Union Budget 2012-13: Missing a Vision

Union Budget 2012-13: Missing a Vision

Arun Kumar

CESP, SSS, JNU.

Mainstream, March 24, 2012.

I.          Introduction: The Context of `Reform’

The IMF Managing Director commented days after the presentation of the Union Budget 2012-13 that India should have the `appetite for change’. Apparently she implied that the Finance Minister should have pushed forward the necessary reforms in policies. She further added that there was need for `leadership and consensus’ and this implies a disappointment with the budget as it was presented. Two points arise. What does she mean by reform and whether she is aware of the political compulsions within which the budget was framed? No matter what a stream of thinking may say about separating economics from politics, the two are deeply inter-twined.

What is the reform that the IMF MD wants? As the head of the international institution which has been pushing the interest of global capital, it is clear she is speaking for that interest alone to the exclusion of all others. It is not that businesses have not retained the concessions they have obtained in the past, like, the tax expenditures of over Rs.5 lakh crore or many new ones like, sops to investments and especially foreign investment. Perhaps, contrary to the expectations of the reformers that they would get major new concessions the budget contains threats to their capacity to generate black incomes, like, measures to close loopholes in tax laws and some with retrospective effect. The IMF represents a powerful vested interest in our policy making.

Since 1991 when the New Economic Policies (NEP) were introduced `reform’ has stood for pro business polices – thus, it is a politically loaded term in a deeply divided society. Due to the pressure from international institutions like, the IMF and the World Bank (and their local business allies) `reform’ has globally come to stand for pro-business market based policies. This has become the universal meaning of the term instead of the dictionary meaning `change for the better’. Thus, politics and economics in times of `reform’ are deeply intertwined and not separate from each other as often claimed.

II.        The Crisis Ridden Context of the Union Budget

The budget was presented in the midst of a crisis for the ruling UPA government. The poor performance in the recently concluded State elections, especially in Uttar Pradesh, had demoralised the ruling Congress party. The Railway budget presented two days earlier had resulted in a political storm in the UPA with the TMC demanding the resignation of the Railway Minister, its own party man, for proposing across the board passenger fare hike. It was expected that Shri Pranab Mukherjee, the Finance Minister and the most experienced Minister in the government would manage matters in such a way that the Congress party’s declining fortunes would stabilize somewhat if not begin to look up. It was expected that there would be deft political management.

On the economic front, the FM was faced with a slowing economy and a persisting global crisis.  Since the two factors are inter-linked, the national economic challenge is getting more intractable. Due to opening up of the economy since 1991, all major markets in India are impacted by global events. Over these matters the national government has little control so the economy is buffeted. This has been the case with commodity prices, like, petroleum products and food, the financial markets which have witnessed wild fluctuations and foreign trade which has seen adverse movements.

The situation is worsened by the internal challenge which is being posed by the `reforms’ based on the philosophy of `growth at any cost’ resulting in deteriorating conditions for the workers and the environment which in turn adversely impacts the workers. This policy has resulted in growing inequity resulting in rising social tension across the nation. It led to a decline in the growth of demand in the economy and to the slow down in the industrial sector witnessed in the last year.

In the name of encouraging private businesses, `reforms’ have allowed a permissive environment that has led to a rapidly growing black economy and to increased corruption. The consequence has again been adverse for the workers and income distribution. It led to crony capitalism getting entrenched in society. Important decisions have been taken on the basis of contacts. As the public finally reacted to it and movements erupted since 2010, the government’s credibility has been challenged and it became crisis ridden. This has slowed down investment decisions and has become another cause for the slowdown in the economy.

The challenges for the economy are many and the Union Budget as the largest economic event of the year was expected to take care of some of them. For instance, the PM himself has said that it is a crying shame that there is massive malnourishment in the country. Per capita consumption of foodgrains has declined sharply since 1991. The quality of education and health, where available to the poor, is indifferent at best. Governance is weak due to the black economy and consequent policy failure. It is not that the nation lacks the resources for development but the growing black economy which has become more than 50% of GDP results in the inability of the government to access them and the private sector fritters them away.

Last year, the global economic crisis worsened after a brief pause in 2010. This time it is not emanating from the world of finance as in 2007 and 2008 but from political factors in USA and the Euro zone. Hence it is deeper than the crisis starting 2007-08. The nation needs to take advance steps to protect itself from the ill effects of the likely global crisis in the coming years. For this it must defend its markets to protect the poor and boost the economy. This cannot be done by opening the markets more as the `reformers’ (including the (IMF MD) would want the policy makers to do. That would only lead to demand leaking out with little benefit to India. Like, in 2008, expenditures must be increased in rural areas and on those items which do not lead to demand for foreign goods – increase expenditures on the poor. The Budget just presented does not quite do that and in fact expenditures on such an important scheme like, MGNREGS is being slashed from Rs.40,000 crore to Rs.33,000 crore even though the FM liberally praises the scheme in para 108 of his speech.

           

III.       Some Budgetary Proposals

The Union Budget for 2012-13 plans for an expenditure of Rs.14,90,925 crore or about 15% of GDP with an expected GDP of Rs.101,59,884 crore. These are huge sums of money and can finance a very large number of schemes for all sections of population. Thus, even if the overall direction of the budget may not be clear or even in the wrong direction, the Finance Minister can claim to have done a lot.

Under `Inclusion’, the Finance Minister has announced increased allocations for SC and ST sub plans of about 18%. For Food Security, there is a 58% increase on Integrated Child Development Services (ICDS). Mid day meals provision has been increased by 15%. Allocation for rural drinking water and sanitation has been increased by 27%. Pradhan Mantri Gram Sadak Yojana (PMGSY) has been allotted 20% more. Backward Regions Grant Fund scheme has been given about 22% more. Budget for Sarva Shiksha Abhiyan (SSA) has been increased by 21.7%. Rashtriya Madhyamik Shiksha Abhiyan (RMSA) is allotted nearly 29% more. For National Rural Health Mission (NRHM) allocation has been raised by 15%.

In addition one may list a few of the schemes that will in some way or the other benefit the marginalized sections: creation of mega handloom clusters, technical support to handloom weavers, market access to Micro and Small Enterprises, Multi-sectoral Nutrition Augmentation Programme, Scheme for Empowerment of Adolescent Girls, SABLA, Rajiv Gandhi Panchayat Sashaktikaran Abhiyan (RGPSA), Rural Infrastructure Development Fund, National Urban Health Mission, Pradhan Mantri Swasthya Suraksha Yojana (PMSSY), Swarnjayanti Gram Swarozgar Yojana (SGS), National Rural Livelihood Mission (NRLM), Mahila Kisan Sashaktikaran Pariyojana, Women’s SHG’s Development Fund, Bharat Livelihoods Foundation of India, Prime Minister’s Employment Generation Programme (PMEGP), National Skill Development Fund (NSDF), Indira Gandhi National Widow Pension Scheme and Indira Gandhi National Disability Pension Scheme, National Family Benefit scheme and a co-contributory scheme SWAVALAMBAN.

While the FM talks a lot about rural development and according it priority the Central Plan figures do not bear this out. In 2011-12, expenditures on this head are less than budgeted by 13%. Further, the amount budgeted for 2012-13 is less than what was spent in 2010-11, in spite of the high rate of inflation. Agriculture and Allied activities are expected to increase by 18% but in 2011-12 less was spent than in 2010-11. How can one have faith that this pattern would not be repeated? It also brings into question the government’s good intentions regarding the rural sector and agriculture.

While the FM’s speech devotes a major portion to these items of concern to the marginalized, in terms of total allocations they are small. A bulk of the expenditures will be on Revenue Account (Rs.12,86,109 crore) and that too on non-Plan (Rs.8,65,596 crore) and a large part of the latter is pre committed for interest payment (Rs.3,19,759 crore). The three big items of non-Plan Revenue Account add up to 72% - these are Interest payment, Defence and Subsidies. Further, establishment expenses are estimated to be about Rs.1,15,352 crore and most of it is on non-Plan account. With this added, 85.33% of the amount is committed and not available for development. Given that Defence is a holy cow and subsidies a consequence of poverty and other policy mistakes which force subsidies to be given, the over all leeway for the government to spend on essential schemes listed above is rather less.

 Establishment expenses are for the running of ministries and departments and there will be an estimated 34,11,340 employees in 2012-13, an increase of 64,667 employees over 2011-12. Of the total employment, Railways account for 38.9%, the Police for 29.8%, the Home Ministry as a whole (including Police) for 30.55%, Ministry of communication for 13.93% and Ministry of Finance for 5.42%. All of them together account for 88.83% of the total employment in the Central government establishment.

Even though the total expenditures were more than the budgeted amount by about 5%, there was a 2.5% shortfall in capital expenditures in 2011-12 compared to what was budgeted and the amount spent was almost the same as in 2010-11. The Plan expenditure was less by about Rs.15,000 crore (3.5%). This is not unexpected since it happens many a times that the Plan expenditures are less than what was shown in the budget. The Central Plan outlay was less by Rs.34,000 crore or about 6%. If this target had been met, the deficits would have been much higher. Similarly, if the expenditures on rural development and MGNREGS had been as planned, the deficit would have been even higher. The point is that it is the non-Plan revenue account expenditures that have gone up beyond what was budgeted.

In 2012-13, the Expenditures are slated to go up by 13%. But the Capital Account expenditures are budgeted to go up by almost 30% and Plan expenditures by 22.2%.  Plan expenditure is budgeted at 34.9% and Capital expenditures at 13.75% of the total expenditure. These are up substantially but given the past experience it is likely that these targets may not be met since the government will be under pressure to show a lower deficit in the budget to meet its fiscal deficit target.

IV.       Budgetary Arithmetic in Doubt

Revenue receipts of the government have turned out to be less in 2011-12 because the tax collections are less and so are the disinvestments. As pointed out above, since the expenditures are more while the receipts are less, the Revenue and the Fiscal deficits have turned out to be much more (4.4% and 5.9%) than targeted (3.4% and 4.6%). Accordingly, borrowings have risen sharply by 26.4%. This will lead to a sharp rise in the interest burden next year. But this is not adequately reflected in the next year’s interest payment figures.

This raises the question of whether the FM has given a realistic budget or is there likely to be slippage? Revenue receipts are taken to rise by about 22%. An optimistic figure is assumed so that the Revenue and the Fiscal deficits can be shown to be less than this year.

The Services Tax and the Union Excise duties have been increased to meet this increased target even though it is known that this will be inflationary. Further, this will lead to a lowering of demand and that will lower the growth rate of the economy. This has not been factored in while assuming a higher growth rate of the economy for the coming year. If the growth rate turns out to be less (as was the case for the current year, 2011-12) then the entire calculation of revenue will not be correct and the deficit can turn out to be larger.

Further, if inflation rate increases, it will be difficult to cut subsidies and DA payment to government servants and pensioner will be higher. The government has instead assumed a sharp drop in subsidies by 12%. The Government is also cutting back on MGNREGS. If these expectations are not fulfilled then there will be a higher deficit.

The Finance Minister bases his budgetary calculations on the basis of the projections of growth of the economy. So if the growth turns out to be less as it did in 2011-12, the budget also does not fulfil its targets. The FM has expressed the hope that things would improve in 2012-13 but the basis of this optimism is not clear. In his speech, he has stated,

“I expect India’s GDP growth in 2012-13 to be 7.6 per cent, +/- 0.25 per cent. I expect average inflation to be lower next year. I also expect the current account deficit to be smaller, aided by improvement in domestic financial savings”.

            In his speech last year also he expressed similar sentiments but they have been belied,

“ … the Indian economy is expected to grow at 9 per cent with an outside band of +/- 0.25 per cent in 2011-12. I expect the average inflation to be lower next year and the current account deficit smaller and better managed with higher domestic savings rate and stable capital flows”.

The growth rate of the economy was expected to increase from 8.4% in 2010-11 to 9 % in 2011-12 but the actual growth rate may be less than 6.9%. Thus, the underlying assumptions in drafting the budget turned out to be incorrect. As pointed out above, revenues have been lower while expenditures have been higher or not spent on certain key schemes and therefore, deficits are higher than budgeted.

V.            Need for Basic Change in the Philosophy of Development

While one way of looking at the large number of schemes for the marginalized sections of society, listed above, is that the government is concerned about the lot of the poor. But the constant increase in the number of schemes and the allocations to them would suggest that the government is not successful in achieving its objective of improving the lot of the marginalized. This can be because the schemes may be inadequate to the task or that there is some fundamental flaw in the government’s basic policies. Both factors appear to be true.

Allocations are indeed inadequate for the task at hand. The problem is compounded by the black economy, so that funds do not reach the ground and of the amount that reaches the ground a part is wasted and/or siphoned out. Thus, there is large scale policy failure especially for the marginalized sections whose voice is weak.

The second aspect is equally crucial. There is a basic flaw in the government’s policy framework which is based on `growth at any cost’ with little concern for distribution and the environment. Fundamental problems are emanating from this philosophy so that the various schemes continuing and the new ones being launched are mere palliatives. Further, as the new schemes are launched the focus shifts from some of the earlier ones and they tend to languish without serving much of the purpose.

Take for instance, MGNREGS scheme the funding for which is sought to be cut on the ground that the money allotted is not being fully spent. The scheme has come in for fulsome praise from the FM in para 108 and yet it is sought to be curtailed. Rather than identify the reasons for the shortfall and make it more effective and expand it, the opposite is being done, reflecting a casual approach.

The increase in the number of schemes and additional allocations for them result in the expansion of bureaucracy. Given the state of our bureaucracy, this results in greater amount of corruption and waste of funds. Thus, the dilemma is that the marginalized need the schemes but in the long run it does not solve the problem and perpetuates them. The `reformers’ are all too happy to use the argument of corruption and ineffectiveness to get the expenditures on the marginalized sections curtailed. This enables them to get more for themselves.

The reformers see the problems as emanating only from supply side. They believe that the market will solve all problems. They do not see that the marginalized are even more marginal in the market and need state intervention. The reformers have less faith in human beings and more in automation and machines. So, the Adhar card for which a lot allocation is being made is expected to solve problems of delivery through direct cash transfers which will eliminate the human being from transactions. While these kinds of technological fixes can solve some of the problems they can also create new ones.

For instance, with ATMs while delays maybe eliminated crime of a different kind has come. Salary payment directly into the employees bank account has eliminated a kind of corruption that used to flourish but black income generation has only increased since new forms of it have emerged. What also needs to be remembered is that there is always a human element behind all technology and that can foul up its use in unanticipated ways.

VI.       Conclusion

The analysis in this piece points to many positive aspects of the budget just presented by the FM. There are the various schemes to tackle the rapidly growing black economy. There is the promise of a white paper on the black economy and so on. However, the positives are overwhelmed by the overall lack of a direction, especially for the marginalized. This is a result of a lack of a long term vision amongst policy makers and to the manipulation of the budgetary arithmetic to suit the needs of the business community.

Education presents a concrete example of a lack of clear long term vision fouling up increased allocations. Problems in education are not only persisting but are getting aggravated. While there is numerical expansion, quality is being compromised. Many even doubt that there is numerical expansion since data is not very reliable. Children in fifth standard do not even have the skills of what a first standard child should theoretically have. Further, even though there has been a rapid expansion of institutions of excellence, like, the IITs, IIMs and Central Universities, standards are on the decline.

Institutions are not just buildings but people running them. These elite institutions had been facing shortage of good faculty and this has increased as more or less the same number of capable faculty members are now spread across many more institutions. Thus, standards are on the decline in the existing good institutions which are sought to be replicated. There is no quick fix to having more of higher education but the policy makers think that there is one. They are resorting to standardization in all forms of ways without understanding that standards cannot be achieved via standardization. The two are often the anti-thesis of each other.

To be fair to the FM, this lack of a long term vision is not a recent phenomenon but a long term one. The problem has perhaps been further aggravated because the government has been a crisis ridden one and has not had the time to think through what it wishes to do. It seems to not even be able to cater to its political interest. By presenting an inflationary budget it is not making itself popular while it needs to regain its appeal with the public. Whatever the implications of the budget for the ruling party, for the nation this is tragic since there is a need for a government that can face the multifaceted challenges confronting the country.

arunkumar1000@hotmail.com. 

The Corrupt Rule the Roost

The Corrupt Rule the Roost

Arun Kumar

CESP/SSS, JNU.

The Hindu, January 7, 2012

Lokpal has failed to become the law of the land in 2011. The Lok Sabha passed it after some acrimony but the Rajya Sabha did not even vote on it. Three distinct views emerged during the debate both inside and outside the Parliament. First, it is a weak bill not worth passing in its present form. Secondly, it is better to have some sort of Lokpal even if it is not what it ought to be. Lastly, the Bill would create a monstrous institution that will undermine Indian democracy, especially because it would affect the functioning of the legislators and the PM.

Many parliamentarians (publicly and/or privately) understandably supported the third view given that either they themselves or some of their party colleagues (current or former) face charges of corruption. They argue that Indian democracy is one of the best in the world so why disturb it by creating a new institution which would have powers over the people’s representatives. While this has some merit, perhaps the real worry is the truncation of their capacity to wheel and deal. Do they not see that the public is angry with the political class because it believes that they undermine democracy? A Chief Minister resigns because of corruption charges but installs his wife as the CM. Many accused of corruption have become CMs or Ministers. Politicians often make public statements only to blatantly deny them soon thereafter, showing utter disregard for public opinion which has reacted by increasingly becoming contemptuous of them.

The middle position prevailed in the Lok Sabha but did not pass muster in the Rajya Sabha. The argument is that it is better to have some kind of Lokpal than none. A middle path is favoured over the extreme positions. However, one may ask whether the middle of two incorrect positions can automatically be correct or even the middle of one incorrect and a correct position be the correct one? It was argued, for instance, that even if the CBI remains under the government’s control it may be granted more autonomy. The moot question is whether such a CBI can be effective?

Some suggest that not having the constitutional status would weaken the Lokpal. It is true that the constitutional status rather than a statutory one is better but how would that by itself make the functioning of Lokpal effective. It is argued that a government unhappy with the Lokpal can remove her/him, as had happened earlier in the case of the Punjab and Haryana Lokayukta or have the Bill modified through a simple majority in Parliament. However, in today’s environment, this would be difficult since now the movements against corruption are much stronger than earlier. The moot question is how would a constitutional position help in curbing corruption if the Lokpal itself is weak because of the inadequate provisions in the Bill? India has several constitutional authorities (like, CAG and CVC) to check malpractices in institutions but illegality has only grown.

Is it the case that because the Election Commission is a constitutional body, it is successful? Elections to five states were announced last week. Since this is the season for fighting corruption, the Election Commission announced steps to reduce the role of black money in elections. Income tax officers will be posted to monitor expenditures, separate bank accounts will have to be opened by candidates to receive and spend funds and so on. These seem timely since much black money is used in elections resulting in forging of ties between the politicians and the corrupt. Most candidates spend way above the election expenditure limit since they buy votes, hire workers, travel, organize meetings and so on. The politicians accepting funds know that a quid pro quo is expected of them. There are also the wealthy fighting elections using their own black funds. They also pay off the party leadership to get the nomination. They may not be obliged to others but their motive is not selfless service but to further their business interests.

Election Commissions have tried to curb the role of black money in elections but no matter what they have tried, the politicians have proved cleverer and have circumvented everything thrown at them. Mr. Sheshan, as Chief Election Commissioner, cracked the whip but many politicians have said in private that he only succeeded in driving spending underground. There are reports of large cash movements during election time. It is good that this is to be monitored but will that be effective? One election organizer of a candidate in the last parliamentary elections admitted that money came in sacks. Apparently, counting machines were installed in safe houses where cash coming in suitcases was counted and distributed to candidates.

In the last two decades none of the election commissioners have been accused of being corrupt even though there have been accusations of biases. Yet, it has not been successful in checking the malpractices in elections that result in the compromised getting elected who then claim legitimacy and propagate corruption with impunity. Yes, booth capturing has declined but new forms of getting votes have emerged. There are election expenditure limits but these are a pittance compared to the actual expenditures. Parties and candidates are supposed to get their accounts audited but can unrecorded transactions be audited? Now candidates will be required to maintain a separate bank account for election purposes. But the black money donated to the candidates and parties will not be deposited in these accounts.

The failure of a constitutional body like, the Election Commission to check the growing scale of corrupt practices in elections has important lessons for reform of the existing watchdog institutions and for Lokpal. India has a multitude of watchdog institutions – constitutional and statutory. What is their experience?

The CAG audits government departments to track malpractices but those in power have found ways to get around it. Intelligence agencies (IB, Revenue intelligence and so on) keep tabs on important people and their wheeling and dealing and have vast amounts of information but illegality has only grown. There are the CVC, CBI and the various police agencies.  Each government department has its Vigilance wing. There are agencies to protect the environment but the powerful are violating environmental laws with impunity, like, in the case of Lavasa or the Adarsh Society building in Mumbai. The Reddy brothers in Karnataka obtained the silence of those that mattered. There are regulatory authorities (like, SEBI and TRAI) to check private businesses but they have not been able to prevent the 2G scam or insider trading in the stock markets. The RBI regulates the financial institutions but repeatedly it is found wanting as in the Harshad Mehta scam, failures of Cooperative Banks and so on.

The Information Commission oversees the Right to Information which has shown some success but increasingly the whistle blowers are being eliminated and its success has remained limited to the highly literate. Media is a watchdog which has exposed innumerable cases of corruption but now it is increasingly entangled in the phenomenon of paid news and is found to be hobnobbing with the powerful and the compromised.

Last but not the least, judiciary is an independent constitutional body yet the number of cases of corruption against judges is increasing. Cases are piling up and now the number of pending cases has crossed four crore resulting in miscarriage of justice in many instances.

In brief, neither independence of functioning nor constitutional status has helped watchdog institutions to effectively perform their assigned task. The reason is that democracy, the super watchdog which should deliver all round accountability, is weak. The ruling class has played havoc with the watchdog institutions so as to control them for their narrow ends. That is why the demand for a strong Lokpal. Democracy ought to have ensured accountability of institutions. Vote should have weeded out the corrupt but it is doing the opposite - the honest rarely win elections.

Democracy has become formalistic. Legislatures should check corruption but it would not be so if the elected are beholden to the corrupt or are corrupt. The problem is political that cannot be resolved by technical fixes or having more laws that are anyway circumvented. A weak democracy presents a no-win situation: if democracy is weak the corrupt get elected and misuse their autonomy; if the legislators’ autonomy is curbed, democracy weakens. Only a highly conscious public can deliver autonomous and incorruptible legislators and not rules. That is why there is a need for political movements that can change the national consciousness, a task being addressed by the movement against corruption and for Lokpal. So, the question is, can there be strong watchdogs in a weak democracy?

arunkumar1000@hotmail.com

Bureaucratisation comes to JNU

Arun Kumar

CESP/SSS, JNU.

The Hindu, December 17, 2011.

JNU, one of the few Indian institutions of higher education resisting bureaucratization is on the verge of giving up. Its Academic Council has recently approved the implementation of the UGC dictated points based system of evaluation for faculty recruitment and promotions. Why is the UGC imposing such a system on the universities?

There is talk of reaping the demographic dividend of India’s young population given that the developed world has a rapidly aging population. Trade in Education under WTO is seen to give a natural advantage to India with its young and English speaking population. To realize these goals, MHRD and UGC obviously believe that the changes they are imposing on the universities are necessary.

Another strand of this strategy is to encourage foreign institutions and the Indian private sector to set up educational institutions to improve educational standards. It is argued that the prevailing standards in most existing (largely public sector) institutions are poor and that they lack the resources to rectify the problem. In this context, financing of higher education is crucial but that needs another piece.

Globalization today involves a race for knowledge generation. Whether it is software, nano technology, manufacturing technologies, climate change, trade negotiations or financial institutions and so on, one who generates better ideas would dominate in the world. Higher education which is expected to generate ideas then becomes crucial and perhaps this is more important than reaping the demographic dividend.

While enrollment in higher education has increased, quality is a concern. Only a handful of institutions produce world class talent which the press plays up every year by highlighting the six figure salary offers they get. At the cutting edge, we have a shortage of manpower because we produce little of it and also most of it is lost through brain drain. Many bright students also leave the country because they are unable to get admission to good institutions.

The need for high quality institutions is obvious. MHRD is trying to replicate the success of elite institutions, like, Central Universities, AIIMS, IITs and IIMs by setting up more of them. In addition, new private institutions in professional disciplines have emerged, like in, medicine, engineering and management. But can buildings turn into institutions of excellence so mechanically?

Premiere institutions face a 30% shortage of faculty. With the opening up of more of them, the shortage has only spread, threatening the standards in the existing institutions. In many private institutions and open universities quality of faculty recruited is indifferent, resulting in poor quality of teaching. Institutions that would hardly be accepted as universities in any country have come up as Deemed Universities.

There are reports of corruption in setting up many of the private institutions. They not only charge high fees, they also extort capitation fees. At times, these institutions are set up to buy real estate at concessional prices and make a quick buck. To get recognition, apparently the officials from the regulatory authority (UGC or AICTE) are bribed - no wonder some of the heads of these bodies have been accused of corruption.

Higher education passes knowledge from one generation to the next and can help society advance by generating new knowledge. The former enables routine tasks to be carried out while the latter equips society to move beyond its present stage and to meet emerging challenges. Copying ideas from the developed world is often inappropriate since they may not be relevant for our stage of development. The two roles require imparting high quality training to students which in turn necessitates high quality faculty. Mr. Jairam Ramesh suggested that the IITs, the most elite institutions in the country, lack world class faculty and he was attacked all around. Not that he was wrong but he hurt the sense of false national pride of many.

Quantity is important but by itself it cannot ensure quality since that requires special efforts. A hundred indifferent lectures can only kill the interest of the students while one inspired lecture can ignite a spark, make learning fun. It is that which motivates academics to become good teachers and high quality researchers - not bureaucratic fiat.

Unfortunately, many of the academics produced by our present system have themselves hardly understood their subject. They dictate notes in class, killing the interest of students. Often, education is less about learning and more a burden which has to be endured to obtain a degree to get a job. Examinations largely test a student’s capacity to reproduce mugged up notes and not the knowledge acquired. The emergence of `Kota schools’ and coaching institutes that train students mechanically is a natural corollary. No wonder, book shops around the universities largely stock mug books for competitive examinations – medical, engineering, civil services, banking and so on.

Authorities are aware of these deficiencies but they lack the understanding of what higher education needs. UGC has introduced one scheme after another, often at the instance of the Pay Commissions. Like, the Mehrotra Committee in 1986 suggested the creation of Academic Staff Colleges to train teachers – to upgrade skills. Since then, promotion of Assistant Professors under Career Advancement has been contingent on attending these colleges. To promote research, academics with M.Phil. and Ph.D. degrees are given increments in pay. To make faculty work harder, hierarchy in academia has been increased so that academics face a selection committee more often. NET examination was introduced to ensure minimum standards amongst teachers in higher education.

These schemes involving huge expenditures have hardly impacted quality leading to the current state of affairs. Rather than understand that the failure of these schemes is in-built since they are divorced from the needs of higher education, the bureaucrats governing higher education have gone for more of the same. Disinterested `academics’ have found ways of beating the system. Today there is a flood of M.Phil. and Ph.D. and NET qualified students without improvement in quality. Academics go through Academic Staff Colleges but with little impact on skills. The reason is that none of these measures ignite the desire to learn. One can take the horse to water but cannot force it to drink.

Now, the UGC, in an attempt to improve the quality of faculty, is enforcing a bureaucratized system of evaluation of faculty, under `UGC 2010 Regulations’, based on a numerical system of indexing merit (API). It would lead to `paper chase’. How many papers or books written, conferences attended, projects completed and so on? All these can be churned out in large numbers with little originality and that will help indifferent academics accumulate points. Already, there is a mushrooming of `refereed journals’, national seminars and publishers who charge money to print books. High quality research requires years to produce and in the new system this would get few points. Producing critiques that challenge authority opening new vistas are not easy to publish and hence would be considered worthless under the new rules. The quantum of work done by an academic is important only to the extent of its quality.

Education is not like a normal homogenized product, like, soaps or same size shiny red tomatoes. An institution of higher education is not like a factory or an office where time and motion study can be used to measure productivity. In fact, there is a need to let a hundred flowers bloom and celebrate dissent as the essence of higher education. Unfortunately, to the education bureaucracy (often including academics) this is anathema.

The short sightedness being displayed by the UGC and to which the academic leadership is succumbing is the result of both poverty of thought and insecurity. Army generals, civil servants and net-workers are often appointed to the top positions in educational institutions not because of their academic quality but due to their closeness either to those in power or to the moneyed. The objective function of such people is to serve the interest of their benefactors rather than that of the academic body or society in general. Hence their focus becomes smooth management rather than cultivation of an environment to encourage knowledge generation. With the recent AC decision, JNU is sliding down this path and caving in to adopt bureaucratized standards of performance. Its academics are failing to stand up to the bureaucratization being imposed by the UGC. A University, expected to give a lead to other institutions is letting down both itself and the nation.

In brief, the bureaucratized UGC while ostensibly promoting excellence has been systematically undermining it for long since it thinks standards can be achieved through standardization little realizing that often the latter is the anti-thesis of the former.

arunkumar1000@hotmail.com

Income Distribution and Economic Growth: A Macroeconomic Perspective with Reference to India

Income Distribution and Economic Growth: A Macroeconomic Perspective with Reference to India

Arun Kumar

CESP/SSS, JNU. 

I.          THE EMERGING GLOBAL CRISIS in 2011

The rich in many European nations have asked their governments to tax them more. This follows the call made by Warren Buffet in the United States that the rich should pay more taxes. The motive is self-interest: to save their economies from sliding further and going into a double-dip recession, and preventing the kind of youth violence that has been witnessed in many countries in Europe. The recession looming on the horizon (if the world is not already in it) will be more difficult to deal with than in the earlier rounds since this time the cause is political rather than financial, as the case was with the global recession that started in late 2007.

In 2007-08, the experts and the analysts were ‘behind the curve' and in a state of denial about the start of the recession. The International Monetary Fund did not acknowledge the recession till late 2008, almost a year after it had started. Ben Bernanke, the head of the U.S. Federal Reserve, only admitted problems in February 2008 when the first stimulus tranche of $160 billion was announced. The U.S. Treasury Secretary did not admit of basic problems in the financial sector even in July 2008 when Freddie Mac and Fannie Mae faced imminent collapse.

Globally, governments boosted demand following the Keynesian device of creating deficits. The U.S. budget deficit went from 3 per cent of GDP to 12 per cent. The same thing happened in India. China provided a $600-billion infrastructure boost. Japan and much of Europe went in for budget deficits to boost demand in their economies. Nonetheless, unemployment rose sharply everywhere. In the U.S., it reached the level of 9.6 per cent. In India, exports which were growing at 35 per cent started plummeting at 35 per cent, leading to large-scale unemployment in labour-intensive sectors such as textiles, gem and jewellery and leather goods. Many industries and services such as transport, finance and real estate went into a tailspin.

The reason for the anemic recovery was that the stimulus was nowhere as big as was needed to boost employment and revive economies in a strong manner. So, when the big economies started climbing out of the recession in early-2010, employment hardly rose in the major economies.

Politics entered the picture globally soon thereafter. The conservatives started pushing the neo-classical paradigm of tax cuts for the rich and balancing the budget. The anemic recovery was used as an excuse to argue that the Keynesian prescription to boost the economy does not work. The implication of the conservatives' programme of cutting taxes on the rich leads to a decline in tax revenue so that the deficit tends to grow. But since the budget has to be balanced, expenditures have to be curtailed — the opposite of what the economy needs. In Britain, the new Conservative government cut back the budget and reduced public sector employment by half a million.

In the U.S., after the Democrats' big losses in the 2010 elections, President Barack Obama could not push his expenditure programme and had to reach a compromise with the Republicans. At the beginning of August 2011, the U.S. government almost came to a grinding halt due to the logjam between the two political forces. This left the markets in panic.

The world economy faces a deep crisis for political reasons. This is not palatable to the conservatives, who once again have a grip on power in the major economies of the world. India is no exception to this conservative mood with the government talking about balancing the budget in stages.

II.        DEFICIENCY OF DEMAND AND CYCLES IN CAPITALIST ECONOMIES

Kalecki (1971) showed why demand in a capitalist economy would be short in the normal course. He argued that capitalists are atomistic decision makers so that their decisions to invest would not automatically equal the full employment level of investment. He critiques Luxemburg’s argument that exports can help overcome demand deficiency by providing an additional market to the capitalists. Further, he negates Baranovski’s argument that investment in machines for the sake of machines can generate demand and help overcome demand deficiency. Kalecki argued that the external market is not exports but export surplus and further that investment in machines cannot increase endlessly.

He showed that growth impulses for a capitalist economy are Investment, export surplus and government deficit. Out of these, the first is limited globally by the atomistic decision making of investors and lack of coordination in the world to achieve full employment level of investment. Regarding the export surplus, one country’s surplus will be another’s deficit so the world as a whole cannot have a surplus. Thus, globally there cannot be a surplus and no stimulus from trade is feasible. However, every government can have a deficit in the budget and each economy can work to increase its demand. In open economies, demand will tend to leak to others but everyone can gain together.

This above prescription from Kalecki is not to the liking of the capitalists since they do not like full employment (Kalecki, 1971). He points out that because of this, economies now go through political business cycles and not the earlier kind of business cycles. The capitalists do not like govt. intervention because it is seen to have anti-capital implications. Hence the neo-classical orthodoxy suggests that the state should withdraw from the economy. This underlies the Washington Consensus since the eighties and has been in operation India since the launch of the New Economic Policies (NEP) in 1991.

II.1       Reaganism and Thacherism in the World since Late Seventies, Washington Consensus and Deepening Marketization

The world has been globalizing for a long time but its form keeps changing from time to time. It has been following a one-way pattern since the beginning of colonization in 1750 (Kumar, 2001). Most influences have been going in one direction – from the West to the current developing world. This one-way globalization has also gone through different phases. The latest one beginning with Mrs. Thacher’s rule in UK from the late seventies and Mr. Reagan’s Presidentship from 1980. They have pushed the world in the direction of marketization. The global institutions of economic governance, like, the IMF and the World Bank, have toed this line.

This was also possible because of the global strategic changes with the weakening of the USSR since the mid seventies and the 180 degree turn in economic policies in China after Mao’s departure. The changes were also visible in the negotiating stance of the advanced capitalist countries in the then GATT. They started pushing the developing world from the early eighties to agree to the new issues – trade in agriculture, trade in services, TRIPS, TRIMS and so on. They succeeded in the Uruguay Round of negotiations in 1986 in introducing these issues in GATT negotiations and managed to change GATT to WTO in 1995 with all the new issues as a part and parcel of the new organization.

In other significant change developing countries used to receive from the developed world `Aid’ at concessional terms. The underlying idea was to help them to `develop’. From the early nineties, this changed to capital flows at market related interest rates. The developing countries had to attract capital by offering onerous terms and concessions. Focus now shifted to FDI and FII flows and domination of MNCs.

The idea of marketization is not just economic but also social. It has resulted in the penetration of the market philosophy into social and political institutions also. People have been turned into `homo-economicus’ – solely determined by economic considerations of gains and losses. Their social and political aspects of existence have become immaterial. They are taken to be rational being maximizing their gains. Whether it is marriage or raising children it is all taken to be motivated by individual gains.

Under this philosophy, economic growth is the growth of human activity whether associated with human welfare or not. It has led nations to adopt the philosophy of `growth at any cost’. The entire burden of such blind growth mania has fallen on the environment and the marginalized sections of society who have little say in the market. With this philosophy, distribution hardly matters and inequalities have dramatically increased in the world - in each country and across groups of countries, like, in the US, India and China. Investment is being recklessly carried on for the sake of investment without taking into account the long run. The limitations of this strategy for long term growth, due to its consequences for social welfare and growing social and political instabilities appears to be no one’s concern today.

II.2.      Distribution, Inequality and Growth

As argued in Section II.1 above, since the seventies, distribution of incomes is not a consideration and there is rising inequality. This impacts consumption since the rich consume a much smaller proportion of their incomes than the poor do. Consequently, the consumption propensity declines. This results in a tendency for deficiency of demand within the economy. The economy would then slow down unless some external demand is generated like in exports or through investments as discussed in Section II above.

This has been visible in the case of say Japan and China. Their savings rate has risen dramatically and they have had to depend on export markets and rapid increase in investments fore maintaining growth. But, the large export surpluses of both these countries have led to large national and international imbalances and instabilities. Hence this kind of strategy has limitations and cannot be a long term strategy of growth.

II.3.      Free Trade, growing disparities and impact on Demand in world economy

The global economy has come under the WTO regime since January 1, 1995. As a result, competition amongst developing countries has increased for selling low and intermediate technology goods in the international markets. The advanced countries maintain there monopoly over advanced technology goods and control its prices. But, the developing countries competing with each other have lowered the prices of the goods they sell. Thus, terms of trade have shifted against the developing countries and in favour of the advanced countries.

To maintain low prices, the developing countries have held back wages of workers. The position of workers has weakened globally as international competition has enabled capital to gain an upper hand. But the weakening has been even greater in the developing world. Labour has lost many of its rights it had gained through struggles since the Second World War. For instance, in India, courts have reversed some of the earlier judgments which had granted workers rights. Currently, in the call centers and BPO sector, even trade unions are not allowed.

 These two global trends are aggravating income disparities across countries and within each country aggravating disparities between capital and workers. As argued above, this is resulting in a tendency for deficiency of demand globally.

II.4.      Black Economy, Global Illegal Flows and Inequality

Another important factor for the rising inequalities globally is the growth of the black economy in various countries and especially in the developing economies. Typically, the black economy is concentrated in the hands of the already rich, the profit earners who try to increase their incomes by illegal means. They share a fraction of this with the other elite sections of society, like, the politicians, the bureaucracy, the police and the judiciary. This is at the expense of the marginalized sections of the population who are the majority in the developing countries. Further, as illegality has increased in the developing world, the size of the black economy has been growing. The effect of the growing black economy leads to aggravation of inequality within countries and also across countries.

Globally, black incomes earners are using tax havens to both take their capital out of their national territories as well as round trip it back to their countries. The tax havens are also used by the corporate sector to siphon profits out of the developing countries via transfer pricing or under and over invoicing of exports and imports.

In India, the black economy has rapidly increased and now amounts to about 50% of GDP. It is concentrated in the hands of at most 3% of the population (Kumar, 1999). Thus, as the black economy has grown the income gap between the top 3% in the income ladder and the rest has grown rapidly.

The result of the growing black economy is to aggravate demand problem both nationally and globally (Kumar, 2009).

III.       INCREASING GLOBAL INSTABILITY SINCE THE SEVENTIES

Globally income distribution has deteriorated in the last forty years. Paradoxically, some countries, like, China and NIC have grown rapidly – narrowing the gap with the rich countries that have grown relatively slowly in this period. So, across nations disparities may show reduction but within each nation, disparities seem to have risen – within the US, China, India, Europe, etc. Thus, disparities between the elite and non-elite globally appear to be growing.

This seems to be creating a global tendency for shortage of demand. While for individual countries, exports may generate additional demand (as for China) for the world as a whole exports cannot counter the demand deficiency since there cannot be a global trade surplus.

The tendency for global demand deficiency is countered by rising levels of investments in Asian economies and the growing levels of consumption in the largest economy – USA.

The USA has shown declining levels of savings since the mid-eighties. Its consumption levels have been driven by the wealth effect based on asset price rise. Stock markets and other markets have shown a rise with the result that the paper wealth has increased and the rich and the middle classes have been spurred into increasing levels of consumption. Consumption has also been spurred by rising availability of consumer loans. This has fuelled demand in the rest of the world. Under Reagan, the USA went in for massive increase in military expenditure and that also spurred a budget deficit and global demand.

The result is that savings and investments rates have risen in Japan, China, NIC and India while they have fallen in the USA. So, there have been current account surpluses in China, Japan and NIC while there has been a deficit in USA and other countries. In effect, the world has polarized between the savers and consumers.

III.1.    Dollarization, Demand in the World Economy and Uncertainty

How has this global imbalance been sustained since the eighties? This was made possible by the dollarization of the world economy. People all over the world were willing to hold dollars and treasury bonds. So, the deficit in the US current account and in the budget could be sustained by the return flow of capital from the surplus countries. Bulk of the rising reserves of China and Japan were in US treasury bills.

The outflow of dollars from the USA to Russia, Central Asian Republics, Latin America was possible because it was seen to be stable. Savings in these countries were held in dollars as a safe currency. Thus, the dollar became like the reserve currency – a safe currency that the rest of the world was willing to hold. Thus, the US could pay for its excess imports by paying with dollars. No other country in the world could do this.

This circular flow of dollars in the world allowed the largest economy to sustain a rising level of consumption which led to leakages of demand to the rest of the world. This led to a boost of demand in the world and also to rising investments in the export surplus economies further boosting demand.

As already pointed out, demand globally was also fuelled by the rising asset prices – of stocks, real estate and other financial instruments. These paper gains meant that people felt they were richer and spent more. However, the rise in asset prices is like a bubble.

In brief, two kinds of instabilities were building up in the world economy – the global savings-investments imbalance amongst nations and the creation of the asset bubble. Both these imbalances were unsustainable over the long run. For instance, rising exports of China and Japan could only be sustained if their currency remained undervalued in relation to the dollar. Their rising reserves were not allowed to increase the value of their currency by appropriate interventions.

The rising amount of dollars held abroad and the rising level of US treasury holdings by foreign entities was only feasible as long as the others had faith in the US economy and the currency retained its characteristic of being a reserve currency. Similarly, the rising asset bubble could only be sustained by its continued rise and reinvestment of the profits made in such speculation back into the same assets. This became an increasingly unstable system over time and finally the bubble burst (for an analysis of this see Kumar, 2009). Of course, as pointed out, there were other inter-linked reasons as well, like, sub-prime crisis and commodity speculation but all these were also linked to the global imbalance and growing disparity across the globe.

III.2.    New Demand Problems since 2008

The crisis of 2008 has changed the above global macroeconomics. With decline in asset prices, rising unemployment and financial crisis, share of consumption in the US has declined. With rising unutilized capacity in industry, investment also declined and finally, crisis in the financial sector meant that loans were not being given so that small businesses have found it difficult to operate. The government did increase its deficit from 3% of GDP to 12% of GDP. The Central Bank provided massive infusion of liquidity to shore up the financial markets and cut interest rates to almost zero to stimulate investments but nothing worked. It was as if the economy had entered a liquidity trap. Thus, the major source of world demand in the world fell.

The world over, this pattern was repeated – in Euro zone, Japan, Britain, China and India. Demand declined in spite of the massive interventions by the Central banks and the increased deficits by governments. Nations like, China and Japan which had strong export surpluses faced decline in exports and in surpluses and this slowed down their economies further.

However, the stimulus no where was as strong as needed because there is a conservative streak of thinking about deficits and stimulus. Krugman has been a proponent of a strong stimulus (Krugman, 2009). In the US, the increase in the government stimulus has been counter balanced by the rise in savings of the households. Thus, a stronger government stimulus was needed. However, under the pressure of the Republicans and the Tea party, the US President has failed to provide a larger package. The stagnant US consumption has led to global demand problems.

The Euro zone has had its own crisis of sovereign debt and a conservative mood based on the poor performance of the economies of Europe. Thus, austerity measures have been imposed to bring the debt ridden and supposedly profligate economies into balance. This is further slowing demand and added to this is the fear of sovereign default. In brief, there is a vicious cycle of slowing demand and growing global crisis leading to the fears of double dip recession taking hold.

Major countries facing crisis are likely to go protectionist since consensus is eluding them. Further, with rising fears of debt default, the financial sector is facing a another crisis. In this context, the Asian economies, to protect their interest, may have to depend on generating internal demand.

IV.       THE INDIAN CONTEXT

The Indian economy started to open itself strongly with the New Economic Policies (NEP) launched in 1991. While its exports and imports as a per cent of GDP in 1991 were around 7% (roughly the figures for the USA, Japan and China) now these numbe4rs have risen to about 20%.

NEP led to a paradigm change in policies. While earlier the collective was taken to be responsible for the problems of the individuals (like, poverty, illiteracy, health and unemployment), now the individual is held responsible for her/his problems and the state has retreated. The market has taken over from the state and is playing a leading role in the growth process. This has meant giving concessions to capital and ignoring the distributional consequences of policies.

In the nineties, after NEP were launched, the economic growth rate remained at roughly the same level as in the eighties (Graph 1 shows that the decadal rate of growth was unchanged), there  has been a growing sectoral imbalance with growth dependent on the services sector whose share has risen to more than 60% of GDP. This imbalance has been based on the relatively slow rate of growth of agriculture and a rapid rate of growth of the services sector. This is the source of rising disparities in the economy.

While agriculture still employs more than 50% of the work force, its GDP share is only 17%. While the Services sector employs 30% of the work force it contributes more than 60% of the GDP. Thus, those in agriculture are the majority but marginalized in national income. Since agriculture is concentrated in rural areas and services in the urban areas, this disparity is leading to a growing urban-rural divide. Further, since the backward states are predominantly agricultural, they are lagging behind the advanced states which have a dominant contribution to the services sector. Finally, since agriculture employs largely unorganized workers there is a growing divide between the unorganized and the organized sectors.

The growing disparity is also based on the post 1991 concentration of resources in the hands of the private coporate sector which is investing in the organized sector and mostly in the advanced states. Thus, agriculture is receiving hardly 2% of the investment and is lagging behind in productivity and wages. It is also not generating new jobs. In contrast, the corporate sector is investing but in capital intensive areas and is therefore shedding jobs in a kind of jobless growth. Thus, overall few jobs are being generated and this is resulting in rising under employment.

Growing problems of employment generation and rising disparities have led to increased political and social instabilities in India. There have been violent protests against land acquisition for projects and setting up of SEZs. Other agitations for reservations and affirmative action have often turned violent since the government is seen as non-responsive and pro-corporate sector. Growing corruption has added to a poor image of the government which is seen to be working against the interest of the poor and in favour of the rich and the corrupt.

To correct its image, government has been forced to go in for programmes for the support of the poor like, the rural employment generation, right to food, right to education, mid day meal scheme in schools, loan waiver for poor farmers and so on. Many of thee schemes coincided with the need for fiscal stimulus in 2007-09 period. They pumped purchasing power in the rural areas of India and prevented demand from rapidly going down. That is why India’s rate of growth fell much less than that of many other economies of the world. Further, since this demand is not import intensive, it did not leak out of the economy.

An aspect of the rise in disparities and the black economy is the dramatic rise in the savings rate from 2000-01 and a simultaneous rise in the direct tax GDP ratio. Both these are an indication of the rich having a much larger share of national income (Kumar, 2007). However, as Graph 1 shows, spurts in growth in the last twenty years have been short lived.

The lesson of the last twenty years is that internal demand in India has been very important. This is also likely to be the case for other developing countries.

IV.1.    Has Growth been for Real?

The rapid growth in some of the newly emerging market economies has been accompanied by large scale destruction of the environment and hence needs to be reassessed (Kumar, 2006). Economic growth should have the connotation of improving social welfare but the environmental destruction and associated pollution and climate change are leading to vast negative consequences and especially for the marginalized sections who are the least able to cope with these changes. With climate change cropping patterns get disturbed and lead to adverse consequences for agriculture where a bulk of the poor are concentrated. It is resulting in unstable prices of food which impact the poor the most.

New chemicals are leading to new diseases and illnesses for which solutions do not exist and these are affecting the poor the most since they are the most vulnerable. They are doing most of the hazardous jobs like, spraying pesticides in the fields or recycling hazardous waste (computer components, ships, plastic or lead acid waste). The increased expenditure on health is sending families down the income ladder into poverty in spite of apparently increased incomes. Thus, such growth is not improving social welfare

Similarly, growth is often based on destruction of assets created in the past. Factories, roads and airports are coming up where often productive agricultural fields existed. Thus, new investment needs to be adjusted for the destruction of past assets and net investments becomes less than the investment figures shown. Similarly, new output from such investment needs to be adjusted for the old output that would not be produced. In other words, more of the past assets that are destroyed the less is the true growth of the economy. Thus, increased growth needs to be adjusted by providing for much larger depreciation.

In India, the effect of such adjustment can shave off up to 25% from the output and growth rate. In this sense, in much of the developing world, growth in this sense is partly spurious. Current growth is at the expense of the future growth as the environment deteriorates and health is adversely affected.

V.        CONCLUSION

The global economic problems starting in 2007 are continuing but for a brief period of respite in 2010. This paper points out that these are the result of the global imbalance in demand in the last thirty years with a divide between savers and consumers. This situation could continue for so long due to the dollarization of the world economy and the wealth effect due to rise in the asset prices driven by finance capital.

The problem was getting aggravated by the growing disparities within countries and across groups of countries due to the strategy of `growth at any cost’ based on marketization and growing consumerism amongst the well off sections. Globally, this was sustained by a shift in power towards capital and away from labour. This itself was a result of big changes in the former Soviet Union and China since the Seventies.

Today, the world is facing the specter of a double dip recession with all major economies slowing down. This is impacting all the economies including China and India. How can the impact of this brewing crisis be minimized? The lesson that India offers from the period 2007-2010 is that government needs to intervene strongly in favour of the poor and the marginalized sections. This would generate local demand which would not leak out and would reduce inequity. Other developing countries also need to increase local demand and reduce inequalities. Clearly, the choice of sectors for increasing growth has to be based on those sectors that have less linkages with external sector and low possibility of leakage of demand. In other words, globalization has to take a back seat to local needs. In this context, real wages have to be allowed to go up even thought that will affect exports.

It must be understood that markets do not have a solution to the current global problem since they cannot improve distribution. Further, given the global crisis, lack of coordination amongst governments and a conservative mood in most advanced countries, individual governments have little control on the situation. The developing world cannot try to be the market to enable the advanced countries to come out of the crisis since they will themselves go down. Thus, there is little choice for the developing world but to be more inward looking and protect its marginalized sections. Today, government intervention has become the key to stable growth in the developing world.

References:

• Kalecki, M. 1971. `Selected Essays on the Dynamics of Capitalist Economy’. Cambridge: CUP.
• Krugman. P. 2009. `Double dip warning’. The New York Times. December 1.
• Kumar, A. 1999. `The Black Economy in India’. N Delhi: Penguin (India)
• ---------. 2001. `The Macro View’. Chapter in the `Alternative Economic Survey 2000-2001’. New Delhi: Rainbow Publishers Limited, Lokayan and Azadi Bachao Andolan. Pp. 20-27.
• -----------. 2006. `The Flawed Macro Statistics: Overestimated Growth and Underestimated Inflation’. Chapter in the Alternative Economic Survey Group (Ed.) `Alternative Economic Survey, India 2005-06: Disempowering Masses’. Pp. 29-44. N Delhi: Daanish Books.
• -----------. 2007. `Macro Overview’. Chapter in the Alternative Economic Survey Group (Ed.) 2007. `Alternative Economic Survey, India 2006-07: Pampering Corporates, Pauperizing Masses’. Pp. 37 – 46. N Delhi: Daanish Books.
• -----------. 2009. `Global Financial Crisis and Government Intervention: Surplus Generation, Gearing Ratio, Asymmetry of Financial Multiplier and Other Considerations’. Accountancy Business and the Public Interest. Vol. 8, No. 1. February 3, 2009. http://visar.csustan.edu/aaba/aabajourVol8-No1.html.
• RBI. Various Years. `Handbook of Statistics’.

European Rich Wish to Pay more Taxes; What about the Indian Rich

European Rich Wish to Pay more Taxes; What about the Indian Rich

Arun Kumar

CESP, SSS, JNU

Published in The Hindu, September 7, 2011.

Startling news, the rich in many European nations have asked their governments to tax them more. This follows the call by Warren Buffet in the US that the rich should pay more taxes. The motive is self interest - to save their economies from sliding further, going into a double dip recession and preventing the kind of youth violence witnessed in many countries in Europe. The recession looming on the horizon (if we are not already in it) will be more difficult to deal with since this time the cause is political rather than financial, as the case was with the global recession that started in late 2007.

In 2007-08 the experts and the analysts were `behind the curve’ and in a state of denial about the start of the recession. The IMF did not acknowledge the recession till late 2008; almost a year after it had started. Mr. Ben Bernanke, heading the Federal Reserve of the US only admitted problems in February 2008 when the first stimulus of $ 160 billion was announced. The US Treasury secretary did not admit of basic problems in the financial sector even in July 2008 when Freddie Mac and Fannie Mae faced imminent collapse.

By the time Lehaman Brothers collapsed and AIG was on the verge of collapse in September 2008, things had gone out of control. The situation could not be salvaged even with the announcement by the US government of a bail out package of $750 billion. $ 350 billion was pumped into AIG alone to keep it afloat.

Globally, an unprecedented amount of liquidity was released by the Central banks. In normal times that would have led to hyper inflation but in 2008, there was a fear of deflation. The problem had originated with the sub-prime crisis in the housing mortgage market and that spread like a contagion to all financial institutions due to the inter-locked balance sheets.

There was a crisis of trust. The financial system had got linked to the shadow banking which was highly leveraged and unstable. It meant that even a small decline in the prices of the assets of a company led to a big fall in profits and valuation. With the accounting practice of `marked to market’, these losses came on to the balance sheet and the company was in danger of losing its entire capital. Thus, as the stock markets and other markets collapsed, most financial sector companies lost their capital and with that their viability. The governments had to step in and bail out these companies.

In the financial markets where borrowing and lending is the name of the game, with trust evaporating, since it was not clear which company would go under next, none could be trusted and lending ceased. Entities that were considered to be `too big to fail’ were failing one by one – Bear Stern, Freddie Mac, Fannie Mae, Lehman Brothers, AIG, Citibank and so on. No amount of liquidity was enough to revive the financial markets until the situation stabilized with the stoppage of the practice of `marked to market’. There was fraud with the major financial entities not telling the entire truth to their customers about the product they were selling them. The US government has just launched investigations into this fraud.

Globally, governments boosted demand following the Keynesian device of creating deficits. The US budget deficit went from 3% of GDP to 12%. The same happened in India. China provided a $600 billion boost to infrastructure. Japan and much of Europe went in for budget deficits to boost the demand in their economies. Nonetheless, unemployment rose sharply everywhere. In the US, it reached the level of 9.6%. In India, exports which were growing at 35% stated plummeting at 35% leading to large scale unemployment in labour intensive sectors like, textiles, gems and jewelry and leather goods. Many industries and services like, transportation, finance and real estate went into a tail spin.

ILO estimated that 60 million jobs were lost in spite of the attempts by various governments to boost their economies. The workers and the poor bore the brunt. Not that the dollar billionaires did not lose as their wealth declined sharply but they had the cushion of their hundreds of millions and billions of assets still in tact.

The reason for the anemic recovery was that the stimulus was no where as big as was needed to boost employment and revive the economies strongly. So, when the big economies started climbing out of the recession in early 2010, employment hardly rose in the major economies.

Politics entered the picture globally soon thereafter. The conservatives started pushing the neo-classical paradigm of tax cuts for the rich and balancing the budget. The anemic recovery was used as an excuse to argue that the Keynesian prescription of boosting the economy does not work. The implication of the conservative’s  programme of  cutting the taxes on the rich leads to a decline in tax revenue so that the deficit tends to grow but since the budget has to be balanced, expenditures have to be curtailed - the opposite of what the economy needs. In Britain, the new Conservative government cut back the budget and reduced public sector employment by half a million.

In the USA, after the Democrat’s big losses in 2010 elections, Obama could not push his expenditure programme and had to come to a compromise with the Republicans. In the beginning of August 2011, the US government almost came to a grinding halt due to the logjam between the two political forces and this panicked the markets.

Euro zone had its own problems of coordination amongst its many disparate constituents. One after the other, Greece, Ireland and Portugal teetered under debt and had to be bailed out by others but on condition that they implement austerity packages. This led to revolt by workers and youth facing unemployment. The possibility of default meant that they had to borrow at higher cost and that worsened their debt situation. When the contagion spread to Spain and Italy matters have become difficult for the Euro zone because it is hardly feasible to bail out these economies. The possibility of sovereign default has increased and that has added to the difficulties of the financial entities that have leant to these nations.

The World economy faces a deep crisis for political reasons – that which is needed is not palatable to the conservatives who have once again got a grip over power in major economies of the world. India is no exception to this conservative mood with the government talking about balancing the budget in stages.

The rich, starting with Buffet have realized that in their own self interest, they have to accept higher taxes so that the governments can boost demand. In the pessimistic scenario now prevailing across the globe, the private sector on its own is unlikely to boost its investment. The citizens sensing trouble ahead are saving more for the rainy day so that consumption demand remains weak. Globally exports growth is weakening. Thus, the only source of boosting demand strongly can be government expenditures.

In France, Mr. Levy, the chief of Publicis and the president of the French association of private enterprises supported Buffet’s idea. 16 of the wealthiest French have signed a petition urging their government to tax them more. A group of 50 wealthy Germans have backed this petition. In Italy, the chief of Ferrari has weighed in with support.

The Indian well off avoid paying taxes both legally and illegally. They manipulate to get themselves huge tax concessions and then make even bigger sums as black incomes. The more property one owns the more tax concessions one obtains. For instance, income from dividend on ownership of shares in companies is exempt. Thus, if a Managing director of a big company gets Rs.30 crore of salary and bonuses, etc., but gets Rs.1000 crore as dividend, the tax liability is only Rs.10 crore, that is, a tax rate of 1% of the total income. No wonder less than 3% of the citizens file income tax returns and India has one of the lowest ratio of direct tax to GDP in the world.

Today, the corporates in the country (less than 0.1% of the population) control 20% of the national income, much more than what the 50% dependent on agriculture make. The legal exemptions they enjoy, called `tax expenditures’, amount to over Rs.5 lakh crores (See, Receipts Budget). Add to this the black incomes these corporates generate annually and their incomes turn out to be astronomical. The corporates pay an average tax of 23% of their legally declared taxable incomes whereas they should be paying about 33%. So, the Indian rich need not ask for a tax rate increase but only to allow the government to eliminate `tax expenditures’ and to voluntarily stop generating black incomes, to more than double tax collections which could give a big boost to the slowing Indian economy. 

arunkumar1000@hotmail.com

Direct and Indirect Benefits of Tackling the Black Economy

Direct and Indirect Benefits of Tackling the Black Economy

Arun Kumar

CESP, SSS, JNU

The Hindu, August 20, 2011.

Anna Hazare’s indefinite fast for the acceptance of the Jan Lok Pal Bill, his arrest from home and the widespread mass protest in urban India has shaken the government. Political parties have woken up to the depth of feeling in the country against corruption. Two things have come together - fight for the Jan Lokpal Bill and the violation of civil rights of the citizens to protest. The protest snowballing in the country is seen as against corruption. Obviously, the public are fed up with the day to day harassment they face. To put it in perspective, it is important to understand the benefits to society of tackling the huge black economy in the country.

Some argue that the black economy also generates jobs and production. For instance, they argue that a lot of goods are bought in the market from the black incomes and that leads to increase in production and employment. They argue that the black economy generates informal sector employment and helps the poor. Some go to the extent of arguing that India escaped the worst effects of the global recession in 2008 and the economy only slowed down because of the large amount of black money floating around which generated additional demand. Some justify bribes as speed money that enables work to be done faster. There is some truth in all this and yet, it can be shown that the ill effects of the black economy far outweigh its beneficial effects.

Think of bribe as speed money. To extract a bribe, the bureaucracy first slows down work and harasses the public. If work was automatically done, why would any one bribe. Thus, the system has to be made inefficient so that those who can afford to pay can get their work done quickly but the rest continue to suffer. Administration becomes run down since rather than devising ways of working efficiently, it is busy thinking of ways of making money by setting up roadblocks to efficient functioning. This has spawned a culture of `middle men’ and personal approach to officers. Things hardly happen in the routine manner and without personal appearance. The middleman is needed by the corrupt to insulate themselves from direct public contact lest someone reports them.  The bribe giver also not knowing how much to bribe and how to contact the administrator in-charge finds it convenient.

Much of the black economy in India is like `digging holes and filling them’. That is, one digs a hole during the day and then another fills it up at night, the next day, there is zero output but two salaries are paid. This is `activity without productivity’. An example is of poorly made roads that get washed away or become pot holed with every rain and need repeated repairs. Thus, instead of new roads coming up much of the budget is spent on maintenance. Teachers may not teach properly in class so that students have to take tuition. Families not only have to pay extra, the students find learning insipid and lose interest and this effects their creativity and the future.

Consider how millions of litigants, their families/friends and lawyers arrive daily in the courts and in most cases the hearing lasts a few minutes and the next date, months away, is announced and they go back home. Not only justice is delayed inordinately, consider the time lost and expense incurred in lawyers fees, travel and in taking leave from work and so on. This goes on since cases that could be resolved in a few months go on for years multiplying the costs. The expense of delayed justice is both direct and indirect. Delay is often a result of the impact of the black economy. Honest people who lose hope start resorting to other means which dents the notion of social justice and weakens society. This cost cannot be calculated in monetary terms but is significant.

Because of the growing black economy, policies fail both at macro and micro levels. Planning or monetary policy or fiscal policies do not achieve the desired results due to the existence of a substantial black economy. Targets for education, health, drinking water and so on are not achieved because `expenditures do not mean outcomes’. The economy does not lack the resources but it faces resource shortage. Much investment goes into wasteful/ unproductive channels, like, holding gold or real estate or abroad through flight of capital. This lowers the employment potential and the level of output in the economy. Capital sent abroad does not generate output in India but does so where it goes. A country that is considered capital short has been exporting capital. A nation that gives concessions to MNCs to bring in capital loses more capital than it gets and that too at a high cost from FIIs or as FDI. Our policies are open to the dictates of international capital because our businessmen and politicians have taken capital out in large doses since independence. Costs are huge.

The direct and indirect costs are of policy failures, unproductive investments, slower development, higher inequity, environmental destruction and lower rate of growth of the economy than it could potentially have been. According to this author’s estimates, we could have been growing faster by about 5% since the Seventies if we did not have the black economy. Consequently, we could have been a $8 trillion economy and the second largest in the world. The per capita income could have been seven times larger so that we would have been a middle income country and not one of the poorest. A huge cost.

The black economy also leads to `the usual becomes the unusual and the unusual the usual’. That which should happen does not and that which should not keeps happening. We should get 220 volts electricity but we mostly get 170 volts or 270 volts and equipment burns out so all expensive gadgets need voltage stabilizers resulting in higher capital costs and maintenance costs rise. Water in taps should be potable but it is of uneven quality because the pipes are not properly laid and sewage seeps in. Thus, we carry water bottles, use purifiers and boil water at great extra cost. Even then, we fall ill since how much can we escape the problem. 70% of all disease in India is related to water so that we spend extra on hospitalization and treatment and then there is the associated loss of productivity; the poor are particularly the victims of this.

Hospitalization can be traumatic because of the large scale callousness there. Public hospitals there crowded and doctors over worked. Due to unhygienic conditions, patients can get secondary infection or the attendants can fall sick. In private hospitals the patient is not sure whether unnecessary tests are being done and whether the consultants coming to see them at all needed. Even after all this, cure is not assured because the drugs maybe spurious or the IV fluid contaminated and so on. The poor suffer from the presence of large number of quacks in the market who give injections or steroids or overdose of antibiotics. It is the strength of the human constitution that in spite of these adversities, many get cured.

The result of all this is that costs everywhere are higher than they need be raising the rate of inflation. If capital is over invoiced by businesses to make money the cost of setting up industry is higher. If poor quality grain is sold in PDS, the price is higher. If tuition is needed for children because of poor teaching, the family’s cost is higher and so on.

At the social level, the cost is a loss of faith in society and its functioning. Hence many are now atomized seeking individual solutions and discount societal processes. At the political level there is fragmentation with states demanding their own package because the belief that the nation as a whole can deliver has been dented. The demand for smallerer states is a corollary because the bigger states neglect the less vocal regions. Each caste, community and region now wants to have its own party to represent its narrow interest leading to the proliferation of smaller parties. Can the cost of this fragmentation and loss of the national spirit be calculated?

New movements for a strong Lokpal, Right to education, to food and to information are likely to recreate a common national ethos that is so necessary and which may generate the political will to tackle the hugely expensive black economy – the fight for one is the fight for the other also.

 arunkumar1000@hotmail.com

The dangers of redefining democracy

The dangers of redefining democracy

Arun Kumar

CESP, SSS, JNU.

The Hindu, July 29, 2011

We have creatively redefined national interest, representation, democracy and corruption to the benefit of vested interests.

If bribe-giving is legalised, some have suggested, the vexed problem of corruption facing the government would be less severe. Some powerful voices from within and outside the government have even argued for this. The argument is in line with the theoretical case that corruption and smuggling improve economic efficiency. Such redefining of words is not an isolated activity today.

Prime Minister Manmohan Singh indulged in it at a recent meeting with newspaper editors. On the Lokpal bill, he said he personally favoured the Prime Minister coming under its purview but added that his Cabinet colleagues were against it — prevarication at its best.

Dr. Singh has acted decisively on issues close to his heart like the India-U.S. civil nuclear deal, which he pushed through in spite of the threat to his government and disquiet among many. Clearly, for him, the Prime Minister coming within the Lokpal's purview is not of much importance. It is consistent with his view that corruption is not as endemic as is being made out by the media and the Opposition, and that it is largely their creation. He also pleaded for moderating the campaign against corruption on the plea that it is spoiling our international image.

His argument that decision-makers act ex-ante, in uncertainty and without full information, must be music to the ears of wrong-doers. He clarified that in hindsight, one can be wiser about the mistakes committed. The sub-text is that inappropriate decisions are not deliberate, but genuine errors of judgment — an alibi for corrupt elements.

As a general proposition, the argument can hardly be faulted. But is it also true in specific cases? In the 2G spectrum allocation case, the CBI, under the Supreme Court's directions, has unearthed blatant wrongdoing. Giving a very short notice to file bids and, that too, a few hours, for instance. Without advance knowledge, a bid could not have been filed. Why did some of the licences go to those who had no experience in the field? None of this had anything to do with uncertainty.

Dr. Singh also argued that he could not be expected to look into details pertaining to each Ministry and that he was not an expert on all matters. But he has a string of agencies and experts at his beck and call. Why was their advice not sought? Especially, when the wrongdoings pertaining to the 2G case were immediately pointed to in 2008? The implication is that the system failed. Is someone accountable for the failure? In the Commonwealth Games scam, there was blatant loot in contracts and purchase of exercise machines and toilet paper rolls. None of this had anything to do with uncertainty or ex-ante nature of decisions or lack of expertise. Has the Prime Minister shifted ground — from his ‘coalition compulsions' argument to giving technical explanations for his silence and inaction?

If Dr. Singh's line of argument is to be accepted, from now on, no one need take responsibility or be accountable as mistakes can be said to be unintended or due to a lack of expertise. Further, one ought not refer to widespread wrongdoing lest it spoil the international image. The Prime Minister, a clever academic, has distorted the meaning of words such as “accountability” and “corruption.”

Changing the meaning of words like “accountability” will damage the system. Rule of law, social justice, good governance and building a civilised society depend on it. Similarly, when terms like “democracy,” “people's representation” and “justice” lose much of their content, democratic institutions decline. Thus the nation needs an institution like Lokpal to bring about accountability.

The government has decided to aggressively stall a stricter Lokpal bill. To be fair, arguments for leaving the Prime Minister and the higher judiciary out of the Lokpal's purview have been advanced by other respected persons too. Their argument is that the inclusion of the Prime Minster and the judiciary will undermine their independent functioning and prevent them from taking tough decisions for fear of being incorrect and inviting challenges. Logically, then, they should not come under scrutiny even after they demit office because even that could deter them from taking decisions. In other words, no accountability should be demanded of the Prime Minister.

Further, it is argued that in a democracy, the Prime Minister is accountable to Parliament. So, any wrongdoing by him would automatically be checked by the Opposition (enforcing accountability). It is also stated that the Lokpal, an agency external to the parliamentary system, will undermine Parliament. It is also feared that frivolous charges could be brought against the Prime Minister, given the nature of fractious politics. Every time a charge is levelled, there would be a demand for the Prime Minister's resignation and she/he would be immobilised.

All this begs the question: why is there a strong demand for bringing the Prime Minister within the Lokpal's purview? Why has Parliament failed to make the Prime Minister accountable? In the last 40 years, many Prime Ministers have been suspected of wrongdoing. Same is the case with many Chief Ministers, Ministers, Chief Justices and the higher judiciary. The existing institutional structure has patently failed to make these high functionaries accountable.

Further, due to corruption, justice is either miscarried or delayed (barring a few high-profile cases). There is a widespread feeling of lack of social justice. The political leadership and the top judiciary are seen to have failed the people in spite of the checks and balances a democracy is supposed to provide. Their credibility has been eroded, leading to the demand that they be made accountable in newer ways — outside the present democratic framework.

In brief, ‘democracy' is being given as the reason for not bringing the nation's highest functionaries within the Lokpal's ambit. The counter-argument is: because ‘democracy' has been twisted out of shape, there is a need for newer ways to re-energise it by, say, an independent Lokpal. Of course, it goes without saying that even the Lokpal may eventually get subverted since there can neither be a magic wand nor a perfect law to deal with social problems.

It is also argued that NGOs and civil society groups are not people's representatives — at best, they represent small groups. The legislators, on the other hand, are people's representatives. This view also emerged in the all-party meeting on the Lokpal bill. While formally this is true, the reality is that ‘representation' has lost much of its meaning. Does anyone represent people's interests today? Members of civil society groups and NGOs who have stood for elections have mostly lost. So the politicians are right in saying they represent only small groups. But this is not the whole truth.

The way the government initially caved in to the demands of civil society groups suggests that it panicked because these groups captured the popular sentiment of that section — the middle class — which has provided the government its legitimacy. The media, by playing up the issue, aggravated matters.

The government's flip-flop on the issue in the last few months ought to clarify whose interest it serves — citizens, the elite or vested interests. While workers' movements (big and small) have been routinely ignored by the government or dealt with a heavy hand, it responded to the middle class protests. With a scam a week surfacing in the last few years, the illusion of the middle class that the government represents its interests stood shattered, which is why the government initially reacted the way it did. As soon as it devised ways of confusing the middle class, it backtracked.

Revelations in the phone hacking investigations in the U.K. have brought out the nexus among the power elite and the erosion of accountability in the mother of democracy. In India, we are way ahead and have creatively redefined national interest, representation, democracy and corruption to the benefit of the vested interests.

 arunkumar1000@hotmail.com