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The Economy and the People

The Economic Survey’s window dressing apart, neither is the economy doing well, nor are the people.

If one were to go by the real gross domestic product (GDP growth rates for 2017–18 and 2018–19 expected/forecasted in the Government of India’s Economic Survey 2017–18 (ES)—6.75% and 7%–7.5% respectively—and accept the Central Statistics Office’s figures that suggest an average 7.5% GDP growth rate between 2014–15 and 2016–17, then India would perhaps turn out to be the fastest-growing economy in the world over the five-year period. Moreover, that the stock market, as reflected in the upward climb of the Bombay Stock Exchange Sensex and the Nifty 50 Index, has been booming. “India must continue improving the climate for rapid economic growth on the strength of the only two truly sustainable engines—private investment and exports,” the ES recommends. The authors want the Indian economy to return to the high growth witnessed from 2003–04 to 2007–08, and sustain it over the long term. But they do not seem to know how. It would entail an understanding as to why that growth process came to be undone and what were the problems with it that could not be addressed. This is found wanting, even though there is an attempt to learn from investment and saving slowdowns in other countries.

From the figures cited in the ES, it seems that on the demand side of the economy, investment has faltered quite badly, though this is not reflected in terms of an expected sharp deceleration in real GDP growth. Only if the incremental capital–output ratio has declined significantly could one go along with the officially claimed authenticity of the high GDP growth rate figures. But there is nothing to suggest that this has happened. The investment data is available only up to 2015–16. This shows a consistent reduction of the investment rate—gross capital formation as a percentage of GDP from around 39% in 2011–12 to 33.3% in 2015–16. Indeed, the fixed investment rate—gross fixed capital formation as a percentage of GDP—declined by 5 percentage points over the period, and by another 2 percentage points in 2016–17. This seems to continue to decline in 2017–18, at a time when the private corporate sector (PCS) has become the main investment engine of the economy. The ES ascribes the faltering of investment partly to the “twin-balance sheet problem”—the financial distress of over-leveraged private companies and bad-loan encumbered public sector banks.

But what about the demand side, namely Keynesian “animal spirits” that spur private investment in the real part of the economy? An important driver of those animal spirits in the period from 2003–04 to 2007–08 was the PCS’s access to undervalued assets. This was made possible by the Bharatiya Janata Party-led (BJP) National Democratic Alliance (NDA) government’s privatisation of public sector assets for a song. And later, one also witnessed the Congress-led United Progressive Alliance government’s handover (leasing) of land, minerals, including coal, and forest resources, as well as allocation of spectrum for telecom to the PCS, also cheaply. Add to this the huge capital subsidy in the form of “viability gap funding” in public–private partnerships for infrastructural projects. All these huge sops to the PCS have become politically difficult to sustain in the face of revelations of corrupt dealings and public protests. Will the BJP government led by Narendra Modi, if it gets another term in office in 2019, be able to continue where the previous BJP-led NDA government left off, in terms of “strategic sales” of public sector assets at depressed rates?

A decline in the growth rates of gross value added (GVA) at constant basic prices in the manufacturing sector since the fourth quarter of 2015–16, despite some signs of recovery in the second quarter of 2017–18, should be a matter of concern. High real interest rates and banks’ reluctance to lend because of the problem of non-performing assets are mentioned as the proximate causes. But competition from imports has adversely affected the growth of sales revenues and capacity utilisation of domestic firms, forcing them to lower their profit margins. This has had a negative influence on expected profit rates, and thereby, the propensity to invest. Moreover, the growth of GVA in constant basic prices in construction has been lacklustre in 2016–17 and 2017–18, adversely affecting employment and demand for steel, cement, and other material inputs. This, in turn, has affected expected profit rates and investment in these industries.

The growth rates of GVA at constant basic prices in agriculture have suffered since the last quarter of 2016–17. Despite the optimism of the ES of recovery in the second half of 2017–18, there is a dire need to revive the mechanisms for assuring “remunerative prices” for both food and cash crops, for the latter, by also renewing the marketing operations of the respective commodity boards. Debt relief to peasants has to be combined with such price supports. Of course, there are those who oppose debt relief to peasants on the ground that it constitutes a “moral hazard,” but refrain from extending the same argument when the so-called captains of industry are the beneficiaries of debt write-offs, even when some of their companies are wilful defaulters. Try suggesting an amendment to company law to the effect that the “limited liability” provision should not apply to the promoters of wilfully defaulting companies.

Way back, at a time when mendacity in public life had not yet reached the chronic proportions it has today, a Brazilian president, during the military-dictatorship period, on an official visit to the United States was asked by a journalist about the state of the Brazilian economy. His reply: “In my country the economy is doing fine, but the people aren’t.” Two of the Modi government’s interventions, demonetisation and the introduction of the goods and services tax (GST), which have caused acute distress to ordinary people in the informal economy, have been hailed as “game changers.” Their only negative “unintended consequence” is apparently a minor dip in the GDP growth ­figures. Their negative impacts on employment and livelihoods have been entirely glossed over.

We have already discussed the negative impact of demonetisation on ordinary people in these columns. Yet, a word or two about how GST is crippling the informal sector might be in order. Apart from the enhanced “transaction costs” and the waiting costs of getting the GSTrefunds due to informal sector “businesses,” the indirect tax burden is being redistributed to bring the informal sector into the tax net, and thereby reduce the load of indirect taxes on the PCS. The informal sector, including non-plantation agriculture, contributes around 45% of GDP and employs around 75% of the workforce. With a significant part of the non-agricultural informal sector drawn into the GST chain, and given the precarious economic viability of the “enterprises” therein, a number of them might just fold up, leading to a significant loss of employment and livelihoods.

As it is, the 2017 Global Hunger Index: The Inequalities of Hunger, a report of the International Food Policy Research ­Institute, suggests that the problem of undernourishment, stunting, wasting and mortality among children under five years of age in India is serious, worse than the same in Bangladesh and some of the African countries south of the Sahara. Some 38% of children in India suffer from stunting, where height is limited by insufficient calorie intake. Citing the 2017 report India: Health of the Nation’s States, the ES emphasises that “malnutrition” is the “most important risk factor (14.6%) that results in disease ­burden in the country.” The larger problem, however, is one of islands of wealth, luxury, and civilisation in a vast sea of poverty, misery, and degradation. Indeed, the consumption expenditures of at least four-fifths of the people in rural areas and at least three-fifths in urban areas are not sufficient to imbibe food that satisfies the respective minimum calorie norms of 2,400 and 2,100 calories per day respectively, for the two ­areas. One has only to contrast their miserable plight with the unprecedented luxury of the 100 dollar billionaires at the top end of Indian society. Not for nothing are sufficient outlays for schemes such as Integrated Child Development Services and Mahatma Gandhi National Rural Employment Guarantee dire necessities.

The ES’s dodgy GDP and GVA numbers, its growth fetishism, its inability to unravel why economic growth processes go awry or the problems that need to be addressed, its eagerness to ­approach the “next frontier” on the ease of doing business, its lip service to climate change and gender, all of these notwithstanding, it does nevertheless serve the main purpose for which it was intended—boosting “investor confidence.” But, in reality, neither is the economy doing well, nor are the people.

Updated On : 6th Feb, 2018


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