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Mainstream, Vol XLVII, No 9, February 14, 2009

Exposing the Fallacy in the Current Policy of Economic Development

Thursday 19 February 2009, by B P Mathur

Review Article

Alternative Economic Survey, India 2007-08: Decline of the Developmental State by Alternative Survey Group; Daanish Books, Delhi; 2008, pp. 319, Rs 295.

The global economy is today facing unprece-dented crisis with falling production and job losses. To prevent economic collapse the governments of the US and other developed countries are giving massive bail-out packages to their failing banks and financial institutions and virtually nationalising them. There has been a return to Keynesianism, even in the so-called capitalist countries, with the state taking an active role in stimulating economic activity and boosting demand. Marxism has once again come into fashion. Marx had predicted that the capitalist system is characterised by periodic booms and busts. Marx’s books are finding place in the best-sellers’ list and his home town, Trier, in Germany has become a place of renewed tourist interest. The state’s direct intervention in the economy is in direct opposition to the ruling economic philosophy of the last three decades, based on the ideology of free markets, deregulation, liberalisation, privatisation and globalisation with the state exercising minimal interference in economic activities. This philosophy derived its inspiration from what is known as the Chicago School with Milton Friedman as its chief protagonist, and was powerfully advocated by the World Bank, IMF and WTO and given practical shape by Ronald Reagan in the USA and Margaret Thatcher in the UK in the 1980s when they came to head their respective governments. The current global economic meltdown has exposed the hollowness of the philosophy of free and unregulated markets.

In such a situation where does the Indian economy stand? Does the economic policy we currently follow help in achieving equitable economic and social development? Have we been able to make a dent on the massive problem of poverty, unemployment and social deprivation that large sections of people in the country face? The Economic Survey released by the government at the time of presentation of the annual Budget presents a rosy and one sided picture of the economy and makes us believe that things are hunky-dory. The reality on the ground is very much different. The Alternative Economic Survey, India 2007-08 (AES) is a brave and painstaking attempt by a team of distinguished economists led by Kamal Nayan Kabra and supported by Arun Kumar, V. Upadhayay, Jaya Mehta, S.P. Singh and many others. The Survey makes an objective analysis of the real state of affairs of the Indian economy. Brought out every year for more than a decade, it keeps alive the spirit of enquiry necessary for the progress and growth of any society.

The AES points out that the current economic policy of encouraging free operation of the market forces is leading to Social Darwinism. The benefit of growth is being cornered by a small privileged group. The government has done very little to tackle the problem of burgeoning inflation, growing hunger, agrarian crisis, falling industrial output and unemployment; as a result India is becoming a dangerous social cauldron. The government‘s policies have favoured big capital, both national and international, which is largely interested in areas of high profit such as retailing and housing, in total disregard for social and ecological concerns. The state has become partisan, favouring privileged groups, and cannot lay claim to be called a development state, interested in the welfare of the people.


The Survey highlights the problem facing the agriculture sector. The share of agriculture, which was 36.4 per cent of the GDP in 1982-83, declined to 18.4 per cent in 2006-07, although it continues to provide employment to 52 per cent of the work-force, indicating the skewed nature of economic growth and the magnitude of the rural-urban divide. There is an acute agrarian distress due to agriculture becoming an un-remunerative occupation, largely because of escalating costs of inputs, whose most visible manifestation is the tragic suicide of farmers across the country. There has been a deceleration in the rate of growth of foodgrains production since 1990. During 1989-90 to 1999-2000 foodgrains production declined to 1.92 per cent per annum as compared to 3.54 per cent per annum during the 1980s. While the population grew by 1.9 per cent during 1990-2007, foodgrains production grew only by 1.2 per cent, resulting in decline in per capita cereal consumption. Shortfall in production led to import of wheat at an exorbitant price—almost one-and-a-half to two times of the domestic procurement price (5.5 million tonnes of imports in 2006-07 and 1.8 million tonnes in 2007-08). The government‘s policy of increasing agricultural productivity has been limited to giving input subsidy and the granting of MSP. Very little has been done to enhance public investment in agricultural infrastructure such as irrigation, power, R&D, post-harvest handling and processing. There is a huge bias against agriculture as people somehow believe that prices of food products should be kept low, without realising its deleterious effect on the farming community. The Nobel Prize winner economist, Theodore Schultz, had pointed out that production has suffered in many developing countries as they deliberately under-price agricultural products and have by political means created an indentured agriculture to supply cheap food for the urban population. Agriculture somehow does not have a political lobby and every interest group is interested in extracting maximum ‘surplus’ out of it; as a result we have not been able to make a dent on the problem of poverty in the country with more than 60 per cent of people still mired in it and eking out their livelihood.

Industry and Corporate Sector

The industrial sector‘s share in the economy is 19 per cent as compared to 63 per cent for the services sector and 18 per cent for agriculture. During the last decade large firms in manufacturing sectors have grown larger and become more capital intensive without providing any growth in employment. There has been a rapid growth of corporate profit during the last five years, but owners have been appropriating much of it for themselves without sharing it with the employees —the profit has been almost double the value of wages and salaries paid to the employees. Another interesting feature in the corporate sector is the phenomenon of Merger and Acquisition, which leads to concentration of wealth, a large proportion of which belong to outbound cross-border deals—Indian firms making overseas acquisitions. The corporate sector has powerful lobbies and can dictate government policies. It is under the pressure of the corporate sector that the government has initiated the policy of SEZs under which prime agricultural land has been acquired at throwaway prices, depriving the livelihood of hundreds of farm families, and SEZs are becoming islands of corporate sovereign entities.

Celebrated economist J.K. Gailbraith in his books, The New Industrial Estate and The Economics of the Innocent Fraud, elucidates how powerful corporations are able to manipulate the needs and wants of the people, determine the price at which a product is to be sold by creating a monopolistic or oligopolistic market situation, and maximise their profit. He also points out how through lobbying powerful corporations are able to influence and shape the government’s policies. The chiefs and top managements of some large corporations in the US have siphoned off huge money as bonus and compensation, even when the companies were facing financial crisis. The present economic collapse in America is largely attributed to corporate greed. The newly-elected US President, Barack Obama, expressed dismay that in 2008, the Wall Street gave a bonus of $ 20 billion to the managers of financial companies in New York while the companies were facing bankruptcy and being bailed out by public money.

India, with abundant labour and shortage of capital, needs to realise the great potential of micro and small enterprises ( MSEs) in securing equitable industrial development. Presently MSEs contribute 40 per cent of the country’s manufacturing output and 34 per cent of exports and employ about three crore persons in rural and urban areas. A Micro, Small and Medium Enterprises Development Act was passed in 2006 giving the legal framework for recognising these enterprises in manufacturing and services. In an era when MSEs face strong competition, the government’s policies should provide them strong support so that they enhance their technological capabilities and improve their product and service quality.

The Survey critically examines several aspects of the economy such as stock markets, financial sector reform, credit allocation, food security, and inflation and its impact on the common man. The Survey also dwells upon the promise and perversities of the National Rural Development Guarantee Programme, the labour market and employment scene, the deterioration of the health services and the dominance of private players in higher education.

Grim Economic Scenario

The AES questions the logic of the Fiscal Responsibility and Budget Management (FRBM) Act on the ground that it puts unnecessary restriction on public spending. It is difficult to agree with this view. The FRMB Act is a very sensible piece of legislation as it attempts to rein in wasteful public expenditure, bring fiscal prudence and support a macro-economic balance. For many years in the past the government has been borrowing money beyond the prudent level and even for revenue expenditure, imposing an iniquitous burden on the future generations who have to pay for the current profligacy. Unfortunately the government has been doing accounting jugglery to achieve the FRMB targets and fixed a target of fiscal deficit at 2.5 per cent of the GDP for 2008-09. According to the latest official estimates, the fiscal deficit of the Central Government will be of the order of eight per cent of the GDP, if we take into account off-budgetary items, Supplementary Grants and lower tax collection. Add to this the fiscal deficit of the States which is of the order of 3.5 to four per cent, and one finds that the economy is heading towards a disastrous and unsustainable deficit of 12 per cent of the GDP.

The position of the external sector has been equally alarming. For many years India has been incurring huge trade deficits and exports have been able to finance only about 70 to 80 per cent of the import bill. During 2007-08 while exports were of the order of $ 158 billion, imports were $ 248 billion resulting in a trade deficit of $ 90 billion and thus exports could finance only 64 per cent of imports (in 2006-07, exports were $127 billion and imports $192 billion, with a trade deficit of $ 65 billion). It is thanks to software earnings and NRI remittances that India has been enjoying a comfortable balance of payments position (software earnings $ 37 billion and NRI remittance $ 41 billion in 2007-08; while in 2006-07, software earnings were $ 31 billion and NRI remittances $ 28 billion). The current account deficit was 1.5 per cent in 2007-08 but may touch three per cent in the current year. The software earnings and NRI remittances are a direct result of globalisation process—globalisation does have its virtues!

Like the rest of the world, the Indian economy today is on a downward slide. While official circles estimate that the economy may grow at seven per cent during the current year, realistic assessment places growth at no more than four to five per cent. The industrial sector is facing recession with job losses—it is estimated that around five lakh jobs may be lost this year. The stock market has crashed, losing 60 per cent of its value. Foreign portfolio investors are shy to come, putting pressure on the rupee, which has lost some 20 per cent of its value against the dollar. The overall economic scenario is grim as the contagion of global economic crisis has hit India.

Pragmatism in Policy

Policy-makers all over the world are groping in the dark as to how to find a solution to the current crisis and what is the best economic model to build a stable economy. It needs to be remembered that there is nothing like a pure capitalist or socialist path of economic development. Capitalism with its philosophy of free and unregulated markets leads to concentration of wealth in the hands of a few causing widespread social disparity. It also encourages individual greed and avarice. On the other hand socialism, in its practical operation, implies control over means of production and distribution by the state, though the philosophy of socialism, when originally postulated, had its roots in the doctrine of equality and liberalism. The economists for a long time suffered from the illusion that the state acts as a platonic guardian of the people. They forgot that it is the politician and the bureaucrat who control the machinery of the state and their main aim is to exercise power and authority with scant regard to people’s welfare. What we need today is a healthy and judicious mix of the free market and socialist ideology to have the ‘right development policy’ and avoid becoming victims of a doctrinaire ideology. It is hard-core pragmatism which should determine our economic policy. We therefore need to design policy initiatives which genuinely take care of the welfare of the vast majority of the people living in this country and give them a dignified and respectable living.

The chief merit of the Alternative Economic Survey is that it questions the conventional wisdom on economic growth and raises basic issues about its direction, quality and content. The authors of the Survey deserve compliments for pointing out the fallacy in the current policy of economic development as it has obviously failed to make a dent on any of the fundamental problems which afflict the economy. n

B.P. Mathur is a former Deputy Comptroller and Auditor General and Director, National Institute of Financial Management. He holds Ph.D and D.Litt from the University of Allahabad and is the author of several books on economic, finance and governance related issues. He is currently engaged as a spiritual seeker, author and social activist.

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