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Mainstream, VOL L, No 20, May 5, 2012

Indian Economy: A Rocking Horse Galloping Forward

Sunday 13 May 2012, by Kobad Ghandy

[This is the first of a four-part article on the current state of the Indian economy by Kobad Ghandy. The author is a Marxist/Maoist thinker, incarcerated in Tihar Jail; he has written two books: one on the Indian economy (Globalisation: Attack on India’s Sovereignty, 2004) and the other on the world economy (Capitalism in Coma, 2009).]

In mid-September last year, the Union Cabinet approved the Approach Paper to the Twelfth Five-Year Plan. On March 15 this year, the Finance Minister presented the Budget for the year 2012-13. Both reflect good intentions, though unfortunately that does not seem to be displayed in actual Plan policy or in budgetary implementation.

The slogan coined for the Twelfth Plan was: ’Faster, Sustainable and More Inclusive Growth’. In his Budget speech, the Finance Minister stated that a principal objective of the Budget was “to focus on domestic demand-driven growth for recovery”. Whether one says “inclusive growth” or “domestic demand-driven growth”, both mean the same thing—to raise the purchasing power of the people to faster industrial dynamism, thereby enhancing overall growth.

Such a policy, if really implemented, would result in a spiral of ever-increasing growth, determined by domestic factors and not by international support. Greater industrial activity means more employment, and more employment means further increased purchasing power .... and so on, the spiral of growth and development continues upwards.

The concept is perfect, the flaw lies in its implementation. The policies implemented so far unfortunately are not in accordance with the stated intention. These have led to structural distortions. This has created a warped economy, rising and falling dependent largely on foreign transfusions.

In the first part of this four-part article, I will present some of the structural deformities, as also an overview of the present situation. In the following parts, I will analyse in more detail the various sectors—financial, industrial, agricultural etc.—and then the nature of the existing market before finally concluding.
The first and major structural deformity: while agriculture accounts for a mere 14 per cent of our GDP (Gross Domestic Product, that is, the value of all the goods and services produced in our country in one year), it supports over 60 per cent of our population; on the other hand, while the service sector accounts for over 60 per cent of the GDP, it supports barely five per cent of the population. Even manufacturing is stagnating at under 20 per cent of the GDP. In developed countries, though the service sector is also large, there they support a proportional part of the population. But, in a developing country like India, vibrant growth could be fostered only with a dynamic industrial/manufacturing sector, which could absorb the population displaced by agriculture. But here, manufacturing and local entrepreneurship is being strangulated due to various factors, and the population displaced from agriculture becomes a floating mass of sami-starved people.
Second structural deformity: increasing dependence on international trade, further crippling the domestic market. Foreign trade has leapt from 37 per cent of the GDP in 2004-05 to 53 per cent of the GDP today. (Economic Survey 2011-12) A flood of imports of cheap commodities drowns indigenous production, making many an industry export-dependent. Why, even the government promotes imports (rather than local production), as in defence. For example, the foreign Tatra heavy-duty trucks were being imported at over double the cost of what could have been manufactured at the Jabalpur plant. Not only were imported trucks said to be sub-standard, and the taxpayers’ money wasted, but such a policy helps generate job in the West rather than India. No wonder the West is elated by the huge defence orders.

The third structural deformity: the bulk of the population barely comes within the market mechanism itself. With 77 per cent of our people, or 80 crores of them, living on a mere Rs 20 per day and another 10 per cent hovering just above that, what market could these people possibly create? Though policy-makers seek to squeeze out a market even from these decrepit people—courtesy C.S. Prahlad’s ‘Bottom of the Pyramid’—even then thair capacity is limited. All that happans is that big business squeezes out local production of basic necessities, adding to the unemployment. It is basically the top 10 per cent, and more particularly the top one per cent, that act as the major domestic market for industrial goods.

And the fourth major structural deformity: it is the systemic siphoning off of vast amounts of wealth from the economy through the black market (estimated at 50 per cent of the GDP) and abroad by varied means. Both act to restrict revenue collection and also prevent capital accumulation within the country.

IT is then these four major structural deformities within our economy which negate the stated good intentions mentioned in the Plan policy and budgetary expectations. And it is these that have brought the economy to the brink of a precipice, notwithstanding the routine statements of ‘sound fundamentals’ being made by the media. Let us now make a brief overview of where we stand today.
First, the rate of economic growth has fallen from a peak of 9.5 per cent in 2005-06 to 6.9 per cent in 2011-12, and is expected to fall even further in the current year to 6.1 per cent or less. The Index of Industrial Production (IIA) has been continuously falling in the last financial year, the worst being in the capital goods sector which has been baving a negative growth of over 15 per cent. Many key sectors, like power, telecom, aviation etc., are in a state of severe crisis.
Then, the Government is on the verge of a Balance of Payments (BoP) crisis, much similar to what we faced in 1990-91, when our gold reserves had to be mortgaged. In that year the Current Account Deficit (CAD, that is, imports exceeding exports and foreign remissions) peaked at three per cent of the GDP, while in the financial year just over it has sky-rocketed to 3.6 per cent (it had dropped to 0.6 per cent of the GDP in 2000-01). At that time our foreign exchange reserves had also been totally depleted, leading to panic. Now, though it stands at about $ 300 billion, things are not as comfortable as they seem on the surface—the external debt by end-December 2011 was $ 335 billion (with about $ 120 billion having to be repaid by June 2012) and the trade deficit last financial year was $ 200 billion. Not only this, repayment amounts and value of imports have jumped due to the drastic fall in the value of the rupee—a de facto devaluation of 13 per cent since July 2011.
Then again, many spheres of the economy are in a state of semi-bankruptcy. The bank NPAs (non-performing assets—a euphemism for bad debts) have sky-rocketed last year, needing huge infusions of government funds to bail them out. In addition, in 2011-12 industry was badly bit with 389 companies baving bad loans amounting to Rs 2 lakh crores, seeking bail-outs. So, both finance and industry are in dire straits.

If we turn to the government’s finances, the situation is no better. Tax revenues and domestic savings are dropping, while the fiscal deficit and public debt are rising. Tax revenue as a percentage of the total expenditure has dropped from 60 per cent in 2006-07 to 46 per cent in 2011-12. Gross Domestic Savings have dropped from 37 per cent of the GDP in 2007-08 to 32 per cent in 2010-11. The fiscal deficit of the Centre reached 5.9 per cent of the GDP in the last financial year, against a budgeted figure of 4.5 per cent. As a result the government’s debt has drastically increased from Rs 1.3 lakh crores in 2007-08 to Rs 4.1 lakh crores in 2011-12. The per capita debt in the same period increased from Rs 23,287 to Rs 36,888. Such spiralling debts entail huge interest payments, sucking away much-needed funds for rural development and people’s welfare.

Finally, if we turn to agriculture, the situation appears as bleak. The growth in foodgrain production has dropped from 3.1 per cent average in the decade of the 1980s to 1.1 per cent in the 1990s and a mere one per cent in the 2001-10 period. As a result, the per capita availability of foodgrains has dropped drastically from 510 grams daily in 1990-91 to 440 grams daily in the 2009-10 period. The viability of agriculture is also being affected by the rise in the cost of inputs and no commensurate rise in yields or market value.

Then, is there no silver-lining in the Indian economy? Of course, there is—rising stock exchange indices and large inflows of foreign capital! True, FIIs (Foreign Institutional Investments) in the first three months of this year grew astronomically; but that was only after the Finance Minister announced a series of concessions demanded by them. And as far as the rise in the stock indices are concerned, these are not due to a buoyant economy, but only due to the large FII inflows. The government desperately needs to sustain these inflows, to (i) sustain the stock prices, (ii) prevent the rupee from crashing further, and (iii) most importantly, prevent a BoP crisis. So, the government is bound to bow further to foreign dictates, caught as it is in its web.

But, such dependence is fraught with great dangers, given the high volatility in the international economy. In fact it would be good for the government to take note of what the President of the CII (a top body of business) had to say at a conference held on March 24, 2012. He had said:

Throughout the 20th century, resources and commodity prices had declined in real terms which gave a huge boost to growth. The global GDP grew 20 times. During the past 10 years, things have changed unpredictably unlike the past centuries. The era of resource-based growth, which was the result of declining commodity prices, was now over; huge volatility is the new phenomenon.... Higher prices and scarcity of commodities have started haunting the globe. It is going to be a different kind of world from what we have seen. It would witness not only imbalance but much more volatility.

And these are the words of no Leftist, but the chief of the Confederation of Indian Industry. One needs to tread carefully while talking of economic reforms in such times. One could learn from the experiences of many of the Latin American governments. As we have seen, past policies have brought the economy to the edge of a precipice, and more of the same medicine may send it hurtling down into the abyss. On April 15, 2012 at a speech in the presence of the Prime Minister, even the Governor of the RBI was comparing the present situation with that of the BoP crisis of 1991. He pointed out that the short-term debt at 23.3 per cent of the GDP is over double that of 1991 (10.1 per cent).

If we are to avoid the abyss, the time has come for strong measures. First and foremost, there is urgent need to set right the structural distortions in our economy.

(To be continued)

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