Tag Archives: Indian Economy

The Broken Headlights of the Union Budget 2017

The union budget is an annual planning document of the central government, which lays bare its economic priorities for the upcoming year. Since it outlines expenditure plans and revenue expectations (from tax proceeds), it has a significant impact on everyone, directly or indirectly, in the Indian economy. The consensus on the current union budget is largely that it is a ‘positive and progressive’ budget. Although seemingly it looks like a good budget, it suffers from a deeper malaise – of lacking a robust economic vision.

A government that is committed to economic development cannot not focus on employment generation and reduction of income and wealth inequalities. Further, employment generation has to happen in conjunction with decent wages. The former is an outcome of (both private and public) investment. It needs to be noted that the National Rural Employment Guarantee Scheme (NREGS) is only an employment safety net and not an engine of employment; one must be very careful not to conflate the two. Decent wages call for worker-friendly labour laws and adequate minimum wages. The inequalities of wealth (notably land and financial assets) keep rising unless structural reforms are undertaken, such as land reforms, wealth tax, and capital tax. (To formulate such reforms, information on the personal ownership of assets as well as their social distribution is required. Hence, the publishing of the caste census becomes a socio-economic necessity.)

With respect to wage policy, the variable of socio-economic significance is the real wage and not the market wage. The real wage tells us how much goods and services that a unit of the market wage buys. The real wage is therefore dependent on inflation and the capacity of the worker to access transportation, health services, and a clean environment. The class of economists who ignored real variables at the expense of the apparent ones were labelled as ‘vulgar’ by the economist–philosopher Karl Marx.

In addition, a piecemeal reading of the budget, while appropriate from the standpoint of individuals and firms, is inappropriate from a macroeconomic perspective. This is because the economy is an interconnected system, and one sector’s gain can lead to another’s loss, and multiple sectors can gain simultaneously. More generally, both private and public economic actions have unintended consequences; for instance, while the increased budgetary allocation for physical infrastructure is welcome, what are its effects on the natural environment?

The Indian economy is facing aggregate demand deficiency because of damp rural incomes, stagnant manufacturing, self-imposed fiscal austerity, and weak external demand. Tax cuts (for low-income individuals and MSMEs) and increase in public expenditure (on railways, roads, and the small increase in NREGS allocation) positively affect the aggregate demand, whereas demonetization-induced low activity levels, fiscal consolidation, volatile external conditions, agricultural distress, low real wages, and stagnant manufacturing sector all negatively affect aggregate demand.

On the aggregate supply front, the Indian economy is constrained by low agricultural productivity, poor working conditions for the majority of the population, inadequate physical infrastructure (access to drinking water, electricity, and roads), and environmental degradation. In short, India fares badly in terms of both physical and human capital. While the current budget gives some importance to physical capital, the allocations to human capital are deplorable. Moreover, the negative consequences of physical infrastructure creation on the natural environment and on the displacement of people must be accounted for in the balance sheet of economic development. Therefore, the paltry allocations to improve aggregate supply give us nothing to cheer. And on balance, the current budget significantly falls short of its intended goal of economic development.

Lastly, in his budget speech, the Finance Minister Arun Jaitley repeats the rationale for the demonetisation move of November 2016. He states that post-demonetisation, ‘GDP would be bigger and cleaner’. Moreover, he asserts (without any argumentation) that the demonetisation-induced fall in economic activity is a ‘transient effect’ and that this ‘is not expected to spill over into next year’ (contradicting the more cautious prognosis contained in the current Economic Survey). It seems that the FM is unaware of the concept of hysteresis: the short-term equilibrium can permanently affect the long-term equilibrium. This is part of the reason why mature democracies are extremely intolerant of labour unemployment. However, it is highly unlikely that official data will reflect the long-run adverse effects of demonetisation, because of its inability to adequately capture the economics of the informal sector.

In sum, there is no cause for any celebration but many reasons to be very worried for the economic present and future of India.

An Economic Analysis of the ‘Make in India’ Program

The ‘Make in India’ program webpage states as its objectives the following: (1) to facilitate investment, (2) to foster innovation, (3) to enhance skill development, (4) to protect intellectual property, and (5) to build manufacturing infrastructure. This short blog post focuses of selected aspects of the program as laid out of the webpage and then critically examines them and the economics underlying them.

Selected features of the program from the webpage are outlined in this paragraph.  The process of industrial licensing has become simpler and for some, the validity has been extended. There is an impetus to develop industrial corridors and smart cities. The cap of foreign direct investment (FDI) in defence raised from 26% to 49%, with further easing of FDI norms underway in the construction sector. Labour-intensive sectors such as textiles and garments, leather and footwear, gems and jewellery and food processing industries, capital goods industries and small & medium enterprises will be supported. Further, National Investment & Manufacturing Zones (NIMZ) will be set up. Incentives for the production of equipment/machines/devices for controlling pollution, reducing energy consumption and water conservation will be provided.

To summarize, the government will provide incentives for the construction of green technology while at the same time making it easier for firms to get environmental (land) clearances. Setting up industrial zones is a good idea because it reduces transportation costs and common infrastructure can be better streamlined; also, they should be located at a safe distance from populated areas. Investment by foreign companies is beneficial if they these investments entail the learning of new technology and scientific and managerial collaboration. FDI should not be forthcoming solely to exploit the low wages prevailing in India.

Undoubtedly, India needs to revive its manufacturing sector. Globally, Indian manufacturing products need to be competitive. To achieve these two objectives, the present government’s ‘Make in India’ program is necessary. As always, we need to wait and see how the program works in practice. This program is aimed at improving the supply-side of the economy – improving the capacity to supply manufactured products. Creating of physical infrastructure will also have multiplier effects on agricultural and services sector.

Two related issues need to be raised in this context. Firstly, what about economic ‘reforms’ targeted at the demand-side of the economy? Secondly, isn’t it more prudent to validate the supply of manufactured commodities from domestic demand than foreign demand? Let us take each of them in some more detail. Raghuram Rajan made the second point in his December 12, 2014 Bharat Ram Memorial Lecture. Ashok Desai, in the Outlook, criticises the previous government for their corruption scandals and economic schemes which, according to Desai, primarily benefited the non-poor and due to their consumption raised the industry and services growth rates.

While supply-side measures are important, we must not lose sight of demand-side measures – such as public investment in health and education. The recent cut in public health expenditure by the current government is indeed very alarming. Equally important is a good labour law framework which ensures good working conditions for workers and a decent minimum wage. This will ensure adequate domestic demand, as our workers will earn above-subsistence incomes and be healthy. If the core institutions of health and education (and clean environment) are also strengthened alongside the labour market ones, then domestic demand-led growth will not be difficult to manage.

A Review of Dipankar Gupta’s Revolution From Above: India’s Future and the Citizen Elite

The year 2013 has seen a number of books on India by several intellectuals. Out of a total eleven chapters, Gupta devotes the first five and the last two in developing his thesis of the citizen elite. The four chapters in the middle deal with the economic contributions of the informal sector, universal health, universal education and the need to have planned urbanization respectively. Gupta’s central thesis is that India, and other democracies, require an ‘elite of calling to dig deep and bring out democracy’s many potentials’ (p. xi). This thesis is not well substantiated in the book and also is problematic in the working of a democracy.

First, we briefly engage with Gupta’s ‘citizen elite’. Their views, writes Gupta, may ‘appear utopian’ and they are willing to ‘forsake their immediate class interests’. Gupta’s causal story runs like this: citizen elites do not ‘maximize the given’, instead, it is their active interventions which render a country democratic. They have a ‘vision’ which goes beyond the short term (p. 37). Moreover, they are interested in furthering the society as a whole and not keen on specific interests – be it class, religion, caste or gender (p. 96ff). ‘Utopia is … about making a better future possible by deliberate interventions in democracy’ (p. 42). He considers them to be ‘leaders’ distinct from the voters. His summary of the first chapter on the first page reads: ‘democracy is meant to change reality and not submit to it. … Thus, while the general belief is that people make democracy, the fact is that a select few actually contribute much more’. Fraternity ‘is the single most important tenet of democracy’ (p. 4). ‘Real democrats are answering to a higher call, for they are fired by the ideal of citizenship whose core attribute is that of fraternity’ (p. 10). ‘Democracy is fragile and requires eternal vigilance’ (p. 10). ‘Democracy can be best understood as an art that has scientific possibilities’ (p. 11). The elites think in terms of ‘aspirations’ and how they can be met. He writes: ‘democracy needs leaders to show the way, even as it needs the people to evaluate them’ (p. 19). The elite, according to Gupta, are the ‘vanguards of democracy’ (p. 21). They are responsible for ‘establishing the foundations and principles of a democracy’ (p. 196). Moreover, ‘they force the state to deliver public services like health, education and energy, at quality levels, to every citizen regardless of class’ (p. 24). He places Lois Bonaparte, Otto von Bismarck and Mao Zedong under the group citizen elite; other citizen elites include Earl Grey (Factory Act in Britain), Robert Peel (who discontinued the Corn Law), Richard Cross (Public Health Bill) and Henry Brougham (Education Bill). They have a ‘calling’ and they ‘were answering to a higher voice’ (p. 26). Such claims as to their higher nature are difficult to justify and more so when Gupta denies any agency or role to working-class movements (p. 27). And Gupta concludes that the present ‘welfare state in Europe is an outcome of such elite interventions’ (p. 31). Gandhi and Nehru, according to Gupta, belong to this class of elite citizens. Despite finding Gupta’s thesis of a ‘revolution from above’ unconvincing, his observations about the current state of the Indian economy and society are astute. It to these observations we turn to below.

In India, 76 per cent of health costs are borne by individuals (p. 39, also p. 146). This is of concern in a country where only about 10 per cent people have some kind of health insurance (p. 146). Furthermore, only 35 per cent of Indians have access to essential drugs. India has only 0.9 hospital beds per 1000 population (p. 149). As for human capital, the Manpower Profile of India 2005 informs us that the skill level of the working class is low (p. 39). Only ‘5 per cent of the total workforce, in India has had the benefit of a vocational training’ (p. 123). Gupta favours ‘universal’ policies in health and education as opposed to the currently existing ‘targeted’ ones. As Gupta rightly notes, ‘[t]argeted policies make sense only when the population concerned in but a fragment of the total’ (p. 137). India spends less that 1 per cent of its GDP on health (p. 141), which Gupta finds ‘inexcusable’. The US spends about 6.8 per cent of its GDP on public health. Gupta reiterates that ‘[u]niversal health does not mean average health, or only health for the poor’ (p. 148). Similar to health, public investment in education is about 3 per cent of our GDP (p. 158). And, Gupta reminds us that ‘Sweden and Denmark allocate over 30 per cent of their GDP to public goods delivery’ (p. 163).

Gupta is disappointed that ‘India’s elite [of] today have committed themselves to commonplace economics and have no patience for the principles of the solar economy’ (p. 40). By commonplace economics, Gupta refers to ad-hoc policies which do not make fundamental improvements in the well-being of people. In contrast, the solar economy, refers ‘to a source of wealth creation that, like the sun, gave without thinking of what it could get in return’ (p. 38). This distinction is borrowed from Georges Bataille, a famous French intellectual and literary figure. Gupta further claims: ‘When the solar economy is in full force its glare makes us colour-blind, race-blind and ethnically blind’ (p. 41). It is not clear how to interpret the ‘solar economy’.

Gupta provides statistics which are indicative of the deep fissures characterising the Indian economy. 93 per cent of the Indian workforce is in the informal sector (p. 119). It contributed 59 per cent off India’s Net Domestic Product when India grew at about 9 per cent (p. 121). Moreover, the informal work in textiles, gems and jewellery, carpets contribute about 32 per cent of our export revenues (p. 121). ‘India’s growth story thus requires a full acknowledgement of the contributions of the small-scale sector and informal labour’ (p. 123). ‘Employing cheap labour is the Indian way of edging out international competition’ (p. 124). The IT sector employs less than 2 million people, contributes about 7 per cent to the GDP and approximately forms 25 per cent of our exports (p. 129). In 2009, 20.82 per cent of FDI went into real estate and construction and it withdrew itself from manufacturing and IT (p. 130). Gupta asks: ‘In 1990 there were 1825 strikes nationwide, but by 2006 the number had dwindled to 192. Why then should entrepreneurs fear strikes today? (p. 135). According to the 2011 census, the rural population in India is little above 69 per cent (p. 185). ‘[U]rbanization cannot be left to happen spontaneously and sporadically, but needs to be engineered keeping in mind the welfare of citizens’ (p. 165). The areas around the State capitals are growing – the Class-I cities such as Raipur, Nagpur, Surat, Pune, Aurangabad. Tirrupur accounts for 23 per cent of India’s garment exports (p. 171). And yes, we should be ‘paying greater attention to the quality of economic growth and not just to quantitative figures’ (p. 168). 45.5 per cent of rural NDP in India is non-agricultural (p. 169). 51 per cent of Mumbai’s population live in slums (p. 178) and the corresponding figure for Ludhiana, a manufacturing industry town, is 50 per cent (p. 183).

On public debt, Gupta is closer to the truth than many mainstream economists in India and across the world. He does not consider high public debt to be bad for the economy as long as investments rise and there is faster economic growth (p. 119). ‘The big paradox of India’s democracy is that free elections and mass hunger go side by side’ (p. 108). In addition, the existence of a ‘patron-client democracy’ implies the ‘lack of public support structures for citizens’ (p. 109). As Gupta rightly observes: ‘failing a proper universal delivery system, patrons are the best way out’ (p. 109) and thus reinforces the need for proper universal delivery systems.

To sum up, Gupta’s observations on the Indian economy are sharp and discerning. But, his thesis of the citizen elite suffers from too many pitfalls and so does his use of the ‘solar economy’ concept. Finally, it is strange that B. R Ambedkar gets only a passing mention (p. 4). Still, the middle four chapters of his book make a valuable addition to our understanding of contemporary India.

Misunderstanding Economic Growth and Development

If two previous posts dealt with trying to understand how economic growth may or may not translate into development, this post goes a step behind and discusses what economic growth means. More importantly, this post examines what economic growth does not mean. The motivation for this blog post comes from Jagdish Bhagwati and Arvind Panagariya’s 2013 book titled Why Growth Matters: How Economic Growth in India Reduced Poverty and the Lessons for Other Developing Countries. Note that the following paragraphs are not intended to be a detailed review of the book; only their central premise – ‘the centrality of growth in reducing poverty’ (p. 4) – will be engaged with. The blog post, however, ends with a critical commentary on the authors’ methodology (focusing on authors’ engagement with opposing views, presentation of authors’ own arguments and referencing), as contained in the Preface, Introduction and the first three chapters. Also, no comments are offered on the data analysis present in their book.

A premise is ‘a statement or proposition from which another is inferred or follows as a conclusion.’ Bhagwati and Panagariya start with the premise that economic growth entails increase in employment opportunities and an improvement in income per person. This is also their conclusion, and forms the title of their book. They write:

Bhagwati argued nearly a quarter century ago that growth would create more jobs and opportunities for gainful improvement in income, directly pulling more of the poor above the poverty line and additionally would allow the government to pull in more revenues, which would enable the government to spend more on health-care, education, and other programs to further help the poor. Growth therefore would be a double-barrelled assault on poverty. (p. xix)

Further, they write: ‘growth helps by drawing the poor into gainful employment’ (p. 23). A simple question is sufficient to negate this view. Does the market create jobs after taking into account the abilities and skills of the poor? Of course not! If so, there would not be any unemployment or underemployment. A well-educated (and healthy) workforce is necessary so as to actually ‘gain’ from the newly created employment opportunities. [Not to forget the hardships involved in deskilling and reskilling.] And, it is not logically necessary for employment opportunities to increase when the economy grows. Jobless growth is a possibility where the surplus is not used to create further jobs; more often, it is a question of whether jobs are being created at the same pace as at which the economy grows.

By definition, economic growth entails a rise in income. But whose income? Economic growth can co-exist with the rich getting richer. Or, economic growth can give rise to stagnant wage shares amidst productivity rises. Growth can be export-led. It can be service-led. It might favour capital-intensive over that of labour-intensive technology. A rise in real GDP can happen because of a variety of reasons. It is these ‘reasons’ that one must investigate. For, it is here that we will find answers as to who the beneficiaries of economic growth are. It is to the mechanisms or processes which generate economic growth that we must attend to in order to comprehend which sector/classes/groups are losing out. For example, the nature and consequences of service-led growth will be very different from that of growth that is manufacturing-led. Bhagwati and Panagariya repeat the same fallacy, pointed out in the previous paragraph, in the following passage.

Conceptually, in an economy with widespread poverty, labor is cheap. Therefore, it has a comparative advantage in producing labor-intensive goods. Under pro-growth policies that include openness to trade (usually in tandem with other pro-growth policies), a growing economy will specialize in producing and exporting these goods and should create employment opportunities and (as growing demand for labor begins to cut into “surplus” or “underemployed” labor) higher wages for the masses, with a concomitant decline in poverty. (p. 23; see p. 43 as well)

Conceptually, in an economy with excess labour supply, labour is cheap. Bhagwati and Panagariya argue that a growing economy with cheap labour will adopt labour-intensive techniques. This reasoning assumes that an unemployed farmer or school teacher can easily and naturally be employed in a firm which exports computer parts. The authors’ views seem to indicate a gross misunderstanding of the actual economic dynamics of any society (see below as well). Moreover, one is not just concerned with mere employment, but with employment that provides good working conditions – including sick leave, maternity leave, overtime wages, etc.

‘The pie has to grow; growth is a necessity’ (p. xx). Yes, a larger surplus makes it feasible for each claimant to get a greater share, including the government. The contention is with respect to the feasibility and who these claimants are. According to Bhagwati and Panagariya, growth automatically and naturally generates higher incomes per person thereby ‘directly pulling more of the poor above the poverty line.’ Growth is not manna from heaven which everyone gets in equal amounts. It is based on definite political, economic and social institutions/processes – wage bargaining, possibilities of reskilling, mobility of labour, gender, caste, family structure, social security nets (family based or from the government) and so on. In this context, the authors rightly note the negative effects excessive licensing, government monopolies and protectionism can have on the growth of an economy (p. xii).

Given the authors’ belief in a strict one-way causation running from economic growth to development, they argue for carrying out growth-enhancing reforms first, which they refer to as Track I reforms. Subsequently, the surplus can be redistributed by the government to achieve development; this can be through transfer payments of various kinds. These are known as Track II reforms. They argue:

Track II reforms can only stand on the shoulders of Track I reforms; without the latter, the former cannot be financed. (p. xxi)

Of course, they can be financed through government borrowing and there is ample literature on the issues surrounding debt-sustainability in relation to achieving full employment. One wishes to see a more nuanced understanding of such matters.

This separation of growth from development is not just illogical and untrue, but also dangerous to public policy. Often, for purposes of economic theorising, in order to carefully study the causal relations between variables, some boundaries are drawn and certain assumptions are made. But, an import of this technique into the domain of public policy is methodologically flawed, where the abilities of individuals to seek jobs and actually work and earn (higher) incomes crucially depend on their social, cultural and economic backgrounds. In other words, while the distinction between economic growth and development might be reasonable for some purposes, in practical politics, they go together. Moreover, if the policy objective is to ensure good quality of life for all, then it must be the case that, to use the authors’ terminology, both Track I and II should be undertaken at the same time, with perhaps a greater emphasis on Track II reforms.

A fundamental error underlies the authors’ belief that ‘growth’ is an automatic process which takes place when the government lets the private players have a completely free hand, international trade is free, and capital can freely flow in and out of the country. It is this notion which makes the authors’ note that ‘Track II reforms involve social engineering…’ (p. xxi). That is, in their view, Track I reforms require no ‘social engineering’. Nothing could be farther from the truth! A ‘market’ is an engineered institution. The belief that ‘free markets’ will deliver both economic and social justice is quite easily discernible from their statements. Making commodity markets free (from both government and private monopolies) is certainly beneficial for economic growth as well as for wider socio-economic development. But, given the (historical or otherwise) arbitrariness (as opposed to ‘merit’) involved in the ownership of various forms of assets, and the tendency of markets to favour the powerful, there is always a crucial role for the government and civil society to intervene in order to ensure social justice (especially in the arenas of education and health). After all, is this not what we mean by participatory democracy?

The preceding commentary is based on a partial reading of Bhagwati and Panagariya’s book, as noted in the introductory paragraph. Their conception of growth, at best, seems superficial and at worst, they misunderstand the dynamics of economics growth as well as development. The view of ‘free markets’ generating growth with rising incomes per person is never an automatic process. It requires visible hands and is indeed social engineering. We end with a few observations on their methodology. For them, all that their critics say are myths; Part I of their book is titled ‘Debunking the myths.’ On one occasion, some of the critics, who are hardly ever named (and therefore not cited), are accused of being ‘intellectually lazy’ (p. 25; also see p. 32, p. 34, p. 35 for the unnamed critics). On the other hand, the following phrases are used for arguments in their own support: ‘state-of-the-art techniques’ (p. 31), ‘detailed state- and industry-level data’ (p. 31), ‘compelling nature of evidence on the decline of poverty under reforms and accelerated growth’ (p. 33), ‘irrefutable evidence’ (p. 37), ‘evidence…is unequivocal’ (p. 38) and ‘these authors’ superior methodology’ (p. 43). Out of the total number of references excluding data sources and reports (around 125 in number), about 37% (around 47 in number) are references to the authors’ work, either as a sole author, a co-author or as the editor of the volume. This is very striking. And, out of citations to Panagariya’s work (about 27 in number), 14 of them are newspaper articles published in the Times of India or Economic Times. It is indeed unfortunate to come across so many fundamental errors in a book like this, because growth does matter, although not at all in the way Bhagwati and Panagariya expound in their book!