Tuesday, April 16, 2024

West Asia Crisis Ratcheting Up Could Spin Out of Control | Arun Kumar

https://theleaflet.in/west-asian-moves-and-countermoves-challenges-of-them-spinning-out-of-control/

West Asian moves and countermoves: Challenges of them spinning out of control

Arun Kumar·April 16, 2024

What will the complex calculus of the new Middle East crisis resolve into, and what will be the impact on India?

—

ISRAEL has succeeded in diverting world attention from Gaza and Hamas to Iran. This is similar to how Hamas, in October 2023, successfully short-circuited US efforts at normalising relations between the Arab states and Israel under the Abrahams Accord.

These moves and countermoves are ratcheting up the intensity of conflict in West Asia with serious global implications, including for India. The Indian approach seems to be similar to that in the case of the conflict in Ukraine— to play both sides.

Countermoves

Iran’s attack on Israeli soil is unprecedented. It is a response to the Israeli attack on its consulate in Syria on April 1, killing some of its top army commanders. It had warned of a retaliation and that gave Israel and its partners, the US, the UK, etc., time to prepare.

The US had already moved its forces and prepared its allies in the region to shoot down the projectiles from Iran. Even Jordan apparently participated in this. Israel could take care of the projectiles that managed to reach its territory. So, 99 percent of the projectiles were shot down in the air and there was little damage in Israel.

The Indian approach seems to be similar to that in the case of the conflict in Ukraine— to play both sides.

It provided a sense of victory to Israel, the US and their allies. This was US President Joe Biden’s message to Israeli Prime Minister Benjamin Netanyahu and to forestall any immediate Israeli retaliation.

Also read: What Palestine teaches teachers of politics and law

Did Iran need 15 days to prepare to attack Israel? Could it not have used many more than 300 projectiles to attack to overwhelm Israeli defences? Could the Iranian allies like the Hezbollah in Lebanon and the Houthis in Yemen not have fired a much larger number of projectiles?

Clearly, Iran was making a show of avenging an attack on them but did not want to hit Israel. It did not want to provoke an attack on its territory from the much superior US and Israeli forces.

The Iranian foreign minister stated in a press conference after the attack that the US, Turkey and some Arab neighbours were given advance information about the limited attack. The US has denied that it had advance information.

Not only were 15 days given to Israel to prepare its defence, the timing of the attack was also conveyed in advance. The drones, which would take six–seven hours to reach Israel, and cruise missiles, which would take two–three hours, were bound to be neutralised given the advance preparations.

Only ballistic missiles, which take only a few minutes to traverse the distance that exists between Israel and Iran, were a serious challenge, but due to the advanced notice and preparation, even they got neutralised.

The Iranian army briefing after the attack also mentioned that the attack was a limited one and had achieved its objective and no more attacks would occur unless Israel attacked its territory. Thus, the Iranian attack was for show and not effect.

The US and the G7 that met in the aftermath of the Iranian attack while condemning the Iranian attack suggested that Israel had won and that it should not retaliate against Iran.

Some even argue that this presents an opportunity to take out Iran’s nuclear establishments and cripple its nuclear bomb capability.

Indeed, Israel’s attack on the embassy in Syria was meant to draw the US and other allies into unequivocally supporting Israel. That support had been dwindling due to the ongoing genocide in Gaza which was inflaming world opinion. Israel has succeeded in this aim. Today, the attention has shifted from genocide in Gaza to the global implications of a wider war in West Asia.

Pressures escalating

The US, while saying it does not want an escalation and that it would not support an Israeli strike, has also said its support to Israel is “ironclad”. Just as Israel has defied US advice to avoid civilian casualties in Gaza and allow more humanitarian aid to enter, it can defy the current US advice to not escalate the conflict.

Also read: The only language Israel understands

Israel could attack, secure in the fact that the US and the allies would defend it if Iran retaliates substantially in response to the Israeli retaliation.

Will Israel oblige by not attacking Iran? The ultra-right in Israel is pressurising the government to retaliate. They have been a part of the growing problem created by the displacement of Palestinians from the West Bank, coming up of new settlements and aggressive assertions in Jerusalem. All this has led to rising Palestinian resentment.

Many Israelis and conservative Republicans in the US are arguing for Israeli retaliation. The Israeli war cabinet said the conflict is “not over yet” and we will “extract a price”.

Even the moderate leader Benny Gantz wants retaliation, though at a time of Israel’s choosing. The ultras argue that Iran has crossed a red line by attacking Israeli soil and it must pay for that.

Some even argue that this presents an opportunity to take out Iran’s nuclear establishments and cripple its nuclear bomb capability.

Hamas’s action was a result of perceived subjugation and atrocities by Israel over a long period, which could not have been anticipated by Israel and the US.

But, there are limits to such actions since there are other players who may be forced to intervene. Also, it could lead to a wider conflict in West Asia. The Sunni nations, though not allies of Iran, may also be forced to act. Already, some of these US allies have prohibited the use of their air space by the US.

Limits of shadow fights

Israel has a huge network of intelligence in not only Gaza but all over West Asia. It has been able to kill its opponents’ leaders in Gaza, Lebanon, Iran, Iraq and Syria. Recently, it could kill the sons and grandsons of Hamas leader.

But, the October 7 attack by Hamas in Israel and Hamas still being able to fight in Gaza six months later lays bare the limits of their intelligence. The extensive network of tunnels in Gaza, the troop strength of Hamas and Israel’s inability to get hostages released for six months also point to the same limitation.

Also read: The brutality in Gaza rekindles the horrible memories of women in war

All this points to the limits of shadow fighting in international relations. Hamas’s attack on October 7 destroyed an equilibrium because it was willing to accept the massive death and destruction in Gaza.

Israel’s attack on the embassy in Syria knowing that Iranians would retaliate has further shifted the out-of-equilibrium position. These instabilities are feeding into each other since one cannot anticipate what nations may do under uncertainty no matter how well a powerful nation may plan.

Hamas’s action was a result of perceived subjugation and atrocities by Israel over a long period, which could not have been anticipated by Israel and the US.

The attack on the embassy in Syria was also unanticipated and a result of Israel’s perception that Iran is behind the Hamas, Hezbollah and Houthis. Iran’s attack on Israel is also a result of its perception of having been attacked on its soil which required an attack on Israeli soil.

Conclusion: Rising global challenges

Now that the world is divided into two blocs, the situation has become more worrisome. Iran is a part of the bloc consisting of Russia and China. It has been supplying drones to Russia for its war in Ukraine. Even though this bloc may not want a second front, it cannot but stand with Iran in case of a Western bloc attack on Iran.

Its stand on the issue will be a crucial determinant of what happens next. The stance of G7 and NATO will be vital since they have been unsuccessfully trying to restrain Israel. Military mobilisation will rise in key nations. The beneficiary will be the military-industrial complex.

Also read: Interview with Adila Hassim, counsel for South Africa versus Israel before the ICJ

War in West Asia will impact the petroleum products market. If Iran is attacked and it blocks the Hormuz Strait or attacks oil tankers, petro-goods prices will rise. Shipping through the Suez has already been impacted and may face further disruption.

India imports 85 percent of its petroleum requirements so the outgo of foreign exchange may increase leading to a deterioration in the balance of payments (BOP), weakening of the Indian rupee and higher inflation.

Thus, the post-pandemic easing of supply bottlenecks may reappear and create inflation globally, disrupting many economies.

India imports 85 percent of its petroleum requirements so the outgo of foreign exchange may increase leading to a deterioration in the balance of payments (BOP), weakening of the Indian rupee and higher inflation.

Foreign investments may slow down. A substantial number of Indians working in West Asia may be forced to return and that will reduce repatriation by non-resident Indians.

Thus, capital flows may be impacted and further aggravate the BOP. India would need to prepare for these challenges in the midst of the fraught election season where the leadership’s attention is not where it should be.

Author of `Indian Economy’s Greatest Crisis: Impact of the Coronavirus and the Road Ahead’. 2020.

Arun Kumar

Arun Kumar is a Retired Professor of Economics at the Jawaharlal Nehru University. He is the author of `Demonetization and Black Economy’ (2018, Penguin Random House) and 'Indian Economy’s Greatest Crisis: Impact of Coronavirus and the Road Ahead' (2020). He blogs at http://arunkumarjnu.blogspot.com/.

Friday, April 12, 2024

Video: Electoral Bonds enquiry needed urgently from independent agency

How come loss-making companies gave crores to the BJP? | Satya Hindi

Money trail in Electoral Bonds scam, investigation can be launched by official agancies but will they? | Arun Kumar (The Wire)

As Media Continues to Expose Electoral Bond Issues, What’s Next?

https://m.thewire.in/article/government/as-media-continues-to-expose-electoral-bond-issues-whats-next

Video: The Electoral Bond Effect ! | Arun Kumar

Sunday, March 31, 2024

Electoral Bonds a dicussion on legal political and economic aspects --with Madan Lokur, Sitaram Yechury, Arun Kumar at Dil Se hosted by Kapil Sibal

In this episode of @dilsewithkapilsibal, host Kapil Sibal discusses various facets and implications of the “crooked intent” of the BJP bringing in Electoral bonds. The data revelations are only the beginning. Investigations must follow, to rescue Indian democracy and restore probity in public life, which is at an all-time low. Where is this money coming from? Justice (retd) Madan Lokur, former judge of the Supreme Court, Sitaram Yechury, CPI(M) General Secretary, petitioner in the matter in court and economist Prof Arun Kumar discuss.

https://youtu.be/ipEK3jA6ohE?si=WEid9NK9Rj4CH5xY

Wednesday, March 13, 2024

India: GDP data for Q3 2023–24 , the real story | Arun Kumar

(Published in The Leaflet)

GDP data for Q3 2023–24: The mystery of a robust growth

Arun Kumar·March 5, 2024

Recently released GDP figures have sprung a surprise, baffled experts and overturned the government’s own data and projections. What could be the reason?

—

GROSS Domestic Product (GDP) figures have sprung a surprise— showing a growth of 8.4 percent in Quarter 3 of 2023–24, on top of the previous two quarter’s growth of 8.2 percent and 8.1 percent.

The annual growth for 2023–24 is projected at 7.6 percent. But given the growth rates in the first three quarters, it is likely to be above 8 percent, unless the economy decelerates sharply in Q4, of which there is little sign.

The surprise

Experts are embarrassed that how could they be so far off. In December 2023, the Reserve Bank of India (RBI) had upped its projected growth rate from 6.5 percent to 7 percent.

Various foreign credit rating agencies had revised the expected growth rate to only around 6.5 percent. The International Monetary Fund (IMF) expected a 6.3 percent rate of growth.

In December 2023, the Reserve Bank of India (RBI) had upped its projected growth rate from 6.5 percent to 7 percent.

The Union finance ministry of India said that the rate of growth would be comfortably above 6.5 percent, but did not say it would be over 8 percent. The largest Indian bank, which usually gives a glowing picture of the economy, which then gets amplified in the media, just a day earlier had predicted a rate of growth of between 6.7 percent and 6.9 percent. It argued that there was a moderation in economic activity in Q3.

Media reports had been mentioning that the festive demand in October and November had been moderate— not the expected big boost to economic activity.

Reports were that the rural market was subdued. El Nino was being mentioned as a reason for problems in agriculture. High cereal prices, in spite of a ban on exports of rice and wheat, were being cited as a reason to doubt the official production figures of agriculture.

Also read: The K is Indian GDP’s reality: Why deny?

A moderation of profits in the corporate sector due to a slowdown in demand was being cited as another signal of slow growth. The war in Gaza was creating problems in shipping and leading to an increase in the prices of imports.

A slowdown in China, Europe, Britain and Japan was the reason for the slowdown in exports. All these were the reasons why the Q3 numbers were expected to herald a slowdown.

Despite these factors, growth has accelerated. This mystery needs to be resolved.

Data points to growing disparities

Sectoral performance compared to Q3 of 2022–23 shows higher growth in manufacturing, mining, electricity, gas, public administration and so on.

There has been a sharp increase in mining, from 1.4 percent to 7.5 percent, and in manufacturing from -4.8 percent to 11.6 percent.

Another boost is from net taxes, which have increased from -2.6 percent to 32 percent. In the case of construction, growth remains unchanged at 9.5 percent.

In the case of group trade, hotels, etc., growth declined from 9.2 percent to 6.7 percent, for the group of financial, real estate, etc., the drop is from 7.7 percent to 7 percent. The biggest drop is in the group agriculture, livestock, etc., from 5.2 percent to -0.8 percent.

Another boost is from net taxes, which have increased from -2.6 percent to 32 percent.

Analysis of the expenditure components of GDP shows a decline in the share of private final consumption, from 61.3 percent to 58.6 percent and government final consumption from 8.7 percent to 7.8 percent. The external sector, represented by exports minus imports, shows a decline from -0.7 percent to -1.8 percent.

These three engines of growth are pulling growth down.

So the growth acceleration is coming from an increase in Gross Fixed Capital Formation, from 31.8 percent to 32.4 percent, in valuables, from 1.1 percent to 1.7 percent and in discrepancies, from -3.3 percent to 0.2 percent.

Also read: GDP growth: The gap between reality and rhetoric

This pattern of increases and decreases in different components of GDP can help resolve the mystery.

First, the sharp increase in net taxes suggests that the incomes of tax-paying citizens have risen sharply. They belong mostly to the organised sector of the economy.

The unorganised sector hardly contributes to the taxes since most of the incomes of this sector are below the taxable limit and they are exempt from the Goods and Services Tax (GST).

So, the sharply higher net tax collection indicates that incomes of the well-off sections belonging to the organised sector have sharply increased.

Second, the decline in the share of consumption in GDP also points in the same direction. The well-off citizens consume a smaller percent of their income while the poor consume most of their income. Thus, a shift of incomes in favour of the well-off will lead to a decline in the share of consumption in GDP.

Third, the decline in the share of agriculture in GDP also suggests the same. It is the largest component (in employment terms) of the unorganised sector. About 85 percent of the farmers are small and marginal cultivators operating less than 5 acres of land and have low incomes from farming. As their income declines, the share of consumption in GDP would drop.

Fourth, the government has shifted its expenditure towards capital accounts so the share of its consumption has declined.

Further, the government’s capital expenditure is shifting towards capital-intensive sectors and away from labour-intensive ones. This boosts the organised sector at the expense of the unorganised sector.

Also, the government’s stated aim is to formalise the economy through digitisation which is damaging the unorganised sector and benefitting the organised sector.

Also read: A taxing tale: Assessing the impact of six years of GST

Finally, the sharp increase in the ‘discrepancies’ points to the errors in the data. Both the production side and the expenditure side of GDP have large errors. To unravel the mystery, there is a need to understand these errors.

Contradictions in GDP data

For the quarterly GDP estimation, the unorganised sector (except, for agriculture) data is not available. That is also the case for most of the organised sector. So GDP estimation is based on various assumptions and approximations. How valid are these?

According to the press note, GDP estimates are based on ‘indicators’, ‘using the benchmark-indicator method’.

The government has shifted its expenditure towards capital accounts so the share of its consumption has declined.

Further, previous year estimates are ‘extrapolated’ using relevant performance indicators. Indicators used are the Index of Industrial Production, the financial performance of listed companies in the private corporate sector, air and rail traffic, etc. These are largely from the organised sector.

In brief, the quarterly estimates are largely based on limited organised sector data (but for agriculture). The limited organised sector data is used to proxy the unorganised sector. This washes out the decline in the unorganised sector and the economy appears to be doing well.

This is not the only lacuna. Projections from the previous year’s data are used. If the previous year’s estimates were in error, that would impact the current year’s estimates.

If the economy suffers a shock, a projection from the previous (normal) year would overstate growth. The methodology would require a change. That would be true for the pandemic and the accomopanying lockdown, and demonetisation. The impact of the shock would continue to affect the estimates, based on projections from the previous year, for several years.

Also read: Is the decline in multidimensional poverty in India real?

Consumption data from the recently released household consumer survey shows per capita rural and urban consumption as ₹3,773 and ₹6,459 per month. But GDP data gives a figure of ₹9,896. This is a result of over-estimating the production of the unorganised sector which produces a large part of the consumption goods.

Thus, even when the economy is not performing well, the method of estimation of GDP will show good growth, as has happened with Q3 of the financial year 2023–24.

Conclusion

The above points to why even if parts of the economy are languishing, GDP data shows the opposite. This is not just to do with the large gap between GDP and Gross Value Added.

Even when the economy is not performing well, the method of estimation of GDP will show good growth, as has happened with Q3 of the financial year 2023–24.

There is evidence of growing disparity in the economy since the unorganised sector is declining while the organised sector is growing— the K-shaped pattern of growth. The recently released Consumption Survey data also points to this.

Clearly, the method of estimating the quarterly GDP based largely on organised sector data overestimates growth, especially when there is a shock to the economy.

At best, the recently released GDP data represents agriculture and the organised sector but not the entire economy.

Arun Kumar

Tuesday, March 5, 2024

On SBI and the Electoral bonds issue | Arun Kumar

https://www.youtube.com/live/of4mjNS58DE?si=xsmc9On0RBGJqQ6G

India Ki Gehrati Berozgari - Prof Arun Kumar on Employment generation issues on Caravan Baatcheet Episode 32

https://youtu.be/dTtx6ad4gQo?si=1cP4hv7xOYjHO2Ot

Friday, March 1, 2024

Which Data Can We Rely On? | Arun Kumar (in The Wire)

The Wire

The methodology of data collection for the latest Household Consumption Expenditure Survey has changed in this round. Therefore, the survey results raise a lot of questions since alternative data is at variance with it.

The household consumption survey report has been released after 2011-12. In between, a survey was done in 2017-18 but its report was not released by the government because it did not suit its narrative. This gives rise to suspicion that reports are released selectively. Photo: Unsplash

New Delhi: The government has released the Household Consumption Expenditure Survey (HCES) for the period of August 2022 and July 2023 earlier this week.

The survey generates estimates of households’ Monthly Per Capita Consumption Expenditure (MPCE) and its distribution. However, only the summary results have been released as of now, in the form of a factsheet (along with Annexures). The detailed report is expected to be brought out subsequently.

The survey report has been released after 2011-12. In between, a survey was done in 2017-18 but its report was not released by the government because it did not suit its narrative. This gives rise to suspicion that reports are released selectively. It also gives rise to the possibility of manipulation of data collection and the way it is officially presented.

HCES 2022-23 does show consumption rising across the board while the leaked report of 2017-18 showed a decrease in consumption. This has enabled officials to claim that poverty in India has declined and less than 5% of the population is poor. At current prices, the increase in average consumption looks impressive. It increased 164% in rural areas to Rs 3,773 and in urban areas by 146% to Rs 6,459. But most of it is due to inflation. Adjusting for inflation, the real increase is 40% and 33.5% for rural and urban areas, respectively. This is in 11 years.

During this period, officially, the net national income has risen from Rs 77.42 lakh crore to Rs 133.48 lakh crore, which is an increase of 72.34%. In other words, consumption growth is way behind the growth in incomes.

Inference on inequality?

If the poor were getting higher incomes, they would spend most of it in consumption since they are unable to fulfil their basic needs. Their consumption should have risen at a much faster rate than the new data shows. It can be inferred that most of the income increase has been for the higher echelons of the income ladder. These well-off save a large fraction of their incomes since they do not need to spend much more on increasing their consumption. The implication is that inequality in incomes is increasing in the country.

What the HCES data shows is the consumption inequality. The more relevant factor is income inequality. And, that is much higher than the consumption inequality since those with higher incomes save more.

This is consistent with the argument that the organised sector of the economy is growing while the unorganised sector is declining. The unorganised sector consists of agriculture and micro and small sectors of the economy. The agricultural sector has been in crisis for a long time as evidenced by the repeated protests staged by farmers. The micro and small sectors’ growth has been declining since at least demonetisation in 2016. This is consistent with the growth pattern of the economy being K-shaped.

The latest taxation data also suggests the same. Officially, it is said that there is high buoyancy – that is, tax collections are rapidly rising. But, in the Indian economy, the vast bulk of the tax is paid by the organised sector. Corporation tax and income tax are paid by the well-off. The prime minister has said that only 1.5 crore individuals (1.1% of the population) are effective taxpayers. GST is collected largely from the large- and medium-scale units since the unorganised sector is largely exempt or in the composition scheme paying a tax of 1%. The finance ministry’s data for 2023-24 shows net tax collections rising at 23.4% when the GDP is growing at 8%. This threefold increase in tax collection reflects the organised sector’s growth. It can only be at the expense of the unorganised sector.

Also read: K-Shape Widens: In 5 Years, Govt Tax Collection From Individuals up by 76%, From Corporates Only by 24%

Inference on poverty

The NITI Aayog has been quick to claim that the data supports the argument that poverty has decreased in India from 2011-12 to 2022-23. The data shows a drop in the share of expenditure on food.

However, several factors must be taken into account when saying that poverty has declined.

[According to Engel’s Law, the percentage of income allocated for food purchases decreases as a household’s income rises, while the percentage spent on other things (such as education and recreation) increases.]

Firstly, the volume of consumption is not given. It could be that the increased absolute expenditure on food items is a reflection of an increase in the prices of those items. When the full data is released, then only one would understand this better.

Second, what is the poverty line that is being used to claim that poverty has declined? Poverty has to be defined as ‘minimum social necessary consumption’. This is space and time specific. So, it keeps changing. The World Bank has changed its poverty line recently from $1.9 to $2.15 per person per day. This amounts to about Rs 26,000 per family of five per month. Even adjusting for nominal dollars, it would be about Rs 10,000 per family per month. If this poverty line is considered, then the number of poor would be much more than the 5% being quoted by officials.

Third, 300 million people have registered on the e-shram portal, and 90% of them have said they earn less than Rs 10,000 per month. Given the level of unemployment, this would imply that most of these people would fall in the category of being poor.

Fourth, the share of expenditure on health and transportation etc. has increased. For the poor, an increase in the cost of travel would be necessary to earn their livelihood, and would not mean that they are better off. Health expenditures are likely to be even higher than stated, given the recovery from the pandemic, and it would not represent a better off family but a poor family struggling to survive.

Fifth, the increase in demand for work under MGNREGS means that people’s incomes have not recovered to pre-pandemic levels. They are still struggling.

Sixth, the level of malnourishment remains high among women, as per the NFHS data. Would these families be spending a lower percentage of their income on food? Would they be buying more of the prepared food (packaged) from the market?

Seventh, high unemployment, under-employment and low labour force participation ratio suggests that incomes could not have recovered, and correspondingly, consumption could not have recovered.

Eighth, could there be higher consumption due to the government welfare measures. The data released provides information on the increase in consumption on account of these programmes giving free items (called ‘revdi’ by the prime minister) like food. On an average, this increases consumption by Rs 87 in rural areas and Rs 62 in urban areas. It is even lower for the poorer sections. It amounts to an increase in consumption of 2.3% for the rural areas and 1% for urban areas. Thus, either the argument that the government is giving a lot of support to the poor is incorrect or the benefits are not reaching the poor.

In brief, more detailed data would be needed to say something definitive about poverty declining.

Conclusion: Premature comparison

The official document mentions that the methodology of data collection has changed in this round compared to earlier. It is no more a consumer survey but a consumption survey. Consumption is split up into three broad categories and the data is collected separately on each one of them. In surveys when the method of collection changes and the questionnaires change, responses become non-comparable.

There has always been a problem in collecting the data of the wealthy and the poor. At both ends of the spectrum, the enumerators do not get a proper response. Thus, even inferring about inequality becomes difficult.

In brief, it is good that the data on consumption has finally come out. But it raises a lot of questions since alternative data is at variance with it. There is also a controversy about the follow up survey being done to test if the 2022-23 survey is robust. This is necessary since the methodology has been changed compared to the earlier consumer surveys. Maybe the full survey results will help clear some of the doubts.

Arun Kumar is author ofIndian Economy since Independence: Persisting Colonial Disruption (2013) and Indian Economy’s Greatest Crisis: Impact of Coronavirus and the Road Ahead (2020).

Thursday, February 29, 2024

Consumer Survey Analysed | Arun Kumar (Hindustan, 27 Feb, 2024)

https://www.livehindustan.com/blog/story-hindustan-opinion-column-another-sign-of-the-country-prosperity-28-feb-2024-9412626.amp.html

Wednesday, February 28, 2024

'Modi Sarkar Ka Naya Survey' - Household Consumption Expenditure Survey Deciphered | Arun Kumar

https://www.youtube.com/live/E4ua6IGFT5g?si=lTE_y7K8Ixspz4Pr

On Electoral bonds, black and elections | Arun Kumar

The Leaflet

Black economy persists with or without electoral bonds

Arun Kumar·February 22, 2024

India’s democratic model needs an overhaul so that elections are not an expensive affair. Only that can create a more just, transparent and efficient system, argues Prof. Arun Kumar.

—

THE electoral bonds scheme has been declared unconstitutional. Various legislative and administrative amendments, implemented to facilitate the scheme, have also been declared unconstitutional. This is a victory for those opposing this scheme.

The government’s argument that the scheme was needed to help reduce the use of black money in elections has not been accepted on grounds of proportionality. The right to privacy of the donors has been held to be less important than the citizens’ right to information about the candidate for whom they were voting.

This is a rare judgment in the last few years that has gone against the establishment’s view. Judgments such as those on Aadhar, demonetisation and Article 370 sided with the establishment’s view even though the court did raise probing questions during the hearings.

Be that as it may, the electoral bonds case was of little consequence for the ruling establishment, even though it has huge significance for transparency and for conducting fair elections.

The government’s argument that the scheme was needed to help reduce the use of black money in elections has not been accepted on grounds of proportionality.

The court has ordered the revelation of names of the recipients and donors— which entity paid and which party received.

Since a vast majority of the bonds were of denomination ₹1 crore and above, these were bought by the rich to donate to their preferred party. The suspicion has been that these payments were bribes in white, to get favours.

Also read: No bond with Article 19: Supreme Court declares electoral bonds unconstitutional, directs SBI to stop issuing them

There were donations to the opposition parties also but that is an investment in the future, in case a party comes to power. Even if it does not come to power, donations could ensure that the opposition raises inconvenient questions of the government.

The Order to reveal the names is likely to be resisted. An appeal against this could be filed. Attempts will be made to connect donations to the ruling party with favours granted. Donations to the opposition parties that are in power in one state or the other can also be so branded.

But, the ruling party at the Union level is the one that can grant big favours and it has received the vast majority of the bonds. How does all this link up to black money?

Elections and black money

In India, huge sums of money are spent on fighting elections. These are way above the election expenditure limits set by the Election Commission of India (ECI), hence illegal.

If these are declared by the candidates, their election will be annulled. So all expenses above the election expenditure limit have to be funded illegally— by black funds.

Election expenditure limits are now ₹95 lakh and ₹70 lakh for a parliamentary constituency and ₹40 lakh and ₹28 lakh for assembly elections. Actual election expenditures are unofficially reported to be around ₹40 crore for a parliamentary constituency and ₹6 crore for an assembly constituency. The actual numbers for a parliamentary and assembly election are respectively 40 and 15 times the allowed limit.

The court has ordered the revelation of names of the recipients and donors— which entity paid and which party received.

The reason for the high expense by candidates is the need for high-power campaigns to overwhelm the citizens to stand a chance to win. Expenses are on maintaining vote banks, bribing voters in cash and kind, hiring workers and musclemen, paying for crowds for rallies and meetings, spending on cutouts and posters, paying media for coverage, etc., and disrupting the opponents’ campaign. These are all substitutes for a lack of adequate attention to constituencies.

Also read: Donor anonymity versus voters’ right to know: Supreme Court reserves judgment in electoral bonds case

Effectively, the expenditure of large sums in elections reflects the weakness of Indian democracy. The public votes for reasons other than the hard work and honesty of candidates.

Instead, candidates have to entice the voters with bribes of various kinds. Also, India is largely feudal, so the public is guided either by those in authority or by emotional issues and not by individual self-interest.

Finally, issues have become complex and the public’s understanding is minimal, which also prevents questioning of authorities. Many can be heard saying, ‘Voting for a losing candidate is wasting the vote.’

The consideration is not a better representation but who appears to be more likely to win irrespective of what they stand for.

Electoral bonds and black money

Electoral bonds were donated to a political party and not a candidate. So the money went to the party. Since there is no limit on expenditure by a political party, it can get all it needs in white and spend it.

If a part of the donation was given to the candidates then the expenditure would be reduced to come under the ceiling set by the law. So the parties did not need to give the money raised through electoral bonds to the candidates and instead could spend it entirely on a general campaign, organised centrally.

The use of black funds in elections reinforces illegality in society and thereby undermines representation and democracy.

If all the money raised via the bonds was to be given to the candidates, then only ₹95 lakh per candidate could be given for a parliamentary constituency. So, for a parliamentary election, the party would at most need ₹513 crore. But the ruling party has been getting more than a thousand crore rupees per annum since 2019.

Obviously, the money received was used for other purposes, such as setting up offices, running them, logistics and social media cells.

Political parties also engineer defections, topple opposition governments and so on. This cannot be done via legitimate money and requires black money which is donated in cash by the backers of the party.

Also read: Electoral bonds: A landmark judgment in the direction of free and fair elections

This money cannot be shown on the balance sheet of the parties and cannot be caught in an audit of the accounts of the party or the candidates. The ECI cannot catch it.

Businesses in India know how to manipulate incomes and expenditures outside their balance sheets to generate black incomes. Under- and over-invoicing and hawala are used for these purposes.

These methods keep one step ahead of the changes the tax authorities make in the laws and rules with the help of income tax lawyers and chartered accountants. Such methods are also available to political parties and candidates for their financial accounting so that they do not get caught using black funds.

So, apart from the funds made available by the electoral bonds, the parties and the individual candidates continued to use black funds. Thus, the non-availability of funds from electoral bonds will hardly change the funding pattern of the parties and there will be no impact on individual candidates.

In brief, funds received via the electoral bonds were: a) In addition to the money received in black and, b) The amount received was small compared to the total requirement.

What to do?

The use of black funds in elections reinforces illegality in society and thereby undermines representation and democracy. Parties and individual candidates who accept large sums of black money are indebted to the donors and do their bidding when they get into power.

Currently existing parties and candidates are unlikely to change, so new parties are needed that have dedicated workers.

This is the implicit and explicit understanding between the two parties. A nexus forms. Outwardly, parties and candidates make a show of wanting to curb the use of illegal funds but that is not the reality.

Also read: Electoral bonds: No solution to illegal political funding

Democracy gets diminished when people vote for the corrupt who largely appear at the time of elections and make promises that they do not deliver on once in power.

People do not get genuine representation from their representatives who serve the interests of a few powerful entities. But people are helpless since the candidates put up by the parties for elections are all similar— they are beholden to the vested interests and do their bidding once they come to power.

Politics will be cleaned up if the public does not get swayed by emotionalism, sectarianism, etc., and voted on objective factors impacting them.

Currently existing parties and candidates are unlikely to change, so new parties are needed that have dedicated workers. Citizens have to become politically savvy to look after their long-term interests.

Since this would undermine the current ruling parties, they will create impediments to the emergence of new parties and honest candidates. The entire State machinery is available to them to coerce and harass and defeat their opponents.

Conclusion

In brief, it is not that in a robust democracy, elections need to be expensive. It is in the imperfect democracy that prevails in India where accountability is weak that elections become expensive.

In such a situation, an instrumentality such as the electoral bonds adds to non-transparency without impacting the black economy or the use of black funds in elections.

Actually, to survive, the black economy needs to control politics so that dishonest parties and candidates come to power.

Arun Kumar

Arun Kumar is a Retired Professor of Economics at the Jawaharlal Nehru University. He is the author of `Demonetization and Black Economy’ (2018, Penguin Random House). He blogs at http://arunkumarjnu.blogspot.com/.

Farmers plight. Why? (Kisanon Ka Saath Kyon Nahi De Rahi Narendra Modi Sarkar?)

Sunday, February 18, 2024

The Solution to Farmers' Problems Lies in the Macro-economic situation | Arun Kumar

The Wire

Poverty and inadequate demand need to be tackled by policy makers by focusing on the welfare of the vast majority and not just of businesses and the well-off.

byArun Kumar

The strife between the government and farm unions has again come to a head with farmers heading towards Delhi more than three years after the 2021 episode. The issues this time are somewhat different from those in 2021-22.

Earlier, the issue was the repeal of stealthily enacted three farm laws. Now the key issue is farmer’s incomes via a legally guaranteed MSP (Minimum Support Price) for all crops.

Linked to this are the demand for debt waiver, pension, additional provision for MGNREGS, etc. The farmers have also widened the ambit of their protest by including rural employment and issues pertaining to indigenous people.

Focus

The key point is inadequate incomes of a vast majority farmers (85%) who have marginal or small holding, plowing less than 2 hectares of land. Even the rest of the farmers supplement their income from agriculture through other work or business, like agri-businesses. Thus, even if the Punjab farmers have taken the lead, they represent the concerns of the farming community.

The talks at the last minute between the government and the farm leaders having failed, the farmers decided to march to Delhi. Trust between the government and the farmers is almost non-existent since the promises made in 2022 when the farmers lifted their siege of the Capital have not been kept. The doubling of farmers’ incomes by 2022 is also nowhere in sight. A Committee, set up to deal with the issue of MSP and reforms in agriculture became suspect since it was packed with pro-government members and therefore boycotted by the farm unions.

Government’s arguments

Why is the government against the farmers’ principal demand – MSP for all crops based on full cost? The farmers feel this is the only way they can turn the currently loss making proposition into a profitable one. Then the other demands, like, debt waiver would lose their urgency.
Some of the arguments advanced against this proposition are:

a) it will be hugely expensive, costing Rs 10 lakh crore. Earlier, the cost was put at Rs. 27 lakh crore;
b) The entire crop would have to be procured;
c) This would not be administratively feasible;
d) Private traders would stop buying and the farmers would lose out;
e) Currently, only wheat and paddy are being procured so how can MSP be implemented in the case of other crops;
f) Only the big farmers get the MSP; and
g) Difficulties will mount in WTO.

The facts?

MSP is applicable to 23 crops and implemented only for wheat and paddy. There is also an assured price for sugarcane to be paid by the sugar mills. So, these three crops assure a profit which other crops do not. Hence cropping pattern has shifted in favour of these three crops. Consequently, crops that suit a agro-climatic zone are not grown there resulting in environmental damage. Like, cultivating sugarcane in water starved areas of Maharashtra and paddy in Punjab. The result is excess production of these three crops, large stocks with the government and much wastage since there is inadequate storage capacity. The Food Corporation of India (FCI) has been heavily subsidized for procuring and holding the stock and releasing it in the Public Distribution System (PDS).

If MSP is implemented for all crops, profitability would be the same across all of them and crops would be grown based on their suitability in a given agro-climatic zone. That would:

a) Eliminate excess stocks of some crops;
b) Reduce need for large storage capacity;
c) Increase production of those crops, which currently are in short supply, like, oilseeds; and
d) Reduce if not end import of these crops resulting in saving of foreign exchange.
The storage space released would become available for other crops. The subsidy to FCI would drastically decline and food wastage would be reduced. As crops suited to the agro-climatic conditions would be grown, environmental damage would decline.

The argument that the entire crop would have to be procured to implement MSP is fallacious. Procurement would be required only when the price drops below MSP – that is at the margin. As excess production declines, the price of the crops would rise above the MSP. If the government were to procure the entire crop and store it there would be mass starvation and sky high prices. Whatever the government procures would get sold in the market, so it would only need working capital which would be a fraction of the Rs.10 lakh crore bandied about.

This would be a win-win situation. So, why is the government reluctant to implement the scheme? It wants food prices to remain low so that workers can be paid a low wage which would lead to higher profit for businesses and benefit the elite which needs cheap labour (servants, drivers, etc.) to maintain its comfortable life style.

Farmers protesting in Rajpura railway station in Punjab. Photo: Special Arrangement
Reform needed

Why do farm produce prices drop below the MSP? Price of agricultural produce is demand and supply determined because there are a huge number of producers and any mismatch between them leads to price changes. For instance, supply floods in during the post-harvest period ad prices drop. Further, NHFS data shows that 30% women and children are malnourished. They are not able to afford proper nutrition in spite of government providing almost free food to them.

The implication is that overall demand is low due to large scale poverty and that is why, farmers don’t get a remunerative price. An OECD study estimates that the loss to Indian farmers in 2022 due to lower price was Rs 14 lakh crore. This is 3.5 times the subsidy to farmers. That is why MSP, procurement and public distribution become crucial. If workers and farmers had a civilised existence, these would not be needed.

The constitution promises a ‘living wage’ to all. If that is ensured, demand for farm produce would rise both from workers and farmers and that would drive prices of agricultural produce above the MSP. So, workers are the natural allies of the farmers and the farmers ought to demand and pay them a ‘living wage’. The farmers would not lose even after paying a higher wage since their MSP would be determined accordingly.

Higher wages and prices would lead to higher inflation which could be tackled by reducing indirect taxes and raising direct taxes. In the alternative scenario presented above, farm subsidies would decline and that would help in WTO negotiations. Subsidies can be shifted to education, health, public distribution system, infrastructure, etc., so that neither the ‘living wage’ nor the MSP need rise unduly. The result of all this would be a virtuous cycle of increase in employment and demand.
Also read: India’s WTO Stance on Farmers Will Be a Test of Its Rhetoric of Championing the Global South

Subsidies are said to be undesirable. That is not the case for education and health which are cases of merit wants or in case of infrastructure, like, communication and transportation. The government gives subsidies to industry and calls them incentives. Take for instance, the PLI scheme which offers heavy subsidies to big corporations who really don’t need them. These are called ‘tax expenditures’ which in 2021 amounted to Rs 4.48 lakh crores. Subsidies are offered on land, water and electricity to businesses. So, why the partiality towards the already well off?

It is argued that farmers should take up employment in non-agriculture. But, employment is hardly available in organised non-agriculture due to mechanisation, automation and now use of AI. The per worker output in the organised sector is 19 times that in the unorganised sector. So, as the former expands due to concessions given to it, overall employment contracts. Workers have to resort to self-employment at low wages or remain disguised unemployed.

The objections raised against the farmers’ demands are only scare crows to frighten the public.
The solution to farmers’ problems of low incomes lies in macro, due to the linkages between output, income distribution, prices, employment and investment. This will provide a rational long term policy. Piecemeal and ad hoc policies attempted till now have resulted in contradictions and persisting poverty. Of late, farmers in Europe have also been blocking roads and highways to rise their demands. Clearly, post the pandemic, the issue of adequate farm incomes has become more acute globally.

Any big policy shift would take a few years to fully get implemented. Poverty and inadequate demand need to be tackled by policy makers by focusing on the welfare of the vast majority and not just of businesses and the well-off. The issue is political, and judges whether the life style of the latter should be maintained at the expense of the former.

(Arun Kumar is retired professor of economics, JNU. He is the author of Indian Economy’s Greatest Crisis: The Impact of Coronavirus and the Road Ahead, 2020)

Saturday, February 17, 2024

India ki Gehrati Berozgari (India's Growing Unemployment) Arun Kumar Speaks to Vishnu Sharma on Caravan Baatcheet [in Hindi]

Monday, February 5, 2024

K shaped it is. Why deny? | Arun Kumar

The Leaflet

The K is Indian GDP’s reality: Why deny?

Arun Kumar January 31, 2024

Supporters of the government deny the K in India’s GDP growth, despite overwhelming evidence. What other forms of inequality— gender, regional, between agriculture and non-agriculture, capital and labour and caste inequality— will the officialdom deny, asks Arun Kumar.

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THE K-shaped pattern of growth within the Gross Domestic Product (GDP) pointed to by critics has riled officialdom and its supporters because it implies not only growing inequality but an overestimation of GDP and its growth.

The supporters deny any possibility of a dichotomous K-shaped growth pattern on the basis of data on income tax returns, labour force participation, consumption, etc. In doing so, they commit a methodological error.

Types of inequality

There are three different kinds of inequalities in an economy— wealth, income and consumption. The government supporters mix them up. There is a hierarchy between them with wealth inequality greater than income inequality greater than consumption inequality.

The reason for this ranking is that everyone has to consume a basic minimum to survive. The poor consume almost their entire income and hardly save. Often they borrow to consume so that their consumption is larger than their income. People at higher income levels save. The higher the income bracket, the more the savings.

Everyone has to consume a basic minimum to survive. The poor consume almost their entire income and hardly save.

So, as one goes to higher and higher income brackets, consumption becomes a smaller and smaller fraction of the income. So, the ratio of consumption to income falls with income. That is why income disparity is greater than the consumption disparity.

Further, the savings are invested and become part of one’s wealth. The higher the income, the more the savings and the accumulation of wealth. The poor have almost no savings and may be in debt, that is, they have negative wealth.

Thus, the wealth curve rises even more steeply than the income curve. The wealth of the wealthy yields an additional income and that leads to more inequality.

These theoretical aspects need to be kept in mind in the debate on inequality. A bare perusal of the arguments of the supporters of the official line shows a mix-up of these three kinds of inequality. What does the actual available data reveal?

Factors underlying growing inequality

First, the GDP data has huge errors since it does not independently account for the contribution of the non-agriculture unorganised sector. This component of GDP has been declining since demonetisation when it was hit hard and hardly recovered from this blow.

However, this decline is not officially measured since it is proxied by the growing organised sector. This gives an upward bias to the GDP and incomes of the marginalised sections, resulting in the false claim that inequality is declining.

Second, the growth in the organised sector is at the expense of the unorganised sector and that is the K to which critics point. This is visible in various industries.

For instance, e-commerce (in the organised sector) is growing at the expense of the unorganised sector trade. Similar reports are available from other industries such as fast-moving consumer goods (FMCG), leather goods, luggage and pressure cookers.

E-commerce (in the organised sector) is growing at the expense of the unorganised sector trade. Similar reports are available from other industries such as FMCG, leather goods, luggage and pressure cookers.

This applies to most of the industries where an item is produced both in the unorganised and organised sectors. Reserve Bank of India (RBI) data shows rapid growth in the sales of the corporate sector when the economy is mostly stagnant.

That can only imply the growth of this sector at the expense of the other component— the unorganised sector.

Third, taxes are paid mostly by the organised sector and the well-off. The unorganised sector is exempt the Goods and Services Tax (GST). For a turnover of below ₹50 lakh, there is no GST and for turnover up to ₹1.5 crore, tax rate is 1 percent under the composition scheme. Former Union finance minister, late Arun Jaitley, used to say, 5 percent of the units pay 95 percent of the GST.

Corporation tax is mostly paid by the big companies. Income tax is paid mostly by the well-off. Out of around eight crore tax returns filed by individuals, effective tax is paid by only 1.5 crore of a population of 141 crore. That is 1.1 percent population.

So, even if income tax data shows a reduction in disparity, that is only from the return filers, who constitute 5.5 percent of the population. That cannot tell us about inequality in the entire population. For example, 30 crore unorganised sector workers are registered on the e-shram portal. Around 94 percent of them report an income of below ₹10,000 per month, way below the taxable limit.

High tax buoyancy of GST, corporation tax and income tax only reflects the rapid growth of the organised sector. In a stagnant economy, this growth is at the cost of the unorganised sector and that increases disparity.

Further, it is the well-off who generate black money by hiding their incomes. In other words, their incomes are actually higher so inequality is greater.

It is the well-off who generate black money by hiding their incomes. In other words, their incomes are actually higher so inequality is greater.

Fourth, due to inflation, incomes rise but their real value may fall if the rate of inflation is higher. Further, as people earn more they go to a higher tax slab and pay more tax. This is called ‘bracket creep’.

So, increased tax payment does not necessarily mean an increase in people’s real income. That is why the level at which individuals begin to pay tax has been raised from ₹2.5 lakh to ₹5 lakh and now to ₹7.5 lakh.

Fifth, there is an increased production of FMCG in the organised sector but not necessarily of consumption. The market share of the big FMCG companies has increased at the expense of smaller units.

So, organised sector units are producing more and because this is at the expense of unorganised sector units, overall production is not rising. Since the well-off are consuming more, especially premium products, it is people in the lower income brackets who have cut consumption. Thus, FMCG consumption is not an indication of a decline in disparities.

Sixth, Periodic Labout Force Survey (PLFS) data shows an increase in employment in the rural sector. This is mostly distress employment. The poor are too poor to be able to afford not to work.

So they do residual work such as pulling a rickshaw, doing head-load work and selling peanuts on the roadside. This is self-employment and not work generated by the system. It yields low incomes and aggravates disparities.

Further, many workers lost work during demonetisation and lockdown and had to depend on the Mahatma Gandhi National Rural Employment Guarantee Act, 2005 (MGNREGA) at wages below what they were earning earlier. This again leads to a growth of disparities.

Seventh, the government giving free ration or gas to the poor increases consumption but not income. So income poverty persists even if consumption rises. Giving 5 kg of foodgrains free to 81 crore Indians is itself an admission that income poverty persists.

Finally, while money wages have risen due to inflation, they mostly lag inflation so that real incomes have fallen. So, who is getting the benefit of an increase in national income— the businesses?

RBI data shows corporate profits have soared. That is why the stock markets have reached new heights. Hence the incomes at the upper rung of the income ladder have risen and so has inequality. This should not be confused with the increase in the wealth of the well-off due to the rise in the valuation of stocks.

The government giving free ration or gas to the poor increases consumption but not income. Giving 5 kg of foodgrains free to 81 crore Indians is itself an admission that income poverty persists.

Conclusion

All the arguments used by supporters of the government to show a decline in inequality and, therefore, an absence of a K-shaped growth pattern, when carefully analysed, prove that indeed a K-shaped pattern of growth exists.

Their argument is based on the denial of the decline of the unorganised sector and the growth of the organised sector at its expense. Since the data is almost entirely based on the organised sector, it masks the K-shaped pattern of growth.

There are also other forms of inequality— gender, regional, between agriculture and non-agriculture, capital and labour and caste inequality.

In addition to K, what else will the officialdom deny?

Arun Kumar