Council, Outline Proposal for the Meghalaya Economic Policy, Shillong: EDC Group, 1995.

[26] . Transforming The Northeast: Tackling Backlogs in Basic Minimum Services and Infrastructural Need, High Level Commission Report to the Prime Minister, New Delhi: Planning Commission, 1997, pp. 8-9

[27] . Assam Tribune, June 4, 1997.

[28] . Asian Development Bank is already looking at the possibility of importing power in Tripura and Mizoram from Bangladesh. See Times of India, New Delhi, June 12, 1997.

[29] . For details about different insurgent groups active in the region as well as all aspects of Northeastern insurgency see mainly Sanjoy Hazarika, Strangers of the Mist: Tales of War and Peace From India's Northeast, New Delhi: Viking, 1994 and Ved Marwah, Uncivil Wars: Pathology of Terrorism in India, Delhi: Harper Collins, 1995, pp.224-316.

[30] . North Eastern Development Finance Corporation, A Project Report on Bandhs in Assam. Guwahati:NEDF, 1999.

[31] . Ibid.

[32] . For details about allegations of Tata Tea funding ULFA militants see cover stories of India Today, New Delhi, October 20, 1997 and Business India, New Delhi, October 20, 1997.

[33] . Report of the Committee on Industry, op. cit p.6.

[34] . To understand how partition of the country has affected negatively the traditional trade and economic links of the Northeast see, Hazarika, Strangers of the Mist, op. cit, pp.257-260.

[35] . For details see, Table 5.3, in Sachdeva, Economy of the Northeast, op. cit, pp. 155-57.

[36] . Centre for Policy Research, Indo-Bangladesh Dialogue: Economic and Trade Cooperation, New Delhi, 1995.

[37] . South-West China includes Yunnan Province, Sichuan Province, Chongqing Municipality and Guizhou Province.

[38] . For details see, Gulshan Sachdeva, "India-China Economic Cooperation in a Growth Quadrangle" in, Kanti Bajpai and Amitabh Matto, eds, The Peacock and the Dragon: India-China Relations in the 21st Century, New Delhi: Har-Anand, 2000.

[39] . See, Che Zhimin, Proposition on Formation of Sub-Regional Zone of China, India, Myanmar and Bangladesh, mimeo, 1988.

[40] . The Kunming Initiative, August 17, 1999. This declaration is the outcome of an International conference to promote growth quadrangle between India, China, Myanmar and Bangladesh held in Kunming, Yunnan from August 14 to 17, 1999. Apart from scholars from all four countries, China and Myanmar were officially represented in the conference.

[41] . For details of this argument see Verghese, India's Northeast Resurgent, op. cit, especially chapter Seventeen of the book.





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