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Mainstream, VOL L, No 28, June 30, 2012

Manmohanomics Responsible for Declining Economic Clout of India

Wednesday 4 July 2012, by Bharat Jhunjhunwala

International Rating Agency Standard and Poors had downgraded the outlook on India from BBB+ to BBB- in April. Since then the dismal data for the last quarter of 2011-12 ending in March have come out. Now Standard and Poors has threatened that it may actually downgrade India because the consensus in favour of economic reforms is eroding.

S&P has mentioned four reasons for this change: investment and economic growth have slowed, current account deficit has widened and political environment is unfavourable. All these are actually a logical result of Manmohan Singh’s economic thinking. He has put his trust and faith in big companies—domestic and multinational. He expects them to make huge investments. This will, he thinks, lead to increase in investment. The investment will be done in modern capital-intensive operations and inexpensive goods that are competitive in the global markets will be produced. This will lead to a high growth rate. These goods will be exported leading to reduction in the Current Account Deficit which will be further reduced by inward FDI. The big companies will make huge profits. The government will garner larger tax revenues out of these profits. This will lead to reduction in the fiscal deficit. A part of the revenues will be used for implementing pro-people programmes like loan waiver and Employment Guarantee Scheme. This will provide solace to the common man and help stabilise the political situation. In this way Manmohan Singh seeks to attain high levels of investment and economic growth, low current account deficit and political stability.

This model does not work though. The reason is that the negative impact of capital-intensive production on the common man is ignored. A milkman was earning Rs 250 a day, 365 days a year. He bought milk in the village, loaded it on his motorcycle and delivered it to the consumers in the city directly. A big company entered the scene and made available cheaper milk. The milkman was thrown out of his business. He now earns Rs 125 a day for 100 days a year in MNREGA. His standard of life has fallen. It must be admitted here that the conditions of the poorest people have improved, courtesy MNREGA. However, that does not compensate for the loss of livelihood and decline in incomes of millions of weavers, milkmen and other sundry trades. A vendor used to sell home-made grubs on the cart at the bus-stand of Rishikesh four years ago. At that time he told me that it was becoming difficult to face competition from Pepsico and Haldiram. Last month I did not find him there. Perhaps he too has gone in the protection of MNREGA.

MANMOHAN SINGH has waived off loans and increased allocation under MNREGA to help alleviate the suffering of the common man. He is unable to reduce the outgo on diesel, food and fertiliser subsidies because the common man is already under stress and not able to bear more hardship. This is leading to increase in the fiscal deficit. The increase in taxes paid by big companies is less than the outgo on these programmes. The government has to borrow more from the Reserve Bank of India, which has turned on its printing presses at full speed. This is leading to inflation. The Boards of the companies are alarmed. They foresee that today’s deficit has to be recouped by imposing higher taxes tomorrow. Their future profits will be under pressure, they believe. They do not like this. They have put their investment plans on hold leading to less investment. Cheap goods that Manmohan Singh hoped for are not being produced. India’s exports are under pressure and the Current Account Deficit is worsening leading to a fall in the rupee. The common man is still not placated. He mourns his lost job. This is leading to political instability.
Manmohan Singh had thought that the big-company capital-intensive model implemented in the developed countries would be replicated in India and investment and economic growth will increase, the Current Account Deficit will reduce and political stability will ensue. But the opposite is happening. The key miscalculation done by Manmohan Singh is the capital-population ratio. The big-company model works if capital investment is large and people losing their livelihoods are few. That was the circums-tance in the developed countries in the heyday of industrialisation. But the same model fails when capital investment is relatively small and the affected population is very large as in India. In this case the expenditure on social security schemes has to be multiplied manifold in order to nullify the negative impact of capital-intensive production. Manmohan Singh’s government is not able to make such huge expenditures leading to the collapse of his model. In Indian circums-tances, Manmohan Singh’s model is like giving subsidy to the landlord and hoping that it would lead to improvement in the conditions of the bonded labour; or giving water to the great Banyan tree in the hope that small plants will grow in its shade; or providing a gun to the street hoodlum to establish peace in the neighbourhood. Similarly, Manmohan Singh is providing free play to big companies in the hope that it will lead to the improvement in living standards of the common man.

Arrogance has not helped. Manmohan Singh chose not to consult Mamata Banerjee before announcing FDI in retail, sharing of Teesta waters with Bangladesh and increase in rail fares. Mamata did not budge because she was connected with the common man’s travails. FDI in retail would lead to loss of livelihood of many street corner stores. Diversion of more water from the Teesta would deprive farmers of North Bengal of life-sustaining water. Increase in rail fares would directly hit the common man. Mamata refused to sign on the dotted line. Thankfully so.
The government’s hype is that the difficulties are due to global recession. That is only very partially true. The recession is also an opportunity. Companies in the developed countries are under greater pressure to outsource goods and services to reduce their costs. Investors are seeking venues to invest their wealth. Petrodollars are floating around not knowing where to settle. It was necessary to capture these dollars and convert the crisis into an opportunity.

The threat of Standard and Poors is a logical result of Manmohan Singh’s economic ideology which is predicated on growth coming from big companies. The need is to change the direction of the economy. Manmohan Singh believes that a part of the income of the big companies will spontaneously trickle down to the common man. This is not happening, however. The need is to put such restrictions on big companies that jobs are created by the market and do not require MNREGA to do the same. For example, tax can be imposed on automatic machines. Companies will be forced to use more labour and jobs will be created without government intervention. There is no salvation for the Indian economy without this change in direction.

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