Nehru’s Legacy in the Present Juncture: Assessing Economic Successes and Failures

Nehru’s Legacy in the Present Juncture: Assessing Economic Successes and Failures

Arun Kumar

Sukhamoy Chakravary Chair Professor, CESP, SSS, JNU

Published in Mainstream, May 31, 2014. Vol. LII No. 23. Pp. 19-21.

Nehru, India’s first Prime Minister, passed away fifty years back in 1964. It is time that an objective assessment is made of his contributions to the nation at that critical juncture of its existence. The newly independent nation was grossly underdeveloped due to the colonial rule. Colonization led to India falling considerably behind the advanced nations in every sense due to drain of wealth and lack of investment in the economy.

The gap in infrastructure between Britain and India in 1950 gives an idea of the lack of investment in the economy (Kumar, 2013). Whether in power generation per capita, roads per thousand sq km or in education per thousand of population, India did not catch up with the 1950 level of Britain even by 2000. So, in spite of massive investment in each of these fields after 1947, India remained backward. The lack of investment over two centuries could not be made up in five decades.

What independent India inherited was a backward economy in every sense. Its agriculture was backward with almost no technical change in more than two centuries. Productivity was low and correspondingly incomes in agriculture were low and poverty entrenched in rural areas. Industry was backward by international standards and largely owned by foreign capital, including certain critical areas like, banking and petroleum. India had little R&D and depended on repeated imports of technology. There was a high death rate due to poor social infrastructure and poverty.

The dream of the national movement was that after independence, India would be turned into a modern economy like that of the advanced western nations. The challenge was how to move from being a poor and under developed nation to an advanced nation in the shortest possible time. For this, poverty, illiteracy and ill health had to be eliminated quickly, physical infrastructure built and agriculture and industry modernized.

Nehru and his followers set out to accomplish this task of modernizing India from the word go. However, there were huge social problems that had to be confronted. India is the most diverse nation in the world with linguistic, regional and religious diversity and wealth and income inequalities and other such variations across the nation. Partition and the war in Kashmir were the immediate crisis that confronted the nation after independence. Drafting the constitution for such a diverse nation was a major challenge. The country was not only poor but still feudal in its outlook and that posed serious challenges to the idea of modernization and to the western institutions of a modern state.

India was also confronted by the Cold war and had to steer a path through this minefield with pressure from the Western bloc to join it. However, given the colonial experience, India did not trust the West. Yet, it depended on the West for trade, aid and military hardware. The dispute and the war with China pushed India towards the West but the dispute with Pakistan forced India towards the Soviet camp. The Indian elite did not like socialism or communism but was forced to ally with the Soviet bloc given that the West and China were supporting Pakistan against India. This led to the dilemma and the confusion in the mind of the Indian ruling elite, namely, while depending on the Soviets for strategic support, technology and arms, it wanted to follow the West as its ideal in terms of ideology, development and consumerism (Kumar, 2013).

In the 1950s under Nehru’s leadership, India quickly set up the framework for its modernization. Constitution, elections, Parliament, Planning, elimination of Zamindari, land distribution, setting up institutions of higher education and R&D laboratories, agricultural universities, IITs, heavy industry, production of basic goods like, steel and energy, nationalization of airlines, banks and petroleum and so on.

There was emphasis on simplicity in life so that the nation could plough its resources into development. The rate of investment and savings increased all through to provide the resources for rapid development. There was emphasis on curbing luxury imports and also import substitution so that industry could grow and diversify. The rate of growth of the economy went up sharply in the 1950s compared to the period of first fifty years of the twentieth century under colonial rule.

The experience and the understanding of the national movement was that problems faced by the people were social and not individual. So whether it be poverty or illiteracy or ill health, the cause was systemic, namely, the British colonial rule that did not set up the institutions needed. It was clear that the individual could not set them up on their own. Thus, the role of eliminating the basic problems faced by the people was given to the collective, the government. Nehru and his supporters accepted this logic and government was given the leading role in the economy; not that there would be no private sector. It was to be the driving force of progress in society. The Indian big business also understood this and accepted the fact that they did not have the capital to set up infrastructure and basic industries.

The economy was to become a mixed economy and planning was given the role to help in optimal utilisation of resources to achieve the fastest possible rate of growth. Central Planning was patterned after the Soviets. The public sector received a large measure of support from the Soviets which also gave some technology which set the country along the path of relative independence. The country tried to balance the state and the market.

This economic strategy also helped ward off the pressures from the two Cold War blocs. At the international level, India went in for non-alignment with a tilt in favour of the Soviet bloc given the US tilt towards Pakistan. The existence of the two competing blocs, enabled Nehru to get the space needed to chart a relatively independent path of development. The Western bloc could not exert the pressure it later did, lest India tilted even more towards the Soviet bloc. Thus, Aid came from the West in large doses. This was sorely needed because of the consistent trade and current account deficits that India ran on account of the Western development path it chose for itself.

Theoretical support for a large and interventionist government came from the ruling ideology at that time in the advanced Western nations. After the great depression of 1929-33, these economies followed the Keynesian approach which led to the creation of a welfare state with large public investment in infrastructure and a large public sector (with few exceptions).

This economic strategy resulted in a big step up in growth after 1950. Industry grew rapidly and diversified. Public services increased so that health standards improved and the death rate fell sharply. Literacy spread and science and technology which was ignored by the colonial power received a big boost.

Unfortunately, for the Nehruvians, the strategy of western development was based on trickle down and led to persistence of poverty and growing inequality in society. It also led to pro urban and pro industry policies to the marginalization of rural areas and agriculture. This led to a growing energy intensity of the economy. For a country that is short of petroleum resources, this has meant that every time the world faces an Oil crisis (like in 1967, 1973, 1979, 1989 and 2000s) Indian economy also goes into a crisis.

The feudal attitudes in society could not be changed rapidly since the leadership was largely feudal in nature. This reflected in the functioning of the institutions set up. For instance, among the elite there was resistance to eliminating illiteracy so that they could get cheap labour. Consequently, adequate emphasis was not given to good school education and especially for the poor. This has been an important cause of the persisting poverty in the country and continuing backwardness. It has also meant inadequate emphasis on R& D. It is not that Nehru did not talk about these critical issues but the party over which he presided did not go along with him. The bureaucracy which was to deliver remained in the colonial mould and did not pull its weight for transforming the nation into a modern state.

The top down policies of copying western modernity also led to inadequate employment generation so that very few could get into the lucrative organized sectors and bulk of the population has remained struck in the agriculture sector and the unorganized sector at low wages. The marginalized sections in society, the SC, ST, women, Muslims and so on have not benefited as much as they ought to have. Thus, the policy of reservations has not only continued but has had to be extended to other marginalized sections. All this led to the growing social and political crisis in the country in later years.

The consensus over policies that existed at the time of independence (due to the experience of the national movement) quickly dissipated with the elite sections cornering the gains of development and wanting more to become like the westerners who were their role model. At a very low per capita income they wanted to have the same consumption level that the average person in the advanced countries had. The growing middle class and the elite in society in their impatience to consume more, increasingly resorted to the black economy and corruption to have higher incomes. Business men also captured policy through corruption and manipulation and this fuelled the black economy further. The seeds of these trends were visible before Nehru’s death. He had to write a letter to all the Chief Ministers cautioning them against the growing corruption in the country.

The growing corruption and the black economy led to failure of policies. The large role of the government in the economy started to come unstuck. Development started to falter and with that the faith of the people in government and its policies also declined rapidly in the 1970s and the 1980s and led directly to the New Economic Polices in 1991. The country came full circle to the pre 1950s policies minus the colonization by a foreign power. Nehru was blamed for the failure of policies which led to India lagging behind the other developing countries like, the South East Asian Tiger economies and China.

In conclusion, it can be said that Nehru’s policies in the 1950s and early 1960s set independent India on a path of rapid development in spite of a very difficult political and social situation in the country and the international situation due to the Cold war. It was his policies that set the base for later faster growth in the country by setting up the social and physical infrastructure. His policies enabled the private sector to grow rapidly and become big enough to take the lead in economic development in the period after 1991. The policy framework put in place resulted in reduction in poverty even if at a slow pace.

However, as pointed out above, the big mistake was to follow the top down approach to development in the race to catch up with the West. It compromised on the independence of economic policies which were only relatively independent because they were basically a mix of the market and central planning copied from the West. These policies led to growing inequity in society, to persistence of poverty, inadequate employment generation, rising energy intensity and periodic crisis in the economy when the global Oil economy faced a crisis. There was growing black economy due to political economy reasons that led to widespread policy failure and to the decline in the faith in government intervention in the economy and that became the undoing of the Nehruvian framework in the post 1991 phase. But the consequence of this change in framework has meant a less caring state and society, growing self-centerdness, rising consumerism, rapid environmental decline and growing inequality. Finally, though the seeds of the failure of the Nehruvian framework lay within itself, Nehru’s legacy cannot be seen in stark terms as success or failur.

arunkumar1000@hotmail.com

Vote on Account: Neither Economically nor Politically What was Needed

Vote on Account: Neither Economically nor Politically What was Needed
Arun Kumar, CESP, SSS, JNU

MAINSTREAM, VOL LII NO 9, FEBRUARY 22, 2014

A vote on account is not expected to make any major announcement of policies since it is supposed to be a temporary measure to enable the government to continue its expenditures to maintain itself and the continuing programmes. It is expected that the new government that would take over in a few months from now would present the full Budget. In a way, the government that is on its way out should not tie the hands of the government that is expected to take over by announcing policies. But these are only conventions. Nothing prevents a government from presenting a full Budget. After all, a new government can again go in for a revised Budget if it so desires.

More importantly, in the vote of account for 2014-15 presented now, there are major policy announcements, like changes in excise duties, to boost the profitability of certain industries that are not doing so well and changes in the accounting procedures to show a much larger Central Assistance for State Plans and a reduced Central Plan Outlay. It has also announced ‘one-rank one-pay’ for the retired Army personnel and waiver of interest on loans to students. Thus, where the ruling party felt it could gain electorally by announcing schemes, it has done so. The question then is: why did it not go further on some crucial matters for the economy?

As the Finance Minister has spelt out, the economy has been slowing down for the last nine quarters. Further, the economy has shown a high degree of macro volatility since the Fiscal Deficit, Current Account Deficit in foreign trade and inflation have shown adverse trends in the recent past. In the last five years, the government has repeatedly said that soon the rate of inflation will decline and invariably that has not happened; it has remained persistently high with ups and downs.

The government’s claims for the next year are not anchored on the prospects of the economy. Its budgetary numbers are predicated on a growth in the nominal GDP of 13.4 per cent. Given the government’s claim that inflation is running at five per cent and the economy will grow at about six per cent, the GDP growth will at best be 11 per cent. Even this is unlikely since the principal problems in the economy are not being addressed. Thus, the budgetary calculus is likely to go wrong and the new government will have to bear the burden of correcting a deteriorating situation.

Inflation is measured by the Wholesale Price Index (WPI) which does not represent the true inflation in the economy since it does not give any weight to services. So, for instance, it does not reflect the rise in the cost of education or health. Even public institutions are charging higher prices to come closer to the market prices. This is on the plea that subsidy is undesirable for the Budget and economy. The public is confused and thinks that a fall in the rate of inflation means lower prices. This is not true since a decline in the rate of inflation only means a slowdown in the rate at which prices are rising. So as long as the inflation rate is positive prices continue to rise. With inflation, the public finds its purchasing power declining and its standard of living affected.

The Finance Minster proudly proclaimed that he is on the path of fiscal consolidation since he has kept the Fiscal Deficit for the current year (2013-14) below the target of 4.8 per cent. But how has he achieved it when tax revenues have fallen short by about Rs 77,000 crores (by 6.5 per cent) compared to the Budget estimates? There is a drastic cut in the Plan size (by Rs 80,000 crores). This is a trick the Finance Minister has been playing on the public consistently year after year. The fiscal deficit target is being achieved by compressing essential expenditures. This is like chopping one’s nose to cure one’s cold.

Thus, when the Budget is presented, to show the government’s seriousness about the Plan for public consumption, inflated figures of Central Plan allocations are presented before Parliament. But after a year, when the next Budget is presented, the actual figures show that much less than the budgeted amount is spent so that the Plan targets remain unfulfilled.

The shortfall for 2009-10 was Rs 41,009 crores, for 2010-11 Rs 60,168 crores for 2011-12 Rs 83,861 crores, and for 2012-13 Rs 1,53,033 crores. The shortfall of RE over BE for 2013-14 is already Rs 65,989 crores. Thus the total shortfall of the Central Plan expenditure over the five years amounts to more than Rs 4,04,000 crores. When Plan expenditures are cut, it implies a shortfall in public investment. No wonder there is shortage of infrastructure like power, water and railways. Further, this leads to a slowdown in the economic rate of growth as the demand falls short and bottlenecks appear. Additionally, it leads to unfinished projects since allocations for them are inadequate.
The country has witnessed a slowdown in exports while imports remain high. Energy and gold imports have contributed substantially to the high level of trade and Current Account deficits (CAD). High gold imports are a result of the demand in the economy due to the uncertainty and the desire of the savers under the circumstances to buy more gold as a hedge. Energy imports have been high since coal production has not kept pace given the uncertainties regarding coal mine allocations due to the corruption cases and environment considerations.
The result of a high CAD has been speculation on the value of the rupee and a decline in its value vis-a-vis the foreign currencies. It fell to a record low of Rs 68 to the dollar. The problem was compounded by the signals emanating from the Federal Reserve (the US Central Bank) regarding phasing out of the quantitative easing. This opened the possibility of drying up of easy liquidity available in the international financial markets in the last few years; this was driving foreign investments into the emerging markets. The slowdown in China and tepid recovery in the US and other advanced economies add to the uncertainty for the world economy. Thus, the external picture has been one of great uncertainty not only last year but over the last three years. This is likely to endure and it will continue to impact the CAD and value of the rupee.
The high CAD has also resulted in a rapid rise in the debt of the country and especially of the short run kind that causes greater instability. The foreign debt of the country is about $ 100 billion more than India’s foreign exchange reserves. That is the signal to inter-national speculators that there is a weakness to be exploited here. While the steps taken by the government and the Reserve Bank to check short-run speculation and reduce the inflow of gold have stabilised the rupee somewhat, these are not enough. Reports are that gold is being smuggled in at an increasing pace and this can again add to pressures on the BOP. So, the situation will remain precarious as long as India’s macro economy is not stabilised.
An important reason for the slowdown of the economy is the decline in the investment rate in the economy. It had peaked in 2007-08 and since then it has declined by about five per cent. An important reason for this decline is that investments in India have been based on crony capitalism and in the last four years with the exposes of various scams and cancellation of licences, businessmen face uncertainty. Further, the government’s decision-making has slowed down with the policy-makers (politicians and bureaucrats) delaying decisions. So, the model of crony capitalism has collapsed and no new one has emerged.
Corruption has also meant that the public has viewed the large investment decisions of the private sector with suspicion. People do not want to give up their land since they believe that natural resources are being looted by the businessmen along with the politicians at their expense. Thus, movements against displacement have become strong and projects have stalled both in the public and private sectors. We have had the examples of Singur, POSCO, Nandigram, Raigadh, Jaitapur, Greater NOIDA and so on. The courts have also viewed with suspicion the various land acquisition demands. Thus, investment by the private sector, both foreign and Indian, has slowed down. As already mentioned, the public investment has slowed down due to the cuts in the Central Plan size in the last five years.
At the root of the instability in the economy is the black economy and indiscriminate opening up leading to the BOP problems. The black economy results in higher costs and waste which causes prices to rise. It also leads to speculative activity and episodic price increases as in the case of onion prices last year. This is compounded by the connivance between the businessmen and policy-makers. The black economy results in shortfall in tax revenues and higher expenditures due to corruption so that the fiscal and revenue deficits are larger than they need be. Due to the flight of capital and under- and over-invoicing of trade and transfer pricing, the BOP turns adverse. Thus, the instability in the economy is a direct result of the black economy which results in the BOP problem, high Fiscal Deficit, higher inflation and a slowdown in investment both by the private and public sectors.
The indiscriminate opening up has led to the reduced policy-space for the government. The government has targeted the Fiscal Deficit as the main variable to operate on since the credit rating agencies look for it hawk-eyed. So, it has not minded the expenditure compression even if that has meant a slowing down of the economy and consequent bottlenecks and problems. It has been warned by analysts that private investment is unlikely to pick up much in the near future given the uncertainty of the coming elections and the likely prospects of a hung Parliament.
The FM’s claim that massive investment projects have been sanctioned does not amount to much in a period of the uncertainty since sanction does not mean the decision to invest. The only chance for the economy to come out of the slowdown was an increase in public investment. For this the black economy had to be effectively tackled. One does not have to close the economy to regain the policy-space but only tackle the black economy. However, the government has been reluctant to do so in the last five years and continues to be so.
The government had a chance in the vote on account to take adequate steps to tackle the macroeconomic imbalances. It has not thought it prudent to do so because these may be seen to be policy-decisions. However, since it has taken some policy-decisions as already pointed out, it should have taken the really critical decisions on stabilising the economy. Instead, the Finance Minister spent much energy on showcasing the UPA’s economic performance in the last 10 years and especially when he was the Finance Minister.
To conclude, the Finance Minister has claimed that of late the various deficits have moderated and so the UPA Government’s policies have been on track. But the experience of the last five years is that the government has not been able to deliver on its claims. It has repeatedly claimed in the last three years that the price rise would moderate and the rate of growth would pick up; but this has not happened. Consequently, the credibility of the government has been low and the public has voted against the Congress in the recent Assembly elections. If the government’s performance was indeed good, why would it lose so comprehensively? If one ponders over this, it is clear that the vote on account neither delivers politically what the Congress-I needed nor economically what the country requires at this juncture—a lose-lose situation for all.

arunkumar1000@hotmail.com

Interrogating the Anti-Corruption Platform

Interrogating the Anti-Corruption Platform

Arun Kumar

Sukhamoy Chakrvarty Chair Professor, CESP, JNU

Published The Hindu, February 6, 2014.

AAP has announced its intention to fight against corrupt leaders from all parties in the coming national elections. So, anti corruption seems to be its main plank for the coming elections since it has not yet announced anything else. Its success in the recent Delhi state elections was on a largely anti-corruption plank. Even the promises of cheaper/free water and electricity to the electorate were based on ending corruption in the provision of these services. Beyond these and a few other issues, the vision of AAP regarding India has yet to emerge. Given the pent up anger of the electorate with inflation and corruption, a limited agenda was enough in Delhi. Would a purely anti-corruption plank also work at the national level for the same reason?

Other political parties have been forced to adopt an anti-corruption stance. Clearly, AAP has succeeded in changing the political discourse in the country. The rapid adoption of the Lokpal bill, promise of passing the other pending anti-corruption bills and the buzz about selecting clean candidates points in that direction.  

Corruption has become a key issue since it results in daily hardships for the aam admi – whether regarding employment, prices, education, drinking water, electricity, dealing with police, bureaucracy, judiciary and so on. The nation faces crucial problems both at the macro and the micro economic levels. Tackling these problems requires addressing the wider economic, political, social and institutional context and not just corruption. Another impression being created is that problems can be resolved by bureaucratic or political fiat?

To tackle corruption, its cause needs to be correctly identified. The basis of corruption is the growing black economy propelled by widespread illegality in a variety of economic activities and the disruption of the democratic institutions. It has grown from 4-5% of GDP in 1955-56 to the present more than 50% of GDP and as an offshoot, corruption has become rampant. Given its all pervasive character, the black economy has become `systematic and systemic’ and that is why, it has widespread macroeconomic, social, political and institutional implications. These cannot be tackled only through checking corruption.

The macroeconomic aspects of the black economy result in wider inefficiencies of the system. It leads to poor quality of goods and services and higher costs. It causes wastage so as to create shortages so that higher profits can be generated through speculation. It reduces the rate of growth of the economy much below its potential, leading to missed development. `Expenditures do not lead to outcomes’ and targets are not fulfilled in say, education. It leads to flight of capital so that a poor country faces a shortage of capital.

In India, businesses have formed a nexus with the politicians and the executive to generate black incomes. This triad has turned politics on its head. It manipulates policies to suit the favoured businessmen who makes extra profits and share it with the other two. The gains of this small group are at the expense of all others and this aggravates disparities. Representation has lost much of its meaning since the elections have largely thrown up those who take the vote of the people but after winning work for the vested interests and against the interest of the people they represent. Even the leaders of the most deprived sections have quickly turned corrupt after coming to power. No wonder people lost hope in the system’s capacity to deliver to them and became more and more sectarian and divided along caste, community and regional lines. Today, hope has revived and people are looking for new clean leaders.

Corruption is associated with the public sector while the private sector is portrayed as its victim. So, less of government is suggested for reducing corruption. Businesses support such a policy since it gets them greater freedom in the market which translates into a higher degree of monopoly, capacity to fix prices and boost profits. The flip side of such a policy is that the aam admi has to depend more on the markets. While this may be welcomed by those who gain from the markets, it is detrimental for the poor who are marginal to it, like, the women, the dalits and the muslims.

The markets often cannot cater to the basic needs of the poor (not just those below the poverty line) because of their low incomes relative to the prices. Today, 23 years after the largely market based policies were introduced after 1991, the marginalized face shortage of work, low wages because of massive under employment, reduced subsidies resulting in higher prices and increasing cost of education and health. Further, advertising is resulting in changing tastes and demand for newer products thus causing the poverty line to rise. There is the paradox of increasing poverty in spite of rising incomes.

 In brief, a business led anti-corruption agenda would benefit the aam admi incidentally; to the extent of reduction of waste. But, because of tilt of policies towards businesses, they would lose much more and in the net would be worse off in spite of reduction in corruption. For example, today most government schools provide indifferent education. If an anti-corruption regime privatizes these schools which will charge higher fees, the poor would not be able to afford them and would be worse off. Even the somewhat better off `middle class’ would lose since it also has limited purchasing power and confronts a situation similar to the poor. The issues of the marginals may get marginalized.

Why are businessmen in India who have gained through crony capitalism and pro business policies interested in an anti-corruption plank? They want to safeguard the massive amount of capital they have accumulated in the last two decades. They have rapidly invested their surpluses into land (say, SEZs), other natural resources like, mines, forests and spectrum and so on.

Since 2010, exposes of big scams threatens these investments. Movements have sprung up against large projects from POSCO to Kutch and Koodankulam to Haryana. So, businesses want to legitimize their gains and launder their image by distancing themselves from those who have been caught in the scams. Further, they want efficient capitalism to multiply their capital rapidly. Hence a section of businessmen support the anti-corruption movement. They also see an opportunity in the present anti-corruption mood of the public to legitimise capitalism by diverting attention to corruption in government - they do not want reformed capitalism or a welfare state. But, can there be efficient capitalism without tackling the black economy of which businessmen are the dominant part? So, the fight against corruption alone can only be a limited one.

A pro-business anti-corruption programme can only have a short run perspective. Over time, as it leads to greater inequity, slow down in the economy and social discontent, the rulers would have to turn authoritarian to quell the rising social and political discontent. What is the alternative?

Tackling the black economy through a pro Aam Admi programme would make government functional rather than minimal. It would lead to a positive sum game and be neither pro nor anti business. It would lead to an appropriate mix of state and market led development which would cater to the marginalized sections of society without promoting sectarianism. Tackling the black economy would also help overcome the deep  macroeconomic imbalances - current account deficit, fiscal deficit, inflation, slow growth, stagnating industry and so on.

Flight of capital would decline turning the current account deficit into a surplus. The fiscal deficit would turn into a fiscal surplus generating enough resources in the budget for improving social and physical infrastructure - education, power and so on. It would lead to reduction in costs (as over invoicing declines) and fall in inflation. As more direct taxes are collected, less of indirect taxes would be required and this would lead to lower prices. Also, as the fiscal deficit falls, the government borrowing would fall thereby reducing its interest burden, the largest single item of expenditure. Finally, as policies begin to work, inequity declines and the investment productivity rises, the rate of growth of the economy would rise. Thus tackling the black economy would be a long term and equitable solution. To check the growing black economy requires political will to cut the triad make institutions functional and promote movements for greater democratization.

There are then two paths for checking corruption. A short run limited micro-economic and ahistorical plank which would be a zero sum game that would marginalize the poor. The other would be a democratic path and positive sum game along which the black economy would be tackled and many of India’s macro and micro economic problems would be resolved.

arunkumar1000@hotmail.com

When the burden falls on the poor

When the burden falls on the poor

ARUN KUMAR.

CESP, SSS, JNU.

The Hindu, January 13, 2014.

Policies being pursued in India are based on the growth-at-any-cost model. The poor and the enviroment suffer while the corporates and organised sectors reap the benefits

The Aam Aadmi Party, having won the trust vote, is now in the saddle in Delhi. By announcing several measures to benefit Delhiites, it had already impacted the political discourse in the nation. The established political parties are trying to follow suit. Why did the previous Delhi government not take some of these steps given that the financial implications are not large while the benefits to the citizens are substantial?

The steps initiated by the Aam Aadmi Party in Delhi have come under severe attack on various grounds. First, that subsidies will increase with adverse fiscal implications. Second, that this would set in motion competitive politics of giving freebies adversely affecting the budgets of other State governments and the Centre. Third, that the benefits would mostly accrue to the middle classes as opposed to the really needy and the poor. Fourth, the steps were initiated when the government had not yet won the vote of confidence and, therefore, did not have the mandate to take such important and far-reaching decisions. Lastly, the tax payers will subsidise others and this is like robbing Peter to pay Paul. This last implies that the measures undertaken by the AAP will benefit some at the expense of others — a zero sum game. The question then is who is the aam aadmi and who will benefit from the steps initiated? A deeper analysis of the processes set in motion by the AAP can help clarify that.

Giving free water of up to 667 litres a day to a family will definitely involve increased subsidy. It is also correct that those who do not get piped water from Delhi Jal Board will not benefit from the announcement and steps would have to be taken to supply them water. The AAP’s contention is that both these are feasible given better governance of DJB, which would reduce wastage of water leading to increased availability of water and higher revenues for the board.

Further, given the surplus in the Delhi Budget, more tankers can be purchased soon and additional water pipelines installed in the coming years. Checking of the tanker mafia in Delhi which operated with the connivance of the officialdom and the politicians would help augment water resources of the DJB. Of course, nothing would change unless corruption is checked. This would be feasible if the Mohalla committees begin to function as proposed by the AAP.

Regarding the reduction in electricity tariffs for the consumption of the first 400 units per month, a subsidy will be borne till Delhi Electricity Regulatory Commission (if convinced) lowers the rates. But, the AAP will also check malpractices by the electricity companies which were yielding them undue profits at the expense of the citizens of Delhi. Earlier, some citizens and businesses were found to be stealing power, causing losses to Delhi Electric Supply Board, but after privatisation, it is the electricity companies who have been stealing from the citizens. It is well-known that regulation is hamstrung by the famous Averch-Johnson effect. It implies that the private regulated companies show higher capital and other expenditures to get a higher price from the regulator for the product/service they provide. The regulator does not have an independent source of determining the cost of production and depends on the private companies to supply them with data and this is manipulated to show higher costs. This is achieved by showing higher capital costs, higher overhead costs, and so on. Past examples of such manipulation are Enron and fertilizer subsidy.

Cross-subsidisation

How can profiteering by the private companies be checked? The accounts of the companies need to be checked by independent auditors and that is what the AAP hopes to do with the help of the CAG. But, what if the CAG, under political pressure, does not play ball? Can the private auditors be used? No, because they are usually in cahoots with the companies.

Thus, at the end of the day, lowering power tariffs may only be possible if the government is willing to increase subsidies. The same may be the case for water. Those who are well-off in society often pay for others on the principle of ‘Ability to Pay’ or ‘cross-subsidisation’. The issue is whether this is fair.

Subsidies are typically a result of economic processes that create economic hardships for those being subsidised. The poor who face under employment and low incomes need state support to afford even a minimal existence. Typically, the low incomes of the poor lead to the higher profits of the businesses and the high living standards of the well-off Indians. In this sense, cross-subsidisation of the poor by the well-off is a way of paying back what was due to the poor in terms of the basics of life.

So, who is Peter and who is Paul in India? As the issue is posed, it is implied that there is a zero sum game, that is, Paul gains at the expense of Peter. Can there not be a positive sum game in which both gain together? Policies being pursued in India for more than two decades have been based on the principle of ‘growth at any cost’ with all costs falling on the poor and the environment while the corporates and the organised sectors benefit. This has led to massive environmental degradation, displacement of the poor and increased disparities. Consequently, at a very low level of per capita income, India has one of the highest number of billionaires and the largest number of extremely poor in the world and has some of the most polluted rivers, air in the cities and habitats in the world.

The growth of the black economy has led to a rapid increase in corruption all around. The top three per cent of the income ladder benefit from this since the underground economy is concentrated in their hands. This worsens the disparity beyond what the official data reveals, leads to price rise, waste of resources and loss of production due to inefficiency.

The black economy also leads to expensive and poor quality services. Take the case of water supply in Delhi. The tanker mafia has corrupted the bureaucracy, the police and the politicians (the Triad). Often, the politician and the businessman are the same person. The Triad makes money at the expense of the citizens. They disrupt the water supply and allow wastage to take place. The loss of DJB and the citizens becomes the profit of the water mafia. Thus, checking the black economy will immediately increase water supply, lower the cost of water to the citizens and increase the profits of DJB. The same is the case with electricity or speculation in vegetable prices (traders prefer that vegetables rot so that the prices shoot up).

Thus, the issue is not robbing Peter to pay Paul but the returning of what was robbed by Peter from Paul. In other words, checking the growing black economy and corruption is a positive sum game for every citizen except the corrupt. This is what the AAP’s agenda is. The black economy is now over 50% of GDP and if brought into the white economy or checked, it would lead to a rise in the tax-GDP ratio by about 20 per cent. This would be adequate to finance the proposed subsidies nationally, lead to lowering of prices for all, result in higher profits for the honest due to increased production in the economy because of the efficiency gains and increased demand. As income generation becomes buoyant, most subsidies can be eliminated.

The issue is macro and not micro as the opponents make it out to be. In brief, the honest Paul and Peter would gain together while only the dishonest Peter would lose. It is the latter who is shedding crocodile tears at the actions of AAP.

arunkumar1000@hotmail.com

The Current Economic Scenario

The Current Economic Scenario 

Arun Kumar

CESP, SSS, JNU

Rediff.com on September 12, 2013 

http://www.rediff.com/business/slide-show/slide-show-1-interview-why-indias-economy-is-in-such-a-mess/20130912.htm

1.      The rupee has fallen dramatically over the last few weeks. Any one particular reason that you’d say is the reason for this fall.

 The most obvious one is that foreign investors and Indian businessmen have lost confidence in the economy. This has led to the expectations of a declining value of the Re. Since the currency markets are notoriously speculative, there is speculation on the decline in the value of the Re. Often expectations are self fulfilling in a speculative market and that is why the Re has been falling rapidly since May 2013. Over the last two years it has fallen from its peak value of around Rs.44 to the dollar.

 The consequence of these self fulfilling expectations is that there is withdrawal of funds from India by say, the FIIs and NRIs. They feel it is better to withdraw funds before the value of the Re declines any more. Further, the exporters are delaying bringing back the proceeds of their sales abroad so as to make more money and the importers are importing more immediately so that they can take advantage of the cheaper Re at this point of time. Finally, to take capital out, there is greater under invoicing of exports and over invoicing of imports. All this is resulting in an increase in the trade and the current account deficits in the BOP which then justifies the fall in the value of the Rupee.

2.  The RBI has tried to stem the fall, but in vain. Was the RBI right in seeking to defend the rupee or should we let market forces decide the rupee’s value?

 The RBI’s steps may be characterized as `too little too late’. It should have defended the Rupee much earlier rather than when it has fallen below Rs.60 to the dollar. The market forces in a speculative situation are destabilizing so there is no market determined value of the Re. When the Re fell from Rs.47 to below Rs.50 then only the RBI should have intervened. This would have prevented expectations of a further fall from building. The RBI has had a kitty of $280 billion dollars in its reserves. It is true that this is based on borrowings of $ 380 billion. However, early intervention would have required small amounts of release while now it would require massive releases to correct the situation.

The RBI has been trying inflation control while in India inflation is not strictly a monetary phenomenon. It should have lowered interest rates to help spur growth. Inflation control in India requires supply side responses and a political will to stop speculative activities and to check the growing black economy. Black liquidity rushes in to speculate so any tightening of money supply by the RBI is undone by the funds from the black economy.

3.      Could the RBI and the government have done anything to stem the fall? Will the recent move at tightening capital account help the rupee?

 RBI by itself cannot control the value of the Re. Both fiscal and monetary policy instruments have to be used. The government has correctly set into motion steps to address the trade and current account deficits in BOP by curbing the inflow of inessentials like, gold.

While it is true that smuggling of gold may revive but overall the demand for gold would moderate and the outflow of foreign exchange on this account would moderate. It needs to be remembered that the inflow of gold increased from 160 tons per annum in 1992 to the current level of about 900 to a 1000 tons after liberalization of the import of gold in 1992. This has led to a massive out flow of foreign exchange.

Capital account restrictions are important since they stem the outflow of capital and foreign exchange. However, the government’s steps are half hearted and leave many channels for the outflow to continue. It needs to be remembered that in the 1997 Contagion in the SE Asian Tiger economies only Malayasia emerged unscathed because it imposed capital account controls. The IMF was critical of Malayasia at that time but later praised it for the management of the economy.

The government also needs to lower the fiscal deficit in its budget by raising more resources and investing more on the Plan account (rather than cutting it). It has been lowering Plan expenditures in the last few years by a whopping Rs.1 lakh crores each year. This has resulted in lower demand in the economy and a slowing economy. In a period when the private corporate sector is not investing enough, the cut in the plan expenditures has resulted in a fall in the investment rate of the economy from its peak in 2007-08 and that has adversely affected growth in the economy.

More resources can be raised by lowering the `tax expenditures’ in the budget which are running at about Rs.5.5 lakh crores (See Receipts Budget). Further, a moderate dent on the black economy of 50% of GDP can raise the additional funds required for maintaining the Plan expenditures budgeted for.

Finally, the investment model adopted by India is based on crony capitalism (more so after 1991) and this has collapsed since 2008 when major scams were unearthed and the public started reacting. Since then the politicians and the bureaucracy has become wary. The businessmen have also suffered with cancellation of licenses so they too are wary. Further, the public has lost trust in big projects that lead to massive displacement while the rich and the politicians make money. Thus resistance has built up to all major projects, like, power plants, SEZs, steel plants and mining projects. All these have stalled and there are cases of withdrawal of projects like, Arcelor Mittal and POSCO.

There is a need for transparent and market based investment in which the public can have confidence and where these projects appear to be in the national interest and not just to fill the pockets of the rich and the powerful. Such a model of investment has not emerged and that is why investment is suffering in the country.

Unfortunately, given the political uncertainty due to the weakness of the present government and the impending state and national elections and the uncertainty of who will come to power, private investors are holding back investments. This is not likely to change any time soon.

4.      Where do you see the rupee vis-à-vis the dollar at the end of the year?

 There is no way to predict the value of the Re even a few months down the line. If the government can successfully reverse expectations, the Re can strengthen and go back to Rs.55 to the dollar but if not it could breach the Rs.70 mark. The latter appears more likely at present given the uncertainties and the lack of confidence in the economy.

5.      How will the rupee fall impact the economy? For example, petrol prices will go up, and this might push up inflation even as growth remains stagnant. Are we back to the “stagflation” days?

 The fall in the value of the Rupee will result in the prices of all goods with import content to rise in price. Immediately the price of energy (petroleum products and coal) would rise and since this is used in all production all prices would tend to rise. Electricity, petrol, diesel, gas prices will rise. Energy is required for transportation so all goods will rise in price due to higher transport costs. All electronics goods, automobiles, etc., with high import component will see a price rise. Internal tourism will be adversely affected because of its import intensive character but foreign visitors may increase in number with the weakening Rupee.

In India, growth is not stagnant but it is still at around 5% per annum which is better than what the IMF prediction for the world economy is. Thus, Indian economy’s rate of growth remains better than the world average and this cannot be called stagnation. The rate of growth will fall as inflation rate rises. Employment generation which is a big concern for India will fall further and lead to persistence of poverty and more crime amongst the unemployed youth.

Exports will do better over time as the prices of Indian goods decline and this would help the growth of some sectors like, software, call centres, textiles and leather goods. However, the rise in exports will not be able to compensate for the decline in internal demand due to inflation. Hencve the rate of growth would tend to fall unless other steps are taken.

6.      What do you think should be done on a priority basis to stem the rupee’s fall?

 Answered as part of Question 3.

7.      Moving to the general economy, how much of the blame for the economic downturn can be blamed on external factors, and how much with the current government’s ineptitude?

 We are facing major macro economic imbalances in the economy.

On the external front, the Current Account Deficit in BOP is also a result of the slow growth in the major world economies – USA, Eurozone, China and so on. That is why the growth rate in exports has fallen while imports continued to surge due to import of energy and gold (prices of both of which rose or remained high). Now with the improvement in growth in US and Euro sone while Indian economy is weakening, capital has begun to go out leading to a decline in the value of the Rupee. Finally, the fear of tapering off of the Quantitative Easing (QE) by the Federal Reserve has made many believe that days of easy money are numbered and capital flows to emerging markets are set to fall. This has created the expectation that the currencies of emerging markets will decline in value and that is what is happening.

On the internal front, the high rate of persisting inflation, high fiscal deficit (kept in control by cutting plan expenditures) and falling rate of growth (especially in industry) reflect deep macro imbalances.

The internal and external factors have dented the confidence in the Indian economy and led to credit rating agencies repeatedly threatening a downgrade. Even though the performance of these agencies was not creditable during the crisis starting 2007, their actions are still influential with investors.

Along with these factors one can add the `policy paralysis’ of the present government since 2009 due to the surfacing of the various scams. The government has been busy warding off pressures due to these exposes rather than setting new directions in policy. Now with elections round the corner, investors will wait and watch and the government will have to get more proactive in encouraging growth through its actions.

8.      You have written that the problems we face is because are following a “borrowed development model”? But many would argue that 22 years of liberalisation has helped India far more than 44 years of state control policies ever did?

 We borrowed a development model in 1947 and another one in 1991 – both have been based on the notion of western modernity and not what India needed. Both have been based on a top down approach and not a bottom up one.  Both have depended on trickle down to the poor. The post 1991 path has not increased growth rates as much as the pre 1991 path did. Our average rate of growth in the period between 1950 and 1980 jumped by a factor of 5 as compared to that in the 50 years before independence. After 1991, the rate of growth has barely increased by 50% over the average growth rate in the 1980s and that too over a few years between 2003 and 2008. We are now back to around 5% rate of growth.

The growth in the last two decades is based on the achievements of the earlier four decades. Also, the growth rate has accelerated due to structural changes where the services sector has become dominant and the slow growing agricultural sector has become marginal to the growth story. Further, the present path is leading to massive disparities since the growth is concentrated in a narrow section of the population. Finally, poverty is changing its characteristics so that in spite of increase in incomes of the poor, poverty is persisting in its changed forms.

We are pursuing a policy of `growth at any cost’ with all costs falling on the workers and the environment. The cost of a deteriorating environment is borne disproportionately by the poor who live in poor conditions. Studies show that the health cost of the poor have risen sharply so that their increased incomes cannot compensate for the increase in the cost of living for them.

The new policy paradigm which has led to increased consumption by the middle classes and the well off hides a massive rise in social and political instability in the country. This has its hidden costs. Further, consumerism is the means used by the ruling class to divert the attention of the people from the real problems faced by them. But rather than provide the solution it is creating additional problems due to the rising expectations amongst the youth which is bombarded with images of high consumption in TV ads, serials, films, etc. However, there is no way that these expectations can be fulfilled since the organized sector jobs paying well are only 6% of the total jobs. 96% of the 12 million children joining the work force every year will have to take up low paying jobs in the unorganized sectors and they cannot fulfil their expectations. This is leading to terrorism and crime all around.

9.      If the current development model is flawed, then what is the development model best suited for India?

One has to go for an indigenous path based on social justice and equity. This does not mean a closed economy. Development has to be from below as suggested by Gandhi. That is what the government also now wants when it talks of inclusive growth but it lacks the will to implement such a path. Its flagship programmes are mere safety devices to take care of the problems its policies are creating. The alternative path would target productive full employment and not just investment. It would be based on an appropriate mix of various levels of technologies. It would create conditions for decentralized urbanization and decentralized development with autonomy devolved from the Centre to the States to the local bodies. It would curb the black economy to release resources from the present unproductive sectors and channel them to productive activities. It would be based on protecting the environment and making everyone not only literate but also creative through high quality education to all. Such a path was spelt out in the alternative budget presented in 1994 which also showed `how to make the desirable feasible’.

arunkumar1000@hotmail.com.

A Macroeconomic View of the National Food Security Bill

A Macroeconomic View of the National Food Security Bill

Arun Kumar

CESP,SSS,JNU

Mainstream, Vol Li, No 37, August 31, 2013

The National Food Security Bill (NFSB) has been contentious. Economic arguments have been presented against it confusing the public. The rich farmers are worried that farm prices would fall because cheap food would find its way into the markets. Businessmen argue that the economy would further slow down with an increase in the burden on the Budget. The elite say that subsidies and inflation would rise sharply due to profligacy. Unfortunately, most of these arguments are based on a partial economic perspective which ignores the full impact of the economic processes that the scheme would set into motion.

There is legitimate concern about corruption, diversion of food and the problems associated with the implementation of the provisions of the Bill. No doubt, given the state of governance in large parts of the country, the full implementation of the provisions of the Bill would take many years. Given that the Congress party may lose politically by bringing in the scheme so close to the next general elections, those whose expectations would remain unfulfilled by the time the elections are held would be disappointed. The moot question is: should corruption be the reason for not implementing what may be a good policy? Should the allotment of spectrum or of coal mines be stopped because there has been corruption in these cases? Can the baby be thrown out with the bathwater?

The case for the NFSB is a macroeconomic one. The nation has the responsibility to feed its citizens. However, due to a lack of incomes and the choices sometimes made by the individuals because of the social pressures, many are unable to buy enough food for their family and that is why there is hunger and malnourishment. Thus, hunger is not an individual problem but has its roots in the country’s macroeconomics. For instance, it depends on the nature of employment generation, the distribution of incomes, investment policies, global factors in an increasingly open economy (including consumerism), production technology encouraged by policies, position of agriculture in the economy and the related issue of terms of trade between agriculture and the other sectors. None of these factors can be changed by individual efforts.

The government, through its policies, deter-mines these macroeconomic factors. Since the launch of the New Economic Policies in 1991, the problem of unemployment, distribution of incomes and so on has got aggravated and worsened the situation of the marginalised in society. Hence in spite of growth, hunger persists. The government is the only entity that can provide the correctives and ameliorate hunger. In this sense, the NFSB is only a corrective to the market-oriented policies currently being pursued and does not resolve the fundamental economic problem of lack of adequate incomes of the poor.

Those who would benefit from the cheap foodgrain provided under the NFSB will get an additional income since they will buy a given amount of food for less. This would leave some money for buying other goods and services including more protein and vegetables. This amount could be substantial since 50 per cent-60 per cent of the budget of the poor is spent on food. If it is assumed that 50 crore people were already benefiting from various State level schemes under which they were getting cheap food, an additional 30 crore people would get the cheaper food and buy not only more food but more of other items of consumption. This would help reduce poverty in the country.

In the present situation of a demand slow-down and a falling rate of economic growth, there would be a stimulus to the economy. This boost would be strong since little of the additional demand would leak out of the economy as happens with the additional incomes of the well-off. Further, there could be additional requirements of infrastructure for storage and distribution of the additional food and this would result in more investment and, therefore, spur growth.

The implication also would be that the rate of inflation for the poor would fall. The total consumption of food would rise leading to an increase in the free market price of foodgrains. That would hurt those not covered by the NFSB and for them the rate of inflation would rise. The lower middle classes would be hurt but the others with inflation indexation can adjust to it. However, the immediate rise in inflation would be small since the government already has huge stocks of foodgrains which, when released in the market, would moderate the price rise. As of March 1, the food stocks were 62.8 million tonnes and with the procurement in the new season these would have increased to above 80 million tonnes while the buffer stock norm for July 1 is only 27 million tonnes. Thus, there is a lot of cushion to keep prices in check. But, as the extra stocks above the statutory requirement get exhausted in a few years, the prices would rise. To check this, the government would have to pursue policies to encourage an increase in output rather than resort to fire-fighting later on.

The higher free market price would lead to a higher price for the farmers and this could lead to an increase in supply. This would also mean that the government would have to give a higher support price to the farmers to be able to procure additional amount for expanded distribution. This would further incentivise the farmers to produce more.

Some argue that the poor do not need more foodgrains but require other items of food. This is only partially correct. Foodgrain availability (proxy for consumption) in India peaked in 1991 at 510 gm per person per day and declined after that (in 2001 by 18 per cent). This has been attributed to a shift in the consumption pattern. However, whenever the monsoons have been bountiful and food prices have dropped, consumption has gone back to around 500 gm.

This suggests that the consumption pattern may have shifted some but a lot of people are unable to buy adequate amount of foodgrains when the prices rise. The well-off consume more of foodgrains indirectly through consumption of animal protein but their consumption is hardly sensitive to prices since they have enough income. Thus, the fall in availability of foodgrains when the prices rise is a reflection of the squeeze of the consumption of the poor. The NFSB would help the poor by making their consumption independent of inflation. The implication also is that the current high foodgrain stocks are not an indication of food self-sufficiency in the country but of inadequate purchasing power of the poor. Further, as the NFSB gets implemented, India may have to import foodgrains unless the production rises.

It is estimated that the subsidy bill on food would rise to more than Rs 1,24,000 crores (around one per cent of the GDP). The additional amount over and above what is being currently spent may be around Rs 35,000 crores. This is insignificant compared to the Rs 5.5 lakh crores of tax expenditures (a kind of subsidy) given to the well-off in society or the revenue loss of Rs 20 lakh crores due to the black economy. The question then is: who should be subsidised? The choice should clearly be in favour of the poor. There will be additional expenditures on storage and other infrastructure. But, the total requirement of storage could decline since foodgrains would be distributed rather than held in the open where they rot adding to the subsidy burden. The losses of the FCI should decline since the food distributed would get some revenue, even if small, as opposed to its complete write-off when it rots and correspondingly the subsidy element could fall.

The real problem would be corruption and identification and delivery to the additional families to be covered. That is why some suggest cash transfer using the UIDAI cards. Examples of Brazil and other countries are mentioned but the recent public demonstrations in Brazil point to the prevailing corruption there. It is not obvious that the UIDAI would be free of corruption. Ingenuity of the Indian elite has fostered corruption in whatever scheme is launched. There is much corruption in transfer of money through banks and post offices. Already corruption cases are surfacing with regard to fictitious cards, etc. even when the scheme is not yet operational. Further, cash transfer may not lead to expenditure on food but diversion to other wasteful expenditures. That danger exists even when cheap food is given but it would be less than with cash transfer.

It is unfortunate that the NFSB was initially brought through an Ordinance rather than being implemented after approval in Parliament. This deprived the scheme of a political consensus which would have helped its implementation. However the politics plays out, in macro-economic terms the NFSB is highly desirable and reflects the nation’s commitment to its citizens and that would help in nation building.

arunkumar1000@hotmail.com

[This is an enlarged version of the article on the subject in Hindustan Times on August 21, 2013. —A.K.]

Indian Economy and the Crisis of a Borrowed Development Strategy

Indian Economy and the Crisis of a Borrowed Development Strategy

Arun Kumar.

CESP,SSS,JNU.

Mainstream, Vol. Li, No 35, August 17, 2013 - Independence Day Special

Introduction: The Current Situation

The economic growth rate has been falling continuously while the consumer price inflation, current account deficit in the external sector and fiscal deficit in the Budget remain at high levels. The lack of confidence in the Indian economy is manifested by the sudden and sharp decline in the value of the rupee vis-a-vis the dollar in spite of the steps taken by the government and the Reserve Bank of India. The stock markets are also fluctuating wildly reflecting the uncertainty in the minds of the investors— both Indian and foreign. The policy-makers appear to be helpless.

The government has tried to talk the markets up but with little effect. The PM, Finance Minister, Deputy Chairman of the Planning Commission and Economic Advisor to the PM have all made pronouncements that the economic recovery is around the corner. These predictions over the last two years have been belied as the data in the Table shows. The rate of growth has fallen quarter after quarter since the fourth quarter of 2010-11.

It is true that the rate of growth is still good compared both to that of most other countries in the world or to the projections by the IMF (and others) of the expected rate of growth of the world economy. This growth is also comparable to India’s historical growth rate since independence. However, the current growth path is not comparable with that prior to 1991 because that was not creating inequality and unemployment which the current marginalising growth has been doing.

Post-1991, growth has been fuelled by the private corporate sector with highly capital intensive technology which does not generate much employment and also increases inequality in the economy. Most of the gains have been cornered by a few leaving little to trickle down to others. This is especially true for the marginalised sections like the unorganised sectors and especially the agricultural sector which still deploys more than half of the work force. The impact of the slowdown in the growth rate is that what trickles down becomes even less and those at the bottom of the pyramid suffer even more.

Coupled with the declining economic growth rate is a stubbornly high rate of inflation measured by consumer prices (roughly 10 per cent per annum). While the wholesale price index (WPI)-based inflation has moderated, it does not reflect the burden of price rise on the consumer. The WPI-based inflation rate does not reflect the rise in prices of services, like school fees or rents or telephone calls and so on. The consumer price index has only a few services; so it also under-represents inflation. The price rise results in shifting purchasing power from the consumers to businesses and thereby reducing the trickle-down and accentuating disparities.

Add to this the rising black income generation in the economy with corruption spreading and growing in scale. Since the black economy is concentrated in the hands of three per cent of the population, inequalities rise. By raising costs all round, the rate of inflation is raised. Further, the inefficiencies associated with the black economy result in wasteful use of capital and lower employment generation than is potentially possible. Through flight of capital it increases the shortage of capital and aggravates the current account deficit on the external sector and leads to BOP problems. Last but not the least, it results in the failure of policies so that targets are not achieved. It affects the collection of taxes and that raises the government’s budgetary deficits which leads to a cut-back in essential expenditures, say, on health and education.

In brief, under the New Economic Policies (NEP) with their pro-corporate sector bias and with a rising black economy, the combination of low rates of economic growth and persisting high inflation results in poor employment generation and mounting inequality. This is a dangerous mix since it can only lead to growing social tensions and political strife in the country 66 years after we achieved political independence.

Consumerism and Environmental Decline along the Path of Development

Sixty six years after independence, we have the largest number of poor people, illiterates and so on in the world. It is not that India has not made progress after independence but it is much less than what was expected. It is much less than what many other nations have achieved in a comparable time-span. India appears to be a case of many missed opportunities.

Further, at a very low level of consumption, India has one of the most polluted environments in the world. The pollution of water in the rivers and underground aquifers is phenomenal leading to increased incidence of various diseases. The pollution of air is also very high compared to even the developed countries and this is also resulting in health problems. The tragedy is that this is at a very low level of per capita consumption. What would happen when with growth consumption rises?

The causes of this high level of pollution are: a) the strategy of ‘growth at any cost’ without taking the environmental factors into account; b) the rampant corruption which leads to cutting corners in every economic activity with environ-mental protection getting the least priority; c) international division of labour which is resulting in polluting industries getting located in the developing countries; and d) rapid increase in consumerism.

Recycling of ships, plastic waste, lead acid, computer waste and so on is taking place in India. Dirty production of heavy chemicals and metals is also occurring here. Massive denudation of forests is the result of open cast mining, large projects for producing power, setting up of airports, expansion of road and rail networks and so on. It is said that development requires all this. Is this true? Not quite since environmental destruction lowers the welfare gains of material growth. It is like digging holes and filling them where there is activity without productivity. One needs to question the development model which postpones the costs to the future generations.

Underlying consumerism is a political strategy of the Indian ruling elite to divert the attention of the population from the present problems by involving them in consumerism. Those who can afford to consume more are happy at the availability of goods in the markets. Those who cannot afford can dream of one day buying these goods. There are those in the middle who aspire to lay their hands on the more exotic ones while buying some of the less exotic ones. Everyone is happy to live in the moment and the future be damned—a very short-term strategy and one that is inimical to building a strong nation and creates atomisation and alienation amongst the people.

The Internal and the External
 Economic Problems

The external environment for India’s economic development has deteriorated since the global crisis began in 2007. Due to the ongoing indiscriminate globalisation initiated in 1991, Indian markets have become more closely integrated with the world markets. The ratio of our exports and imports to the GDP have risen dramatically. Movements in the financial markets (like the share market) are now governed by those in the international markets. Commodity prices move in tandem with international prices like in the case of petroleum products and foodgrains. The result is that a crisis in the global markets leads to a crisis in the Indian economy.

Since the recovery from the recession starting 2007 was tepid in the OECD countries, the Indian economy also faltered soon after the recovery stalled there. The green shoots in the US economy in 2009-10 withered after 2010. Unemployment there has remained high and so has underemployment. Eurozone has gone back into recession and so has the British economy. The Japanese economy has been growing slowly and the Chinese economy has been slowing down recently. Thus, all the major economies of the world have been growing slowly or slowing down.

India’s exports have consequently suffered. (See Table) Imports have remained high because of the high prices of energy and India’s rising demand for energy. Further, due to uncertainty the demand for gold in India has remained high in a period when gold prices have risen globally. Thus, the gold and energy import bills have been high keeping the import bill high. This is the reason for the continuing high trade account and current account deficits. The problem has been aggravated by the high debt ($ 365 billion in September 2012) in relation to the reserves ($295 billion in January 2013) the country holds, and this prevents the RBI from intervening more aggressively. Further, the proportion of short-term debt in the total debt has increased since 2008 and this is the one that can evaporate quickly destabilising the position of the country’s foreign exchange reserves.

With the slowing down of the Indian economy, high rate of inflation and fiscal problems, the international community has been losing confidence in the Indian economy. Thus, the credit rating agencies have been threatening to lower India’s rating. This would lead to a higher cost of borrowing abroad and devaluation of the currency adding to the repayment burden. These would lead to an increase in the current account deficit. This sets up a vicious cycle of declining growth, higher current account deficit and lowered credit rating for India.

The rating agencies monitor the fiscal deficit of the country. So, the government has been trying to keep the fiscal deficit low. How is that being done? By cutting back on Plan expenditures (two years back by about Rs 1 lakh crore and in the last fiscal by more than that) and other essential expenditures. This is like chopping the nose to cure a cold. Cutbacks in a period of a slowing economy and demand shortage lead to further demand shortage and a further slowing down. Thus, the fiscal deficit target is being met by cutting back expenditures and not better management and in this sense the fiscal situation is out of control in spite of the fiscal deficit not rising dramatically. This strategy, which keeps the growth rate low, is bound to make the rating agencies lower India’s rating.

The savings and investment rate of the Indian economy fell after 2007. It has not recovered and, as the Table shows, it has fallen further in the previous two years. This is a cause of the slowdown in the economy. Both the private corporate sector and public sector companies are flush with funds but are not investing since the demand is limited. Thus, the government’s strategy of dealing with the problem has become the cause of the problem.

The current problem facing the economy is the external orientation of the policy-makers. They are sensitive to the wishes of the discredited rating agencies and multilateral agencies. This outward orientation of the policy-maker has marginalised the Indian population at large. No wonder, economic experts being appointed in the government are being imported from the US.

The External Orientation of the Indian Policy-makers: A Historical Perspective

India started in 1947 with a borrowed strategy of development which propagated the top-down approach. It was a mixed economy model based on the market economy in the West and the path of central planning from the Soviets. India’s ingenuity lay in combining the two paths but both were copied and based on trickle-down. This is called the Nehruvian strategy of development. The indigenous path suggested by Gandhi based on a bottom-up approach was rejected because the Indian elite wanted to quickly copy Western modernity and join the Western elite. Consequently, while a small elite did well, the rest had to plod along with the little that trickled down. This strategy paid lip-service to the poor and poverty removal. It met with crisis after crisis since the mid-1960s—failure of agriculture and consequent food insecurity, Naxalism, Emergency, rising strife, alienation and black economy and growing inefficiencies, repeated approach to the multi-lateral agencies for help/adjustment and support at high national cost and so on.

The path met its waterloo in 1991 and the strategy was changed from the mixed economy to the market economy with the state retreating strategically in favour of the private sector. The trickle-down declined further. This was characterised by the World Bank (earlier) as the ‘market friendly state intervention’. In the Indian context with its large black economy and high level of corruption this led to the strengthening of the ‘crony capitalism’ model of investment being followed in the country since independence. With the lowering of the priority to public sector the private sector became the dominant sector and it extracted huge concessions—like ownership of natural resources and cuts in taxes. The new strategy based on marketisation stopped paying even lip-service to the poor. We are embroiled in the numbers game of counting the poor without eliminating poverty which has constantly changed its face with growing consumerism and commercialisation of everything.

While the earlier strategy produced growth which was much faster than during the colonial period prior to 1947, it also kept the growing disparities in check (not that it reduced them). The post-1991 strategy does not even claim to reduce disparities because now growth is the key to development; distribution does not matter. The policy-makers recognise this factor and, therefore, have put into place policies to mitigate the ill-effects of the ongoing marginalising growth: MGNREGS to get some employment for the underemployed and for those who migrate from the poor areas to richer areas; mid-day meal scheme to get children into schools otherwise their parents will set them to work to supplement their family income; loan waiver scheme for farmers so that the indebted farmers can get relief and do not commit suicide in large numbers. Now there is the Food Security Bill which will hopefully provide more nutrition to the poor. Today 40 per cent of the women and children are malnourished and face disability and permanent poverty.

So, even after 66 years of independence, the government—dominated by the elite—remains insensitive to the problems of the people of India. It is continuing with the borrowed path of development which leads the nation from one crisis to the next without a solution—in fact, only non-solutions abound which result in the accumulation of more problems. To divert the attention of the people, the policy-makers have promoted consumerism in a big way leading to a huge environmental crisis and other problems. Thus, what the colonised mind of the Indian elite thinks is the solution has been the problem since independence and that is why the policy-makers currently appear to be helpless.

[Based on the author’s new book, The Indian Economy since Independence: Persisting Colonial Disruption, published by Vision Books, New Delhi]

The author is the Sukhamoy Chakravarty Chair Professor, Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi. He can be contacted at e-mail: arunkumar1000@hotmail.com /nuramarku@gmail.com