Growth Scenario: Is the Common Man in the Picture?
Arun Kumar
Introduction
The Economic Survey notes `the growth performance of the Indian economy during 2003-04 and 2004-05 indicates a possible ratcheting up of the trend rate of growth of the economy from around 6 per cent to about 7 per cent per year. Developments in the current year provide supportive evidence.’ (p. 14). A graph is produced alongside on p. 15 which is used as supportive evidence. How far is this a valid claim? The recent rise in the Saving Investment rate is seen as a cause of optimism for achieving higher growth rates.
Growth at any cost has become acceptable to many under the influence of conservative economists who believe that nothing much can be or should be done about distribution. They express faith in trickle down. Government economists also express faith in this view. Such arguments are based on a mechanical view of Man as a sophisticated machine devoid of social linkages and consequences. Government need not worry about them, they will take care of themselves.
Further, the public has got used to tall claims from the government, like, during the `India Shining Campaign’ of the previous government, even while it finds its lot deteriorating. It needs to be asked, how far has this growth benefited the poor and the common person in the country? The continuing problems of the farmers, youth looking for employment and those in the unorganized sectors suggests that all is not well.
Section I of this paper presents the government’s claims of positive features of the economy in 2004-05 and then critically examines its case for a transition to a higher growth path in Section II. Implications of the current growth path for employment generation and the marginalized sections of the people are discussed in Section III. Section IV analyses the nature of the growth path and the growth impulses in the economy. It also looks at the philosophical underpinnings and the deeper implications of the growth path for the common man. The rising Investment and Savings rate are analysed in Section V. The final section presents the conclusions.
I. The Positive Features of the Economy in 2004-05
The Economic Survey 2004-05 argues that the economy performed well (expected growth rate of 6.9%) in spite of the drought experienced last year. The Index of Agricultural production is expected to show a marginal decline over 2003-04 (179.2 as compared to 180.1). However, data on Rabi crops indicates that the fall may be greater than this. The index of wholesale prices is expected to grow by 5.0% instead of 4.6 % last year in spite of the drought and the raise in petroleum goods prices which had its impact on internal prices. Rate of Industrial growth has continued to rise to reach 7.8% while the services sector grew at 8.9%. India, therefore, presents the image of one of the fastest growing economies in the world with moderate rates of inflation.
This picture looks even better when the fact of higher Savings and Investment rates is factored into the analysis. The Investment (Graph 1) and Savings rates declined after 1999-00 and started to pick up in 2002-03 and have gone up to reach a new high last year. This suggests that with a constant capital output ratio, the rate of growth can pick up.
On the external front, exports have continued to rise strongly (25.6% in $ terms) and the foreign exchange reserves rose by a further 22.7% in $ terms to reach the record figure of $128.9 billion on February 4, 2005. This would cover 16 months of imports and places the economy in a more stable situation than earlier. These resources provide the base for a faster expansion of the economy without the worry of higher inflation.
The other critical resource for a faster expansion of the economy is the availability of food. The stocks have declined sharply in the last three years but they remain at comfortable level and no shortage of food is anticipated. In other words, neither foreign exchange nor food would be a constraint to faster growth of the economy. While infrastructure could be a constraint to the faster growth, government has been claiming that the economy has transited to a higher growth path. How far is this correct?
II. Higher Growth Path or a Downturn
The Economic Survey presents a graph (p. 15) that gives the rate of growth of a year as the average in the preceding 10 years. Graph 2 presents this along with the actual annual growth rate and the decadal average growth rate for comparison. The graph of the past averages shows that the growth rates have been rising since 1980-81. However, this graph can be read in different ways. There is no dispute amongst analysts that the growth rate went up in the 1980s as compared to the 1970s. The decadal average growth rate shows that the averages for the 1980s and 1990s are certainly higher than for the 1960s and 1970s. However, they are not very different from each other. So where does the argument for the higher growth rate come from?
Even the graph in the Economic Survey suggests that there is a stagnant rate of growth in the last 10 years. Further, it displays a cyclical pattern and one cannot project from that to argue that the rate of growth will now rise. Finally, it distorts the pattern of actual growth so that it is not a good way to show that there would be a higher growth in the future. For instance, in 1990-91, there was a sharp downturn but the graph shows an upturn. In fact, why take the average for the last ten years and not five years or some other number of years. Graph 3 presents for comparison the past 5 and past 10 year averages. The 5-year graph shows more fluctuation as expected and shows that the trend is falling in the recent past. From that can one conclude that now the rate of growth of the economy will fall, contrary to the expectation in the Economic Survey. One needs to more carefully interpret the kind of graph presented in the Economic Survey.
If an economy is on a steady rate of growth at r%, the past ten year average income bears the following relationship:
(Yt)av α Yt-10.
If Y displays a cyclical pattern with a periodicity of 10 years (or a sub-multiple), the fluctuation would be eliminated. In other words, the graph crudely represents the past and that is hardly the basis to project if there is a new growth path based on some parametric changes in the economy.
Further, if the authors of the Economic Survey wish to claim that this graph is useful then they must also accept that according to them the economic up turn started 25 years back when the old policies were in operation. Then where was the need for the New Economic Policies with all their iniquitous consequences? Are they trying to make a case that if equity is a concern there was no need for the New Policies launched in 1991?
The past 10 year average Graph also shows that while the peaks are narrow the troughs are wide. This is the classic pattern of business cycles. What this suggests is that the rate of growth after reaching a peak in 2003-04 is now on its way down. The New Economic Policies by limiting the role of the government in the economy prevents the government from implementing anti-cyclical policies to give a boost to the economy (Kumar, 1996). The cyclical pattern is also a consequence of the narrowness of the base of the growth impulses of the economy (discussed below) and the rise in the size of the black economy that accentuates the tendency for deficiency of demand in the economy (Kumar, 1999).
III. The Weaknesses: The Positive Hides the Implications for the Poor
Since 1991, governments have been using the Economic Survey to paint its policies in a positive light. It therefore, tends to gloss over the negative aspects of its actions. Much of the national media, controlled by the corporate sector, also plays a supporting role. For instance, in the post budget discussion, the views of the corporate world are given predominance even though they produce a tiny fraction of the GDP. The media has been a party to spreading the `feel good’ factor. It has put out stories of Indian students getting high starting salaries abroad (up to a crore per annum) and by Indian standards high salaries in India itself. What is not pointed out in these stories is that they are only talking of a few thousand such lucky young people. A bulk of the 9 million young Indians who join the workforce annually struggle to get jobs and often will get salaries of just a few thousand rupees per month.
The fact that the economy will grow at around 6.5% while agriculture witnessed a drought itself is an indication of the growing divide between the few and the many. While close to 60% of the population, dependent on agriculture, will witness a declining per capita income, the rest of the economy employing 40% of the work force, will experience a growth rate of 9%. This picture is not undifferentiated and needs refinement.
The share of the unorganized sectors in National Income has dropped from 64.3% in 1991-92 to 58.5% in 2001-02 (Kumar, 2005). However, employment in this sector is rising as a fraction of the work force. The organized sector employs 5% of the work force (counting child labour also) but produces about 41.5% of the output. Thus the ratio of the per worker output in the organized sector compared to that in the unorganized sector would be 13.5. Since 65% of all investment is going into the organized sector, the organized sector worker is getting 35 times more capital than a worker in the unorganized sector. This underlies the wage differential between the two sectors.
Consequently, those in the organized sector of the economy (5% of the work force) will experience a rising income but not those in the unorganized non-agricultural sectors (35% of the work force) whose share in output is falling while their share in employment is rising (Kumar, 2005). Further those in the fast growing sectors of ICE, software and BPO are a minuscule fraction of the organized sector workforce and will experience even higher growth in incomes. In brief, around 3% of the households (in the organized sector and self employed) will see their average incomes rise, about 60% in agriculture will see average incomes fall and the rest will have stagnant or marginally rising average incomes.
Further, since most of the private investment is going into the already developed areas and government is cutting back capital and developmental expenditures, the backward areas are languishing and this is resulting in growing differentiation between the advanced and the backward regions. In sum, growth is leading to rising inequity which would explain the continuing distress of the farming community as reflected in the unabated suicides, the distress of the youth which is unable to find proper work, the marginalization of the unorganized sector and the backward areas of the country.
The government has delayed the passage of the Employment Guarantee Bill. Even though it is only a safety net device and in itself inadequate to take care of the problem it is necessary to at least meet the urgent needs of the really poor in society. Further, there is no overall appreciation of the causes of the problem amongst the policy makers and of the fact that a comprehensive view of the problem is necessary to boost employment generation in the country. What they do not realize is that they need to look at each of their actions to see which ones are reducing employment generation. The following makes this clear:
1. The government, in spite of build up of foreign exchange reserves that are proving to be an embarrassment is continuing to welcome FDI in areas which have been traditionally labour intensive like, retail and construction. These moves will cause a further decline in employment elasticity. This reflects a mind set in which the poor do not count and only the needs of the elite are important. The question is why should India not be protecting employment when the employment situation is reaching crisis proportions? The capital needed in the sectors that are being opened up is available within the economy. After all, total approval of FDI in 2003 was about 5,500 crore, a mere 0.9% of all investment in the economy. Even though it is small, it is also forcing Indian industry to also upgrade and use more capital intensive industry. The net effect of new technology (even though it creates some jobs) is lower employment in the organized sector and also elsewhere. Use of new technologies like telecom or computers in older industry is reducing employment in traditional industries.
2. To appease industry and specially foreign capital, the government has been trying to push through labour reforms on the plea that flexible labour markets will result in more employment. All this is resulting in is that employment is declining in the organized sectors which are using VRS, etc., to reduce their work force. If the argument was correct, why is employment generation not dynamic in agriculture where employment elasticity is now close to zero whereas there is full freedom to hire and fire since it is entirely in the unorganized sector?
3. Reduction in customs duties since 1991 is undermining not only the large-scale sector but more importantly the small scale sector and this is effecting employment generation in the country. In 1991, the customs duties were of the order of 4% of GDP and now they are down to 1.7%. In 1991, they were roughly equal to excise duties but now they are around 40%. Since internal indirect taxes feed from one good to the other, they raise prices which effects even the small-scale sector which is otherwise mostly outside the net of such taxes. Further, the benefit of cheap imports goes mostly to the large and medium sectors which are more import intensive than the small scale sectors. Cheap imports effectively means dereservation for the small-scale sector. In brief, the small-scale sector suffers both due to internal and external competition.
4. The stagnant employment generation is also linked to the narrowness of the growth. It is dependent on the well off sections (say, 3% as pointed out above). The demand from this upper crust is for imported and/or high technology goods. These have low employment elasticity.
5. Agriculture is not only starved of investment but whatever it is getting is mostly labour displacing and that is why it is generating little work. Opening up and build up of stocks has led to stagnant or declining prices while the new investment has raised costs due to the adoption of new technology. This underlies the crisis in agriculture which is resulting in low investment and little employment generation.
6. Higher budget deficit of the government and cut back in social sector expenditures is accentuating the hardship of poverty (See the Chapter on Public Finance in this volume). Public health and education which have a huge potential for employment are in a state of near collapse.
Commercialization in the social sectors (health, education, drinking water, etc.) is on the rise creating two markets one for the elite and the other for the rest and creating problems for the common man who does not have the wherewithal to pay the higher costs for these basics of life. It is leading to a collapse of public education which is effecting research and making it more narrowly focused on courses with commercial value. The focus on learning is changing to that on passing exams. This has the potential of locking the country in a low value added and low productivity production using cheap labour. The country is becoming a part of the global division of labour. The poor with low levels of skills are the residual in the process. The backward parts of the country are also at the tail end of this process. In brief, commercialization in education will strengthen accentuate differentiation.
Growth has been based on the consumerism of the well off and has overlooked normal welfare decreasing consequences, like, displacement, polluting production, growing malpractices in social sectors, etc. In other words, growth is associated with a decreased amount of welfare of the common person. Drinking water, air and food are all polluted, resulting in a decline in health and increased medical costs. The growing malpractice in the health sector is adding further to costs. The growth in the services sector because of these rising costs is in part spurious.
There are two consequences of this. First, there is a need to redefine poverty and second, economic growth rates need to be reassessed to bring them more in line with increase in the true welfare of the people. Environmental damage, loss of assets due to displacement also need to be deducted to calculate the actual rate of growth of the economy. In brief, the current data does not adequately represent the growth rate of the economy and does not measure the welfare implications for the poor.
IV. Narrowness of the Growth Impulses
Growth since 1990-91 has been accompanied by:
Growth in share of output of the a) organized sector, b) services sector and c) more developed regions and a fall in the share of a) employment in the organized sector and b) expenditure of government on development and especially in the social sectors, like, health and education.
So, a) fewer people are producing more and earning more, b) the poor who need more government support are getting less of it and c) poverty is getting concentrated in agriculture and in rural areas of the backward regions.
Thus the base of growth of the Indian economy is becoming more and more narrow. If child labour and women who are at home and wanting work are also counted then the unorganized sector is 95% of the work force and the un and under employment rates higher than the official data reveal (Kumar, 2005). Since their incomes are rising slowly or stagnant, mass demand is rising slowly.
The elite whose incomes have risen fast, accentuating disparities, can sustain high growth in demand only for a short period of time. This results in demand deficiency manifesting itself repeatedly. Prior to 1990-91, while the down turn was associated with a downturn in agriculture now that is also modified by the business cycle in non-agricultural sectors due to demand factors. The reduced role of the government lowers its capacity to boost demand when there is a downturn. The economy has to revive on its own through increases in private investments but since that is flowing into the more developed parts, the poorer areas become more marginal and more dependent on the government which is in retreat.
Growth is also narrowly based in the urban areas and in the more developed areas. Given that poverty is entrenched in the rural areas in the backward states, the higher growth does not benefit the poor. The divide is only likely to grow with this narrowly based growth. The dilution of the role of government has also affected the backward states more than the others.
The growth in black economy leads to an increase in disparity, reduces the effectiveness of expenditures by the Government and leads to failure of policy (Kumar 1999). As the Finance Minister said in his budget, `expenditures do not mean outcomes’. All this reinforces the cyclical factors.
Underlying the post 1991 policies and the growth path is a philosophical view – a faith in the efficiency of markets. Markets marginalize Man (Kumar, 2005). They cater to the purchasing power of the individual and not to her needs and wants. Markets are based on a mechanical view of Man - that of a sophisticated machine which can be switched off or on at will with no social consequences. People are seen as demand or suppliers of factors. Nothing else matters. Everything else is put under `ceteris paribus’ as of little consequence.
This view underlies the present policies. So unemployment is not important but the stock market is. Faith in the markets is also an expression of distrust of people and their ability to contribute to society for non-monetary reasons. For instance, privatization implies that the public sector cannot be run on a spirit of public purpose while the same institution can be run on the profit motive. For example, take the privatization of services in the Railways. The same people will not do a task for the railways but do it if they can earn a profit by doing it. The task is the same and the person may also be the same but the argument is that the work would only be done for a profit. Markets cater to the greed of Man and promote it and then its proponents argue that Man only works for a monetary incentive.
Health and education have traditionally been considered to be priceless for a good reason. More than monetary reward is associated with them. Teachers and doctors were given a high status in society and they were expected to show the way to society and individuals. Sacrifice was involved in it. Today, markets consider sacrifice to be foolish. In these fields, there is a move to charge what the market will bear. Commercialization is forcing the valuation of these services and they are becoming a source of high profit. Public education and health system which are still cheap have been devalued by society and the private sector is emerging rapidly making legitimate and illegitimate profit. Society is inevitably taking a narrow view of these services.
However, these services can only be valued if a narrow and mechanical view is taken about them and they are treated as other normal goods. This contradicts the very idea underlying them – of treating Man as a being. If we squeeze the patient and the student dry because the market will pay the price, what will they do tomorrow? If these services are treated as non-market and as builders of society, distinct from other goods and services, there would be a profound impact on policy.
This underlying view is also undemocratic since people do not count. It divides people and hands over the reins of control to those who control capital. Leaders are not leaders of men but of capital - those who operate on behalf of capital and do not believe in the finer aspects of human existence. This is the distinction between today’s leaders and those of an earlier generation. Market as an ideology has become so dominant that even the common man is subject to its control and unable to resist because of lack of alternative visions. They need to be created but little is being done in that direction. This, in spite of the hardships that the common man has to undergo not only in poor countries, like, India but also in the more advanced countries.
In India, it is clear that since NEP were launched, through each cycle and there have been three of them, the common man is getting more marginalized. The economic processes are complex and most do not understand the direction they are likely to take. This atomizes them and they only act in a limited framework leaving the bigger picture to Capital. The media is not helping to understand the big picture. Leaders are untrustworthy since they have repeatedly failed so who to look up to except film actors and cricketers who anyway push for the corporate sector through their life style and advertising.
V. Savings and Investment
The growing disparity, pointed to above, underlies the rise in the savings propensity. As incomes get concentrated in the hands of the few, in spite of more luxury goods consumption, since these people have a higher savings propensity, the overall savings propensity rises. This argument can also be understood in terms of the rise in the share of services sector and the decline of the agricultural sector in National income. The former has higher per capita incomes than the latter so the savings propensity is higher.
However, it may be argued that the rise in the share of the savings propensity has taken place through the Nineties so why was this phenomenon not visible earlier? The reason is that the growing black economy masks the rise through siphoning out of the savings from the economy through flight of capital. The measured savings propensity is not the true value. In the last few years, there is evidence of a return of capital that had earlier gone out. This is one cause of the rapid build up of reserves. As flight of capital has slowed down, the Savings propensity is rising to its true value. Thus, the rise is partially statistical and will not have any real effect.
Data on the rate of Investments shows that it has also risen but not as much as the Savings propensity. After a long time, the savings propensity is now higher than the Investment rate. Graph 1 presents data on GDCF and it indicates that Investment increased more or less secularly till 1991 (to peak at 26.3%) but after that there has been a cyclical pattern with peaks in 1995-96 at 26.9% and again in 1999-00 at 25.3% and now in 2003-04 at 26.3%. Interestingly, the figure is now just what it was in 1990-91. Hence there is little scope for claiming that the economy has now transited to a new growth path of around 8%. Further, the Savings-Investment gap that has opened up will actually dampen demand and act to reduce the rate of growth.
Public sector disinvestment could also be playing a part in the return of capital. Assets are being sold cheap by the government and the private sector is trying to take advantage of it and bringing back a part of its capital stashed abroad. There is also the capital that is trying to take advantage of the higher interest rates available in India and the possibility of the strengthening of the rupee viz-a-viz the dollar.
Some may argue that public sector assets are not going cheap but at market valuation. The Ambani case points to the difficulty of valuation of a company and its assets. The two brothers have tried all means available and have not been able to agree to a price. The problem is even more complex in the case of public sector because it was not run to make a profit so current profits cannot be a criterion for valuation. When the private sector takes over a unit, it does not fulfill any of the earlier social obligations so that immediately it reduces costs and cuts losses and increases profits. Thus, valuation has to be on potential profitability. The recent adverse comments by the CAG on disinvestment are a pointer in that direction.
VI. Conclusion
`Accelerating growth is necessary but not sufficient for reaching out to the poor in the economy’ (p.18). Yet, the entire strategy of the government is to go in for more market based changes in economic policies which will mean that the poor will remain marginal. The paper shows that growth is narrowly based in a small elite in the organized sectors of the economy. Consequently, and past experience bears out, the economy is now ready for a downturn after a cyclical high. The graph produced in the Economic Survey (p. 15) that the economy has been accelerating for the last 25 years is hardly useful since it is sensitive to the number of years chosen and using a 5 year average one may come to the opposite conclusion than presented in the Survey. Further, even if it is taken at face value, it is not only not useful to project for the future since if new factors are at play, one cannot use it to project, it also shows a) that there is a stagnation of growth rates and b) if one can accept that growth has been on the upswing for 25 years, then there is no need for the iniquitous growth propelled by the New Economic Policies. One could have continued with the old policies and had growth with less of inequity.
The paper argues that the current growth in the economy is narrowly based and because of the reduced role played by the government in the economy, the economy is witnessing business cycles. This along with the return flow of capital is the cause of the rising Savings rate. It is statistical and the excess of Savings over Investment is likely to lead to a down turn. These cycles are coupled with shocks from agriculture so that there is a complex pattern of rates of growth which is not in the control of policy makers. This is resulting in distress for large sections of the population – farmers, young seeking employment, small scale sector, those in the unorganized sectors of the economy and those in the backward areas of the country.
Growth is not only not generating adequate employment, the welfare associated with it is declining so we need to reassess the growth rate itself. Through the cycles, the poor suffer the most. They are at the edge of survival and each downturn affects them adversely and cumulatively this erodes their condition. The decreased intervention by the government is resulting in lower expenditures on social sectors at a time when the common person needs more of it rather than less. The state of collapse of public education and public health has long run consequences for the country as a whole. The nation is becoming a part of an international division of labour in which it is getting more marginalized and the poor suffer its worst consequences.
References.
Government of India. National Accounts Statistics, Central Statistical Organisation, Various issues.
Government of India. 2005. Union Budget 2005-06.
Government of India, Ministry of Finance, Economic Division. 2005. Economic Survey 2004-05.
Kumar, A.1999. The Black Economy in India. New Delhi, Penguin.
-------------. 2005. Factors Underlying Jobless Growth in India And the Need for a New Development Paradigm. Bhartiya Samajik Chintan. January - March. Vol. III, No. 4 Pp. 215-229.
Graph 1
Arun Kumar
Introduction
The Economic Survey notes `the growth performance of the Indian economy during 2003-04 and 2004-05 indicates a possible ratcheting up of the trend rate of growth of the economy from around 6 per cent to about 7 per cent per year. Developments in the current year provide supportive evidence.’ (p. 14). A graph is produced alongside on p. 15 which is used as supportive evidence. How far is this a valid claim? The recent rise in the Saving Investment rate is seen as a cause of optimism for achieving higher growth rates.
Growth at any cost has become acceptable to many under the influence of conservative economists who believe that nothing much can be or should be done about distribution. They express faith in trickle down. Government economists also express faith in this view. Such arguments are based on a mechanical view of Man as a sophisticated machine devoid of social linkages and consequences. Government need not worry about them, they will take care of themselves.
Further, the public has got used to tall claims from the government, like, during the `India Shining Campaign’ of the previous government, even while it finds its lot deteriorating. It needs to be asked, how far has this growth benefited the poor and the common person in the country? The continuing problems of the farmers, youth looking for employment and those in the unorganized sectors suggests that all is not well.
Section I of this paper presents the government’s claims of positive features of the economy in 2004-05 and then critically examines its case for a transition to a higher growth path in Section II. Implications of the current growth path for employment generation and the marginalized sections of the people are discussed in Section III. Section IV analyses the nature of the growth path and the growth impulses in the economy. It also looks at the philosophical underpinnings and the deeper implications of the growth path for the common man. The rising Investment and Savings rate are analysed in Section V. The final section presents the conclusions.
I. The Positive Features of the Economy in 2004-05
The Economic Survey 2004-05 argues that the economy performed well (expected growth rate of 6.9%) in spite of the drought experienced last year. The Index of Agricultural production is expected to show a marginal decline over 2003-04 (179.2 as compared to 180.1). However, data on Rabi crops indicates that the fall may be greater than this. The index of wholesale prices is expected to grow by 5.0% instead of 4.6 % last year in spite of the drought and the raise in petroleum goods prices which had its impact on internal prices. Rate of Industrial growth has continued to rise to reach 7.8% while the services sector grew at 8.9%. India, therefore, presents the image of one of the fastest growing economies in the world with moderate rates of inflation.
This picture looks even better when the fact of higher Savings and Investment rates is factored into the analysis. The Investment (Graph 1) and Savings rates declined after 1999-00 and started to pick up in 2002-03 and have gone up to reach a new high last year. This suggests that with a constant capital output ratio, the rate of growth can pick up.
On the external front, exports have continued to rise strongly (25.6% in $ terms) and the foreign exchange reserves rose by a further 22.7% in $ terms to reach the record figure of $128.9 billion on February 4, 2005. This would cover 16 months of imports and places the economy in a more stable situation than earlier. These resources provide the base for a faster expansion of the economy without the worry of higher inflation.
The other critical resource for a faster expansion of the economy is the availability of food. The stocks have declined sharply in the last three years but they remain at comfortable level and no shortage of food is anticipated. In other words, neither foreign exchange nor food would be a constraint to faster growth of the economy. While infrastructure could be a constraint to the faster growth, government has been claiming that the economy has transited to a higher growth path. How far is this correct?
II. Higher Growth Path or a Downturn
The Economic Survey presents a graph (p. 15) that gives the rate of growth of a year as the average in the preceding 10 years. Graph 2 presents this along with the actual annual growth rate and the decadal average growth rate for comparison. The graph of the past averages shows that the growth rates have been rising since 1980-81. However, this graph can be read in different ways. There is no dispute amongst analysts that the growth rate went up in the 1980s as compared to the 1970s. The decadal average growth rate shows that the averages for the 1980s and 1990s are certainly higher than for the 1960s and 1970s. However, they are not very different from each other. So where does the argument for the higher growth rate come from?
Even the graph in the Economic Survey suggests that there is a stagnant rate of growth in the last 10 years. Further, it displays a cyclical pattern and one cannot project from that to argue that the rate of growth will now rise. Finally, it distorts the pattern of actual growth so that it is not a good way to show that there would be a higher growth in the future. For instance, in 1990-91, there was a sharp downturn but the graph shows an upturn. In fact, why take the average for the last ten years and not five years or some other number of years. Graph 3 presents for comparison the past 5 and past 10 year averages. The 5-year graph shows more fluctuation as expected and shows that the trend is falling in the recent past. From that can one conclude that now the rate of growth of the economy will fall, contrary to the expectation in the Economic Survey. One needs to more carefully interpret the kind of graph presented in the Economic Survey.
If an economy is on a steady rate of growth at r%, the past ten year average income bears the following relationship:
(Yt)av α Yt-10.
If Y displays a cyclical pattern with a periodicity of 10 years (or a sub-multiple), the fluctuation would be eliminated. In other words, the graph crudely represents the past and that is hardly the basis to project if there is a new growth path based on some parametric changes in the economy.
Further, if the authors of the Economic Survey wish to claim that this graph is useful then they must also accept that according to them the economic up turn started 25 years back when the old policies were in operation. Then where was the need for the New Economic Policies with all their iniquitous consequences? Are they trying to make a case that if equity is a concern there was no need for the New Policies launched in 1991?
The past 10 year average Graph also shows that while the peaks are narrow the troughs are wide. This is the classic pattern of business cycles. What this suggests is that the rate of growth after reaching a peak in 2003-04 is now on its way down. The New Economic Policies by limiting the role of the government in the economy prevents the government from implementing anti-cyclical policies to give a boost to the economy (Kumar, 1996). The cyclical pattern is also a consequence of the narrowness of the base of the growth impulses of the economy (discussed below) and the rise in the size of the black economy that accentuates the tendency for deficiency of demand in the economy (Kumar, 1999).
III. The Weaknesses: The Positive Hides the Implications for the Poor
Since 1991, governments have been using the Economic Survey to paint its policies in a positive light. It therefore, tends to gloss over the negative aspects of its actions. Much of the national media, controlled by the corporate sector, also plays a supporting role. For instance, in the post budget discussion, the views of the corporate world are given predominance even though they produce a tiny fraction of the GDP. The media has been a party to spreading the `feel good’ factor. It has put out stories of Indian students getting high starting salaries abroad (up to a crore per annum) and by Indian standards high salaries in India itself. What is not pointed out in these stories is that they are only talking of a few thousand such lucky young people. A bulk of the 9 million young Indians who join the workforce annually struggle to get jobs and often will get salaries of just a few thousand rupees per month.
The fact that the economy will grow at around 6.5% while agriculture witnessed a drought itself is an indication of the growing divide between the few and the many. While close to 60% of the population, dependent on agriculture, will witness a declining per capita income, the rest of the economy employing 40% of the work force, will experience a growth rate of 9%. This picture is not undifferentiated and needs refinement.
The share of the unorganized sectors in National Income has dropped from 64.3% in 1991-92 to 58.5% in 2001-02 (Kumar, 2005). However, employment in this sector is rising as a fraction of the work force. The organized sector employs 5% of the work force (counting child labour also) but produces about 41.5% of the output. Thus the ratio of the per worker output in the organized sector compared to that in the unorganized sector would be 13.5. Since 65% of all investment is going into the organized sector, the organized sector worker is getting 35 times more capital than a worker in the unorganized sector. This underlies the wage differential between the two sectors.
Consequently, those in the organized sector of the economy (5% of the work force) will experience a rising income but not those in the unorganized non-agricultural sectors (35% of the work force) whose share in output is falling while their share in employment is rising (Kumar, 2005). Further those in the fast growing sectors of ICE, software and BPO are a minuscule fraction of the organized sector workforce and will experience even higher growth in incomes. In brief, around 3% of the households (in the organized sector and self employed) will see their average incomes rise, about 60% in agriculture will see average incomes fall and the rest will have stagnant or marginally rising average incomes.
Further, since most of the private investment is going into the already developed areas and government is cutting back capital and developmental expenditures, the backward areas are languishing and this is resulting in growing differentiation between the advanced and the backward regions. In sum, growth is leading to rising inequity which would explain the continuing distress of the farming community as reflected in the unabated suicides, the distress of the youth which is unable to find proper work, the marginalization of the unorganized sector and the backward areas of the country.
The government has delayed the passage of the Employment Guarantee Bill. Even though it is only a safety net device and in itself inadequate to take care of the problem it is necessary to at least meet the urgent needs of the really poor in society. Further, there is no overall appreciation of the causes of the problem amongst the policy makers and of the fact that a comprehensive view of the problem is necessary to boost employment generation in the country. What they do not realize is that they need to look at each of their actions to see which ones are reducing employment generation. The following makes this clear:
1. The government, in spite of build up of foreign exchange reserves that are proving to be an embarrassment is continuing to welcome FDI in areas which have been traditionally labour intensive like, retail and construction. These moves will cause a further decline in employment elasticity. This reflects a mind set in which the poor do not count and only the needs of the elite are important. The question is why should India not be protecting employment when the employment situation is reaching crisis proportions? The capital needed in the sectors that are being opened up is available within the economy. After all, total approval of FDI in 2003 was about 5,500 crore, a mere 0.9% of all investment in the economy. Even though it is small, it is also forcing Indian industry to also upgrade and use more capital intensive industry. The net effect of new technology (even though it creates some jobs) is lower employment in the organized sector and also elsewhere. Use of new technologies like telecom or computers in older industry is reducing employment in traditional industries.
2. To appease industry and specially foreign capital, the government has been trying to push through labour reforms on the plea that flexible labour markets will result in more employment. All this is resulting in is that employment is declining in the organized sectors which are using VRS, etc., to reduce their work force. If the argument was correct, why is employment generation not dynamic in agriculture where employment elasticity is now close to zero whereas there is full freedom to hire and fire since it is entirely in the unorganized sector?
3. Reduction in customs duties since 1991 is undermining not only the large-scale sector but more importantly the small scale sector and this is effecting employment generation in the country. In 1991, the customs duties were of the order of 4% of GDP and now they are down to 1.7%. In 1991, they were roughly equal to excise duties but now they are around 40%. Since internal indirect taxes feed from one good to the other, they raise prices which effects even the small-scale sector which is otherwise mostly outside the net of such taxes. Further, the benefit of cheap imports goes mostly to the large and medium sectors which are more import intensive than the small scale sectors. Cheap imports effectively means dereservation for the small-scale sector. In brief, the small-scale sector suffers both due to internal and external competition.
4. The stagnant employment generation is also linked to the narrowness of the growth. It is dependent on the well off sections (say, 3% as pointed out above). The demand from this upper crust is for imported and/or high technology goods. These have low employment elasticity.
5. Agriculture is not only starved of investment but whatever it is getting is mostly labour displacing and that is why it is generating little work. Opening up and build up of stocks has led to stagnant or declining prices while the new investment has raised costs due to the adoption of new technology. This underlies the crisis in agriculture which is resulting in low investment and little employment generation.
6. Higher budget deficit of the government and cut back in social sector expenditures is accentuating the hardship of poverty (See the Chapter on Public Finance in this volume). Public health and education which have a huge potential for employment are in a state of near collapse.
Commercialization in the social sectors (health, education, drinking water, etc.) is on the rise creating two markets one for the elite and the other for the rest and creating problems for the common man who does not have the wherewithal to pay the higher costs for these basics of life. It is leading to a collapse of public education which is effecting research and making it more narrowly focused on courses with commercial value. The focus on learning is changing to that on passing exams. This has the potential of locking the country in a low value added and low productivity production using cheap labour. The country is becoming a part of the global division of labour. The poor with low levels of skills are the residual in the process. The backward parts of the country are also at the tail end of this process. In brief, commercialization in education will strengthen accentuate differentiation.
Growth has been based on the consumerism of the well off and has overlooked normal welfare decreasing consequences, like, displacement, polluting production, growing malpractices in social sectors, etc. In other words, growth is associated with a decreased amount of welfare of the common person. Drinking water, air and food are all polluted, resulting in a decline in health and increased medical costs. The growing malpractice in the health sector is adding further to costs. The growth in the services sector because of these rising costs is in part spurious.
There are two consequences of this. First, there is a need to redefine poverty and second, economic growth rates need to be reassessed to bring them more in line with increase in the true welfare of the people. Environmental damage, loss of assets due to displacement also need to be deducted to calculate the actual rate of growth of the economy. In brief, the current data does not adequately represent the growth rate of the economy and does not measure the welfare implications for the poor.
IV. Narrowness of the Growth Impulses
Growth since 1990-91 has been accompanied by:
Growth in share of output of the a) organized sector, b) services sector and c) more developed regions and a fall in the share of a) employment in the organized sector and b) expenditure of government on development and especially in the social sectors, like, health and education.
So, a) fewer people are producing more and earning more, b) the poor who need more government support are getting less of it and c) poverty is getting concentrated in agriculture and in rural areas of the backward regions.
Thus the base of growth of the Indian economy is becoming more and more narrow. If child labour and women who are at home and wanting work are also counted then the unorganized sector is 95% of the work force and the un and under employment rates higher than the official data reveal (Kumar, 2005). Since their incomes are rising slowly or stagnant, mass demand is rising slowly.
The elite whose incomes have risen fast, accentuating disparities, can sustain high growth in demand only for a short period of time. This results in demand deficiency manifesting itself repeatedly. Prior to 1990-91, while the down turn was associated with a downturn in agriculture now that is also modified by the business cycle in non-agricultural sectors due to demand factors. The reduced role of the government lowers its capacity to boost demand when there is a downturn. The economy has to revive on its own through increases in private investments but since that is flowing into the more developed parts, the poorer areas become more marginal and more dependent on the government which is in retreat.
Growth is also narrowly based in the urban areas and in the more developed areas. Given that poverty is entrenched in the rural areas in the backward states, the higher growth does not benefit the poor. The divide is only likely to grow with this narrowly based growth. The dilution of the role of government has also affected the backward states more than the others.
The growth in black economy leads to an increase in disparity, reduces the effectiveness of expenditures by the Government and leads to failure of policy (Kumar 1999). As the Finance Minister said in his budget, `expenditures do not mean outcomes’. All this reinforces the cyclical factors.
Underlying the post 1991 policies and the growth path is a philosophical view – a faith in the efficiency of markets. Markets marginalize Man (Kumar, 2005). They cater to the purchasing power of the individual and not to her needs and wants. Markets are based on a mechanical view of Man - that of a sophisticated machine which can be switched off or on at will with no social consequences. People are seen as demand or suppliers of factors. Nothing else matters. Everything else is put under `ceteris paribus’ as of little consequence.
This view underlies the present policies. So unemployment is not important but the stock market is. Faith in the markets is also an expression of distrust of people and their ability to contribute to society for non-monetary reasons. For instance, privatization implies that the public sector cannot be run on a spirit of public purpose while the same institution can be run on the profit motive. For example, take the privatization of services in the Railways. The same people will not do a task for the railways but do it if they can earn a profit by doing it. The task is the same and the person may also be the same but the argument is that the work would only be done for a profit. Markets cater to the greed of Man and promote it and then its proponents argue that Man only works for a monetary incentive.
Health and education have traditionally been considered to be priceless for a good reason. More than monetary reward is associated with them. Teachers and doctors were given a high status in society and they were expected to show the way to society and individuals. Sacrifice was involved in it. Today, markets consider sacrifice to be foolish. In these fields, there is a move to charge what the market will bear. Commercialization is forcing the valuation of these services and they are becoming a source of high profit. Public education and health system which are still cheap have been devalued by society and the private sector is emerging rapidly making legitimate and illegitimate profit. Society is inevitably taking a narrow view of these services.
However, these services can only be valued if a narrow and mechanical view is taken about them and they are treated as other normal goods. This contradicts the very idea underlying them – of treating Man as a being. If we squeeze the patient and the student dry because the market will pay the price, what will they do tomorrow? If these services are treated as non-market and as builders of society, distinct from other goods and services, there would be a profound impact on policy.
This underlying view is also undemocratic since people do not count. It divides people and hands over the reins of control to those who control capital. Leaders are not leaders of men but of capital - those who operate on behalf of capital and do not believe in the finer aspects of human existence. This is the distinction between today’s leaders and those of an earlier generation. Market as an ideology has become so dominant that even the common man is subject to its control and unable to resist because of lack of alternative visions. They need to be created but little is being done in that direction. This, in spite of the hardships that the common man has to undergo not only in poor countries, like, India but also in the more advanced countries.
In India, it is clear that since NEP were launched, through each cycle and there have been three of them, the common man is getting more marginalized. The economic processes are complex and most do not understand the direction they are likely to take. This atomizes them and they only act in a limited framework leaving the bigger picture to Capital. The media is not helping to understand the big picture. Leaders are untrustworthy since they have repeatedly failed so who to look up to except film actors and cricketers who anyway push for the corporate sector through their life style and advertising.
V. Savings and Investment
The growing disparity, pointed to above, underlies the rise in the savings propensity. As incomes get concentrated in the hands of the few, in spite of more luxury goods consumption, since these people have a higher savings propensity, the overall savings propensity rises. This argument can also be understood in terms of the rise in the share of services sector and the decline of the agricultural sector in National income. The former has higher per capita incomes than the latter so the savings propensity is higher.
However, it may be argued that the rise in the share of the savings propensity has taken place through the Nineties so why was this phenomenon not visible earlier? The reason is that the growing black economy masks the rise through siphoning out of the savings from the economy through flight of capital. The measured savings propensity is not the true value. In the last few years, there is evidence of a return of capital that had earlier gone out. This is one cause of the rapid build up of reserves. As flight of capital has slowed down, the Savings propensity is rising to its true value. Thus, the rise is partially statistical and will not have any real effect.
Data on the rate of Investments shows that it has also risen but not as much as the Savings propensity. After a long time, the savings propensity is now higher than the Investment rate. Graph 1 presents data on GDCF and it indicates that Investment increased more or less secularly till 1991 (to peak at 26.3%) but after that there has been a cyclical pattern with peaks in 1995-96 at 26.9% and again in 1999-00 at 25.3% and now in 2003-04 at 26.3%. Interestingly, the figure is now just what it was in 1990-91. Hence there is little scope for claiming that the economy has now transited to a new growth path of around 8%. Further, the Savings-Investment gap that has opened up will actually dampen demand and act to reduce the rate of growth.
Public sector disinvestment could also be playing a part in the return of capital. Assets are being sold cheap by the government and the private sector is trying to take advantage of it and bringing back a part of its capital stashed abroad. There is also the capital that is trying to take advantage of the higher interest rates available in India and the possibility of the strengthening of the rupee viz-a-viz the dollar.
Some may argue that public sector assets are not going cheap but at market valuation. The Ambani case points to the difficulty of valuation of a company and its assets. The two brothers have tried all means available and have not been able to agree to a price. The problem is even more complex in the case of public sector because it was not run to make a profit so current profits cannot be a criterion for valuation. When the private sector takes over a unit, it does not fulfill any of the earlier social obligations so that immediately it reduces costs and cuts losses and increases profits. Thus, valuation has to be on potential profitability. The recent adverse comments by the CAG on disinvestment are a pointer in that direction.
VI. Conclusion
`Accelerating growth is necessary but not sufficient for reaching out to the poor in the economy’ (p.18). Yet, the entire strategy of the government is to go in for more market based changes in economic policies which will mean that the poor will remain marginal. The paper shows that growth is narrowly based in a small elite in the organized sectors of the economy. Consequently, and past experience bears out, the economy is now ready for a downturn after a cyclical high. The graph produced in the Economic Survey (p. 15) that the economy has been accelerating for the last 25 years is hardly useful since it is sensitive to the number of years chosen and using a 5 year average one may come to the opposite conclusion than presented in the Survey. Further, even if it is taken at face value, it is not only not useful to project for the future since if new factors are at play, one cannot use it to project, it also shows a) that there is a stagnation of growth rates and b) if one can accept that growth has been on the upswing for 25 years, then there is no need for the iniquitous growth propelled by the New Economic Policies. One could have continued with the old policies and had growth with less of inequity.
The paper argues that the current growth in the economy is narrowly based and because of the reduced role played by the government in the economy, the economy is witnessing business cycles. This along with the return flow of capital is the cause of the rising Savings rate. It is statistical and the excess of Savings over Investment is likely to lead to a down turn. These cycles are coupled with shocks from agriculture so that there is a complex pattern of rates of growth which is not in the control of policy makers. This is resulting in distress for large sections of the population – farmers, young seeking employment, small scale sector, those in the unorganized sectors of the economy and those in the backward areas of the country.
Growth is not only not generating adequate employment, the welfare associated with it is declining so we need to reassess the growth rate itself. Through the cycles, the poor suffer the most. They are at the edge of survival and each downturn affects them adversely and cumulatively this erodes their condition. The decreased intervention by the government is resulting in lower expenditures on social sectors at a time when the common person needs more of it rather than less. The state of collapse of public education and public health has long run consequences for the country as a whole. The nation is becoming a part of an international division of labour in which it is getting more marginalized and the poor suffer its worst consequences.
References.
Government of India. National Accounts Statistics, Central Statistical Organisation, Various issues.
Government of India. 2005. Union Budget 2005-06.
Government of India, Ministry of Finance, Economic Division. 2005. Economic Survey 2004-05.
Kumar, A.1999. The Black Economy in India. New Delhi, Penguin.
-------------. 2005. Factors Underlying Jobless Growth in India And the Need for a New Development Paradigm. Bhartiya Samajik Chintan. January - March. Vol. III, No. 4 Pp. 215-229.
Graph 1
Source: Economic Survey 2004-05
Graph 3
Graph 3
Source: Economic Survey 2004-05
Graph 2
Source: Economic Survey 2004-05.
Graph 2
Source: Economic Survey 2004-05.
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