India's Economic Challenges: The View From The Other Side

One man's progress is another's problem. India's economic growth has been impressive and will probably continue to be for the foreseeable future.

However, the litany of challenges is long and well-known - rampant corruption, underdeveloped infrastructure, nationalistic state and local governments, political and social unrest, among others. Western corporations exploring the Indian market have been put off by the chaotic political structure, lack of centralized control and fear that their investments and IP may be stolen with the full support of the government and the courts.

In the following essay from the Pragoti blog, it becomes apparent that this perspective may not be isolated. The sense of grievance and victimhood which permeates the piece is apparent, as is the sense that this rises to the level of a political manifesto for many, if not all:

"The media and the official economists are going gaga over the high growth rate achieved in the Indian economy in the last year. They are claiming that India has withstood the economic crisis; the growth rate has reached the pre-crisis level and India has reached a path of sustained high growth. This rosy picture has several black marks and exposes the vital flaws in the Indian economic scenario. This article attempts to expose the nature of these flaws in the Indian economic system and locates the Union Budget 2011-12 in this context.

Macroeconomic Overview
The high growth rate that has been achieved in the Indian economy has not translated itself into development for all sections of the population. Rather, this growth process itself, being led by the corporate sector and the rich, is essentially anti-egalitarian. That is why in India we have a situation where the numbers of billionaires as well as the number of malnourished children are one of the highest in the world. The issue that the policy makers are facing today is whether they want to perpetuate this unequal growth process or usher in a more egalitarian growth trajectory for the country. The Budget 2011-12 is categorical that the government is committed to the former. Let us see how.

Since the current growth process in the Indian economy is essentially one led by the corporate sector, (within a world dominated by finance capital), to continue this growth process the government has to continually woo this sector for undertaking investment in the economy. This takes the form of providing the corporate sector with massive tax concessions. In the year 2010-11, more than Rs 88000 crore was provided as tax concessions to the corporate sector only. Secondly, it is not only enough that these tax concessions are provided to the corporates. Additionally, the government has to show with acts and deeds that they are ready to hand over public assets to the private sector for ensuring ‘investor confidence’. Therefore in this budget, a target of Rs 40000 crore has been set for disinvestment of public sector companies. Thirdly, finance capital always abhors government intervention in the market, which is detrimental to its own benefit. Therefore, to ascertain the confidence of finance capital, the government has to proclaim that the fiscal deficit will be within certain limits and the government will not increase its borrowing from the market. Both of these have been proposed in this year’s budget. Fourthly, the government also has to show to these investors that the government is putting a leash on its investments. As a result in this year’s budget we find that the total expenditure of the government has been reduced from 15.4% of GDP (2010-11) to 14% of GDP in 2011-12.

The problem is that such brazen pro-corporate policies cannot be implemented without facing public outrage. Therefore, it is left to the government economists to theorize why such steps are necessary for the benefit of the poor in the country. In the process of doing so, the economists ask the people to rely blindly on the market. The Economic Survey is producing an additional chapter over the last two years to argue why the market is the best guide towards pro-poor policy making in India. It is argued that the state should only be an ‘enabling state’ where it will only enable the market to function in an efficient manner. It is taught to the public that India is slowly achieving full-capacity output (see Economic Survey page 21). Since we are on the verge of full-capacity output, any increase in government borrowing or expenditure will lead to increase in inflation or interest rates.

Such arguments dished to the people in the garb of high economic theory does not reveal to the people that markets are susceptible to major crises (as happened during the recent financial crisis) and that free market capitalism necessarily gives rise to inequality. A simple statistics can reveal this point. The share of agriculture in GDP has now reduced to 14.2%. However even now, around 67% of men and 84% of women are employed in this sector in rural areas (NSSO Report 2007-08). In other words, the growth process of the economy has not been successful in moving out people from agriculture to other activities and giving them meaningful employment. Whatever growth is taking place in industry and services in the country are not getting translated to adequate number of jobs. As a result the unemployment rate remains at a level of 8%. (NSSO Report 2007-08) What is necessary to uplift the conditions of the poor and bridge the inequality existing in the economy is to go for active government policy aimed at redistribution of wealth and income. This entails higher taxes on corporates and the rich, high government expenditure etc, which are vehemently opposed by finance capital and the big business in India. The government representing their class interests acts according to their benefit.

Food, Inflation and Agriculture
The Economic Survey 2010-11 says that continued high food inflation is a concern facing the Indian economy and the policy makers. To ascertain the causes of the high inflation, the Economic Survey points to two factors viz. high domestic demand and higher global prices on account of the global recovery. Elaborating on these issues the Survey points out that there has been monetary easing in the advanced countries, because of which there exists a higher money supply in the world economy which are driving up the prices. This is however incorrect. The fact of the matter is that the advanced economies are still in the process of recovering with high unemployment and low growth. Any monetary easing on their part should not lead to inflation because of the existence of unutilized capacity in the economy. The problem with global food inflation is that there has been a systematic decline in the global food production. This year, bad weather conditions in various countries have added to this already delicate supply situation giving rise to a global inflation of food articles. Be that as it may, the world food prices will affect Indian farmers and consumers only when we expose them to such global fluctuations in the world prices by opening up the economy. That is precisely what the policy makers have been doing over the last two decades. Now to blame the rising global food prices for inflation at home is rather ironical.

If we look at the domestic factors driving food inflation, the Economic Survey points out that rise in demand due to schemes like the NREGA may be a contributing factor. This is however totally unconvincing. There is a table given in the Economic Survey, (page 7) which shows that the growth rate of consumption of food has declined from 6.4% in 2007-08 to only 0.5% in 2009-10. So the demand pull on food is actually declining according to the Economic Survey only. If food inflation is happening even then, it is surely a result of supply factors. The most obvious point is that there has been a slow-down in agriculture over the years. While everybody seems to be celebrating the 5.4% growth rate in agriculture in 2010-11, it needs to be pointed out that this growth is on the basis of a low base. For example, the food-grain production in the country was 234.5 million tonnes in 2008-09 which declined to 218.1 million tonnes in 2009-10 and subsequently increased to 232.1 million tonnes in 2010-11 (Economic Survey, page-2). In other words, the food-grain production this year has not reached the previous peak output yet. To have any sense of celebration on the achievement in agriculture is therefore quite misplaced.

Budget Provisions on these Issues
What are the steps that have been taken in the budget to deal with the situation with respect to the above mentioned issues? The answer to this question is basically nothing. If the government was at all serious about improving the conditions in the agriculture sector, it would have increased to a significant extent the plan outlay on agriculture. Rather, what it has done is that it has increased such allocation by only around Rs 400 crore or by 2.65%, which is basically a reduction of such expenditure in real terms. Moreover, it is shocking that the government has reduced the allocation for the Ministry of Agriculture by around 6.5%.

The government has reduced the food subsidy in absolute terms by Rs 27 crore. Moreover, the government has withdrawn Rs 15000 crore subsidies for petroleum products and around Rs 5000 crore for fertilizers. At the same time the government has refused to reduce the excise duties on petroleum products.

The economic philosophy behind such acts is very clear. Suppose there exists an inflationary situation in the economy. This can be tackled in two alternative ways. One is to augment the supply and second is to cut demand. Clearly, the government is resorting to the second option of cutting the demand of the poor people by reducing expenditures, which can ultimately lead to a decrease in the inflation rate in the economy. Such anti-people stance on the part of the UPA Government only exposes their very little concern for the aam admi in the country.

Financial Sector Liberalization
All over the world, a vigorous debate is taking place on the issue of financial liberalization in the aftermath of the global crisis. It is being repeatedly pointed out by heterodox economists that financial liberalization increases the fragility of the financial architecture of an economy and reduces the effectiveness of the regulatory framework and eventually leads to a crisis. This was clearly evident in the global crisis where the entire financial architecture of the world was on the verge of collapse. At that time, our Prime Minister celebrated the resilience of the Indian economy and attributed such resilience to the relative insulation of our financial sector from global financial flows. But in this year’s budget, the government has announced a series of financial sector reforms, starting from opening up the Mutual Funds for FII investment and increasing the FDI limit for corporate bonds and infrastructure. Moreover, the Finance Minister pointed towards major reforms in the insurance, pension funds and the banking sector, aimed at more opening up of these sectors for FDI.

These policies are to the detriment of the interests of the majority of the people in the country. Such financial sector liberalization will only increase our vulnerability to the crisis of the advanced capitalist countries. However, the government’s economic philosophy does not give it any other choice. This is because the government has decided that it will not indulge in public investment for generating growth in the economy. Therefore, the private sector has to be relied upon. As has been already argued in order to maintain the confidence of global and domestic corporates, the government has to continuously provide sops to them. In other words, unless the overall economic trajectory of the government changes, such anti-people reforms are bound to increase in the coming days.

External Sector
India’s situation in the external sector is also a matter of worry. The current account balance has been in the negative for the last 5 years, but it is now reaching 3.5% of GDP, which is very high. This rise in the current account deficit has been due to a moderate slowdown in the growth rate of exports but more importantly as a result of an increase in the growth rate of imports. An increase in imports is a natural corollary of a growing economy. But the point is to increase exports to meet the import bill. However, the world economy, particularly the advanced countries, is still facing a slowdown of growth. As a result, in the near future, there is little prospect for Indian exports to increase drastically. On the other hand, as a result of the unrest in the Middle East the prices of Crude Oil in the international market have crossed $100. This will impose an additional import bill for India and therefore increase the current account deficit. The increase in global oil prices also has its ramifications in India, where the prices of petroleum products will rise, adding to an already inflationary situation. Now, if the relative inflation in India, is higher than other countries then the competitiveness of the Indian commodities will get eroded (even at a constant exchange rate) and result in a decline in the exports. In short, the current account deficit in India is showing signs of not improving in the near future.

Added to this problem of current account deficit, there also exists the problem of short term capital flows into India. Since the advanced capitalist countries are still in a crisis, global finance in search of more profits has found their destinations in the developing countries like India and China. In 2009-10, there has been a huge surge in portfolio flow into the Indian economy. Such capital flows have the problem of appreciating the currency as well as fuelling an asset price bubble in the domestic economy. Both these issues need to be tackled. An appreciation of the Indian Rupee will adversely affect the exports while an asset price bubble will only result in a crash and a concomitant financial crisis. It is therefore imperative that the India takes care of these problematic developments in the external sector.

The Budget announcements this year has not given any direction in this regard. Rather than guard against such short term capital flows, the Finance Minister has given a recipe for even more financial deregulation. Moreover, the Government without taking any steps on oil prices and decreasing oil subsidies wishes to pass on the burden to the common people. This will only cause more miseries for them.

Conclusion
The Budget presented this year by the UPA Government has been an exercise, where the UPA has given up all pretensions of working for the aam admi and has gone all out to woo the corporate sector without any concern for the problems of the people. The Budget is a reassurance to the corporate sector that the Government remains committed to its core agenda of neo-liberalism.