Thomas Piketty and Lucas Chancel have just written a paper as part of their work for the World Inequality Report discussing the movement of income inequality in India. And their conclusion is that the extent of income inequality in India at present is greater than it has ever been at any time in the last one hundred years.

Their estimates go back to 1922 when the Income Tax Act became operational in India. The share of the top 1 per cent of the population in total income at that date was around 13 per cent. It increased to 21 per cent by the late 1930s and then fell to about 6 per cent by the early 1980s before rising to 22 per cent in 2014, the final year of their study.

What is striking about the paper’s finding is the almost exact synchrony between the break in inequality trends and the transition from dirigisme to neoliberalism. In the period between 1951 and 1980, the bottom 50 per cent of the population captured 28 per cent of the increase in total income while the top 0.1 per cent actually witnessed a decline in their income. In fact the income of the bottom 50 per cent increased faster over this period than the overall average. Between 1980 and 2014 however the top 0.1 per cent captured a higher share of the increase in income (12 per cent) than the entire bottom 50 per cent (11 per cent).

To be sure, data on income inequality can always be questioned. For a start we have no income surveys in the country; all we have are sample surveys relating to consumption expenditure and getting from the distribution of consumption expenditure to the distribution of income is problematical since we do not know how savings, which constitute the difference between the two, are distributed. Secondly, in all sample surveys, the top percentiles are always insufficiently represented, precisely because they are so few in number. Statisticians therefore make all kinds of assumptions about how income is distributed within the top decile to arrive at the share of the top 1 per cent or the top 0.1 per cent of the population. And these assumptions can always be questioned.

It is not surprising therefore that the Piketty-Chancel estimates too have been questioned by some commentators. But no matter how one views their absolute figures, the trends revealed by them can scarcely be questioned, since more or less the same method of estimation is employed across time. And this trend is entirely in conformity with what other researchers have been saying, and also with what one would theoretically expect. Credit Suisse for instance provides wealth distribution data. According to these data the top 1 per cent of households in India currently owns more than half (57 per cent) of the total wealth of all households, and wealth inequality in India has been rising extremely rapidly, indeed more rapidly than even in the United States.

Wealth distribution is invariably more unequal than income distribution, because the working class which has no wealth has nonetheless an income. Hence the Piketty-Chancel figures for the share of the top 1 per cent in income are by no means out of sync with the Credit Suisse figures about their share in total wealth. (By the same logic however they seriously negate estimates that put the share of wealth of the top 1 per cent at only 28 per cent, though even these latter estimates recognize the significant increase in wealth inequality since 1991 when neoliberal reforms began and when the share of wealth of the top 1 per cent was just 17 per cent according to them).

A measure of inequality that is often adopted is the Gini coefficient which captures the distance between the actual distribution and an ideal distribution characterised by absolute equality. The problem with the Gini coefficient however is that by looking at the distribution as a whole it misses out on questions like the shares of the top percentiles. For instance even when the share of the top 1 per cent may be increasing, the Gini coefficient may show a decline in inequality if some redistribution is occurring say from, say, the 4th decile from below to the bottom decile, ie, from the “poor” to the “very poor”. Piketty and Chancel accordingly do not use the Gini coefficient but look at the shares of the top few percentiles, which is a much more useful measure (especially if we are talking of economic power).

The Piketty-Chancel figures show that 1983-84 was the year of the lowest income-share for the top 1 per cent, after which this share started rising. It may be recalled that neoliberalism first made its appearance around that very time and that the budget presented in 1985 by Vishwanath Pratap Singh, who was then the finance minister in the Rajiv Gandhi government, contained significant steps in this direction (against which in fact the Left parties had organised a convention in New Delhi at that time). The association between growth in inequality and the pursuit of neoliberalism is thus strikingly close. And not surprisingly, such a growth in inequality has characterised almost every country in the world in the period of “globalisation” which is characterised by the almost universal pursuit of neoliberal policies under the diktat of international finance capital.

The authors, both in the paper itself and also individually in interviews, give a number of reasons why income inequality has increased in India in this period, reasons having to do with the pursuit of neoliberalism. The decline in the highest marginal income tax rate from 98 per cent to 30 per cent, the persisting inequality in land ownership, and the lack of access to education and health by the poor, are some of the points raised by the authors.

All these are very important. But there is an additional factor that needs to be mentioned here, namely the attack on petty production, including peasant agriculture, that neoliberalism has brought in its wake. While an improvement in the conditions of the peasantry does not necessarily benefit the agricultural labourers automatically, a deterioration in their conditions invariably gets “passed on” to the labourers. And what is more, since, in the event of such a deterioration, destitute peasants seek employment in the urban economy, where very few additional jobs are being created, they tend to swell the reserve army of labour which also affects the wages of the urban workers and hence the overall urban income distribution.

In other words, as rural India has on average a lower income than urban India, any widening of the rural-urban difference has the effect, other things being equal, of widening overall income inequality (by the Piketty-Chancel measure). But it also has the additional effect of widening the income inequality within the urban sector itself. It does this via a swelling of the reserve army of labour in the urban economy through the immigration of destitute peasants into it. For both these reasons, the assault on petty production launched by neoliberalism constitutes an important factor behind the growth of income inequality.

The case of China, where, according to these authors, income inequality was rising rapidly earlier but got reversed in the current century is instructive in this context. To be sure, there are basic differences between the Indian and the Chinese economies; but an important proximate factor behind the reversal of the growing inequality in China was the policy adopted by the Chinese Communist Party under the slogan “Towards a Socialist Countryside”. This policy checked and reversed some of the encroachments on peasant agriculture that the attempt to industrialise through a relentless export drive had entailed.

The introduction of a wealth tax (which, amazingly, India does not have), the increase in income tax rates upon the rich, the provision of quality education and health services to all under the aegis of the State, and of course land redistribution, are undoubtedly some of the steps that must be taken to reverse the growing income inequalities; and these entail a jettisoning of neoliberalism. But even while recognising this, we must also recognise, which the authors do not do explicitly, that neoliberalism is not just a policy of choice that can be given up at will. It corresponds to a stage of capitalism where international finance capital has acquired hegemony; overcoming neoliberalism therefore requires a class struggle against this hegemony through a wide mobilisation of workers and peasants.

The authors however rightly take on the apologists of neoliberalism who argue that such a growth in income inequality is essential for achieving the high GDP growth that has actually occurred in countries like India. This is absurd, since the highest rate of income growth that has ever occurred in world capitalism was experienced in the post-war period, during the so-called “Golden Age of Capitalism”, when income inequality actually was declining the world over. This decline in income inequality to be sure was not because of the operation of capitalism but because of the concessions that capitalism had been forced to make in the face of the looming socialist threat; but it shows that the argument that growing income inequality is essential for higher growth is a complete non-sequitur.     

Courtesy: Newsclick.in

Some weeks ago when the official “quick estimates” of GDP for the third quarter of 2016-17 (October-December) had been released, putting the GDP growth in this quarter (over the corresponding quarter of 2015-16) at 7 percent, which broadly conformed to the CSO’s prediction before demonetisation, a veritable chorus had gone up that the critics of demonetisation had been proved wrong, that the measure did not have the recessionary effect they had claimed it would.

The fact that this growth estimate was spurious, produced at the behest of the BJP government which specialises in “post-truths”, was pointed out by many (see People’s Democracy, March 13). One particularly bizarre element in that estimate had been the growth rate of manufacturing output at 7.7 percent, when according to the index of industrial production, the manufacturing sector had grown only by 0.2 percent in that quarter. We now have fresh figures for industrial production for the month of February 2017, and they only confirm what the critics have been arguing, viz. that demonetisation has had a seriously recessionary effect on the economy.

It should of course be made clear that the Indian economy has witnessed an absolute industrial stagnation for several years now which has to do with a stagnation in domestic demand combined with sluggish net exports owing to the ongoing world capitalist crisis. But as if this was not enough, the Modi government chose to impose upon the economy a massive demonetisation for no rhyme or reason; and this has compounded the industrial recession even further. February 2017 had an index of industrial production that was 1.2 percent below that of February 2016; and for manufacturing the index was a full 2 percent below a year ago. February 2016 itself had witnessed a 0.6 percent growth compared to the preceding February, so that the decline in growth rate is 2.6 percent.

Within manufacturing, the consumer goods sector, which is where the impounding of people’s purchasing power through demonetisation is likely to have the maximum impact, registered a -5.6 percent growth rate, compared to 0.6 percent in February 2016. For the entire April-February period, the growth rate of consumer goods industries has been 0.1 percent in 2016-17 compared to 3.2 percent in 2015-16. And the manufacturing sector as a whole has witnessed, for the April-February period of 2016-17, a growth rate of -0.3 percent compared to 2.3 percent for the corresponding period of 2015-16. Not surprisingly, even bourgeois “experts” belonging to various “think-tanks”, who are taken aback by these poor figures, are now beginning to attribute them to the persistent effects of demonetisation.

It may however be argued that simply showing a fall in growth rate in manufacturing or in consumer goods compared to a year ago is insufficient for establishing the recessionary effects of demonetisation. What is needed is a finer analysis, comparing the trend before November 2016 when demonetisation occurred with the trend after November 2016. Only if there is an observed break in the trend around the time of demonetisation can we say with some degree of confidence that demonetisation did have a recessionary impact.

It is obvious, as already mentioned, that the impact of demonetisation is likely to be felt most strongly on consumer goods output. The other segments, such as basic industries, capital goods industries and intermediate goods industries, typically represent purchases not by households or even petty producers so much as by corporate, or generally larger, enterprises, and in their case the shortage of currency does  not constitute a major hurdle to effecting a purchase, because payments are usually made through non-cash means. Of course, if the demand for consumer goods, and therefore the output of consumer goods, is adversely affected by the shortage of purchasing power owing to demonetisation, then this will also affect the demand for producer goods; but this effect will occur only with a time-lag. The immediate impact of demonetisation will be felt primarily on consumer goods, which are purchased by households and in whose purchase cash payments play a major role.

In fact one can go even further. The demand for consumer durables is likely to be less affected by a cash shortage than the demand for consumer non-durables. This is so for two reasons. First, because the purchase of consumer durables, as it involves relatively lumpy payments, is effected to a greater degree through non-cash means than through cash, so that the direct effect of a withdrawal of cash from the economy upon the demand for consumer durables is likely to be less than upon the demand for consumer non-durables. And secondly, with regard to the indirect effect, arising from the loss of incomes of people who are hit by the direct effects of cash-shortage and therefore reduce their demand for consumer durables, this typically would take time to manifest itself. For both these reasons if the short-term impact of demonetisation is to be investigated then the sector to look at is the consumer non-durables sector.

Accordingly I have calculated the growth rate of output of the consumer non-durables sector, from the index of industrial production, separately for two sub-periods: April-October 2016-17 and November-February 2016-17, over the corresponding months of the preceding year. For both sub-periods there is an absolute decline in 2016-17, but while the drop is 2.47 percent for the first sub-period of seven months, it increases to 3.62 percent for the next four months.

There is a further point to be noted here. When there is a fall in demand for consumer goods, it is not as if the output of the sector is curtailed immediately. The fall in demand typically entails an increase in inventories with the sellers, and only when this happens do they cut down on their orders from the producers and the latter in turn cut back on production in response to the curtailment of orders. There is therefore a necessary time-lag between the reduction in demand and the reduction in output.

Keeping this in mind if we calculate the growth in the index of industrial production for consumer non-durables for the months December-February 2016-17 (over the corresponding months of 2015-16), ie, leave out November itself when the effect of demonetisation on output could not have been felt in view of the time-lags, we obtain a growth rate of -5.3 percent. While the growth rate was -1.85 percent for the period April-November 2016-17, it fell to -5.3 percent for the next three months, which shows a decisive break in the trend. This trend was negative for the year as a whole, but it became even more negative for the three months December-February 2016-17 when the effect of demonetisation got further superimposed on the already negative trend.

The index of industrial production, it must be remembered, is extremely inadequate for capturing developments in the small-scale sector where the impact of demonetisation has been the most pronounced. It is prepared by compiling data from 15 sources which are mainly government ministries and official departments. They do not include any source that can provide data on what is happening to the small-scale sector.

The IIP of course is still much better than the GDP estimates which of late have started relying on company statistics to arrive at production data, which is absurd because of the existence of a vast non-company sector. This absurdity gets further heightened when we look at the quick estimate of GDP, such as the one that came out recently and the government used for debunking its critics. This is because in arriving at these quick estimates only some company data are looked at, and not even comprehensive data for all companies. But even the IIP which is much better than these various GDP estimates in giving an indication of industrial growth, is also flawed, in the sense of not taking cognizance of developments in the small-scale sector. If, despite this flaw, the IIP shows such a sharp break in trend, and a sharp curtailment in industrial output in the post-demonetisation months, then the real impact of demonetisation can be easily imagined, when we also take into account the sector which is its primary victim, namely the sector of small-scale and petty production.

Needless to say, the impact of demonetisation has not been confined to the manufacturing sector. Its impact on services and other tertiary activities, especially in the small-scale sector, has been quite profoundly adverse. We have looked only at the manufacturing sector because some data on it have become available recently. Our query in other words has been the following: can we find any evidence of an adverse impact of demonetisation in data pertaining to just one particular sector that have come out recently? And the answer is overwhelmingly in the positive, which should dispel all the lies that government propaganda has been peddling of late about demonetisation having had no recessionary effect.
 

The manner of its doing so consists in introducing important legislation in the guise of “money bills”. Now, any important legislation has to be approved by both houses of parliament before it can become the law of the land, which is why, failing its passage in the Rajya Sabha, the Land Acquisition ordinance has still not become permanently legally binding. In the case of “money bills” however even if the Rajya Sabha objects to a proposed enactment, this fact cannot prevent its becoming the law of the land as long as the Lok Sabha continues to back it. Using the deception of calling important legislations “money bills” even when they palpably are not, or of incorporating into the Finance Bill, which is indubitably a “money bill”, all kinds of basic changes in our polity which are not confined to budgetary matters per se, the BJP government is using its majority in the Lok Sabha to push through far-reaching changes in the texture (though not of course in the basic class nature) of the Indian State.

In the case of the Aadhar Bill for instance, it sought to make the Aadhar card virtually compulsory for all citizens. It did not enter into any debate on the subject, and persisted despite protests from opposition parties as well as from several voluntary organisations, and despite a Supreme Court directive to the contrary, by pretending that it was only a “money bill” where the Lok Sabha’s majority opinion was all that mattered, and not a piece of legislation which had wider implications, including for the citizens’ right to privacy. The Bill made the possession of an Aadhar card an essential pre-requisite not just for applying for a Pan Card, a driver’s license, and a bank account, but even for accessing the mid-day meal scheme, for applying  for work under the MGNREGS, for obtaining subsidised provisions under the public distribution system, and for getting provident funds and pensions for the aged, the widows and the differently-abled. This was a transgression of a Supreme Court order of October 15, 2015,which had said that Aadhar cannot be made mandatory for welfare programmes.

The Supreme Court in an order of March 27, 2017, has once again reiterated, in response to a contempt-of-court petition filed against the government’s proposals in the Aadhar Bill, that access to welfare schemes, like MGNREGS, subsidies under the PDS, mid-day meals, provident funds and pensions, and the Jan Dhan Yojana, must not be made conditional upon the possession of an Aadhar card. But it has allowed the government to make Aadhar mandatory for opening a bank account (other than under the Jan DhanYojana), and for applying for a Pan Card or a driver’s license, on the grounds that these are not welfare services.

The Supreme Court’s use of the “welfare”-“non-welfare” distinction for deciding on whether Aadhar should be mandatory is extremely unsatisfactory and misses a basic point. MGNREGS for instance is not just a “welfare” measure, but a de facto right conferred on the rural BPL population through a unanimous resolution of both houses of the parliament. It is not just a “do-gooding” act, but a right of the people. Making Aadhar mandatory for applying for work under the MGNREGS is not just snatching “welfare” away from the people; it amounts to snatching a right away from the people. In any case however, no matter what one thinks of the logic of the Supreme Court judgement, the BJP government’s intentions are clear: it is to make Aadhar mandatory for all and the danger of doing so is quite clear.

The Aadhar Bill allows for unprecedented surveillance of every citizen and a massive invasion of privacy. The government can use these to target political opponents, critics, dissidents, and others who may be “straying out of line”. Because it enables data sharing even by private companies, it renders all citizens vulnerable to identity theft, fraud, cyber-piracy, data breaches and other uses of their personal data with very serious security implications. Even though the Bill has some protection and cyber-security provisions, they are grossly inadequate. And yet this is what the BJP government wants to foist on everyone without even the approval of the Rajya Sabha.

A second area where the government is seriously trespassing on citizens’ rights under the guise of a “money bill” relates to the draconian powers being given to income tax authorities in the new Finance Bill. Until now search and seizure operations could be ordered by the income tax authorities only if they had reason to believe that “certain documents are in the possession of the assessee which he is not likely to disclose or that certain bullion and other undisclosed assets are in his possession which he is not likely to disclose”. An order to this effect had to be issued by the officer before search and seizure operations could be carried out, which enforced a degree of accountability, and hence restraint, upon the officer because this order could be challenged. Now however such restraint is being removed, which makes tax raids on opponents and dissidents and seizures of their assets that much easier. The State, through the personnel of the income tax department, is now set to assume a far more intimidating form than till now.

While this measure is being justified in the name of eliminating corruption and black money, another provision in the same Finance Bill serves ironically to legitimise corruption. The biggest source of corruption in the country, as is well-known, lies in the nexus between the corporate sector and the ruling class politicians. Now, under the existing Company Act, only a company that has been in operation for at least three years can contribute to a political party, and there is a political funding cap of 7.5 percent of the net profits of the company. Besides, any such funding has to be done through a Board resolution, which must also state the name of the beneficiary political party. The BJP government is amending the Company Act to do away with the cap and also the need to name the political party which is being funded. This means that any company can contribute any amount of money to any political party without anyone knowing anything about it.

Companies would obviously fund only those political parties which are in power or likely to come to power; and they would do so in expectation of gains to be made through that party returning the favour when in power. Such cozy deals would now escape all public scrutiny and can assume unlimited magnitudes because of the BJP’s proposed amendment, from which it obviously hopes to profit handsomely. This amendment of the Company Act is a massive assault on democracy, a strident move towards the disempowerment of the working people, a legitimisation of the fusion of corporate and State power, and a license for big-ticket corruption.

The BJP government in short is, in the most blatantly undemocratic manner, that is, in the guise of “money bills” steamrolled through its majority in the Lok Sabha, introducing basic changes in the texture of the State which would make it a snoopy, and intimidating State working in close cahoots with corporate capital.

Until now we have seen vigilante mobs of Hindutva ruffians roaming the streets, terrorising people, lynching individuals, and branding those they dislike as being “anti-national”. This ruffian attitude incidentally is not confined to only some fringe Hindutvaelements; the other day even a former home secretary of the country, RK Singh, whose official duty had been to uphold the law of the land and who is now a BJP member of parliament, expressed the view that “we are nationalists” and cannot avoid assaulting anyone who is “anti-national”. But now, in addition to these roaming ruffians, the organs of the State are also going to be let loose upon anyone who dares to criticise the ruling party, which, in addition to such strong-arm tactics from diverse sources, will also have access to unlimited corporate funding for fighting elections. And this is the government, ironically, that imposed a massive demonetisation upon the people, whose effects are still being felt by them, in the name of fighting corruption and black money!
 

Newspapers were quick to underscore, and in general laud, this shift in approach from “welfarism” to “development”. Since government policy is set to reflect this shift from now on, its implications are worth examining. 

Nobody obviously prefers “doles” to development, neither the recipients of these “doles” nor those who advocate them. The real issue is how to bring about the kind of development that actually empowers the poor by providing them with opportunities. 

The petty production sector that has been under attack during the period of neo-liberal economic policies, of which the more than three lakh peasant suicides over the last two decades alone is a tragic expression, can hardly be expected to enlarge employment opportunities for the poor, unless there is a decisive break from neo-liberalism; and PM Modi who is closely linked to corporate houses is certainly not contemplating such a break. Indeed so deep is the faith of corporate India in this Prime Minister that his election victory has led to a rally on the stock market. 

He has of course made two big promises for the agrarian economy: to waive loans of marginal farmers, and to offer interest-free agricultural credit; but let us examine these. Let us assume for argument’s sake that he keeps these promises. Even so, the former is only a once-for-all measure which does not lead to a revival of the agrarian economy. 

What such a revival requires is a general restoration of profitability of agriculture, and also its protection against the vicissitudes of market price fluctuations, including fluctuations in world market prices which at present get freely imported into the Indian economy under the neo-liberal regime. 

In fact in PM Modi’s own state of Gujarat, which is ruled by his own Party under a Chief Minister handpicked by him, groundnut farmers are in deep distress at this very moment because of a price-crash. Unless these basic problems of peasant agriculture are tackled, once-for-all actions like loan-waivers, though no doubt beneficial, will not overcome the agrarian crisis. 

The UPA government too had effected a major country-wide loan waiver, but that has not stopped the agrarian crisis, of which one important expression has been the drop in per capita foodgrain production in the country after 2011-12. 

As for his second promise, it is obvious that foreign banks and private banks, which flout priority sector lending norms for agriculture with impunity, will hardly provide interest-free loans to this sector; it is only the public sector banks that may be pushed into doing so. But just as their being pushed by the government into giving loans for “infrastructure projects” to favoured corporate players has saddled them with large amounts of “non-performing assets”, likewise their being pushed into giving interest-free loans to farmers will only further worsen their financial position. 

This per se should not matter and the government should fiscally support them; but a government that has been pushing for increasing the share of private equity in public sector banks (in the name of fulfilling the “Basle norms”), will, instead of providing such fiscal support (that may come in the way of so- called “fiscal responsibility”, that is keeping the fiscal deficit down to 3 percent of GDP), simply use their financial stress as an excuse for privatizing them, in which case the interest-free loans too would just dry up. PM Modi’s promise of interest-free loans for agriculture, which normally should have been welcome news, carries therefore a huge sting in the tail, if it is at all implemented. 

Put differently, unless profitability is restored in agriculture, unless farmers are protected against price-fluctuations, unless all banks, including foreign and private banks, are made to give interest-free loans to agriculture, each one of which entails a departure from the neo-liberal regime that the pro-corporate Modi government is totally incapable of attempting, any revival of the petty production sector, and the creation of employment opportunities for the poor within that sector, is simply out of the question. 

Indeed far from reviving petty production, the Modi government has just dealt a huge blow to it through its demonetization measure. The fact that the BJP has nonetheless won in Uttar Pradesh with a vote percentage that dropped only by 2 percentage points compared to 2014, which is less than what many expected, does not negate this. 

Likewise the fact that the CSO’s third quarter GDP estimates do not show as large a drop in growth rate as many had expected, does not negate this. In other words, whether the adverse political fall-out of demonetization is large or small is irrelevant to the entire question of its effect on petty production which has been unambiguously and severely adverse. Indeed in Modi’s own Gujarat peasants have been on the streets demonstrating against demonetization and have even faced police repression for doing so. 

It follows therefore that when Narendra Modi is talking of creating opportunities for the poor, he is thinking essentially of employment opportunities through an expansion of the corporate sector. And since no significant expansion of the public sector is on the cards, it is the private corporate sector that is expected by him to be the location for such new opportunities. Now, if the private corporate sector is to be relied upon for providing such new opportunities, then it will demand additional “incentives” from the government. 

So, when PM Modi is talking of shifting away from giving “doles” to the poor, what he has in mind is that the money being currently used for welfare schemes for the poor should be withdrawn from such schemes and handed over to the corporate magnates. Given the entire framework of his thought and his economic strategy, this is the only conclusion that one can draw from his remarks. 

But let us pursue the matter a little further. Suppose such a regressive fiscal transfer does happen; could it increase employment opportunities for the poor? The only way this could happen is if there was an increase in private corporate investment brought about through such a transfer. But private corporate investment occurs only in response to an expected growth in the size of the market for the goods that the sector produces. (If private corporate investment is undertaken to supplant petty production, then that will only worsen the conditions of the poor by causing a net shrinking of employment opportunities via a process analogous to the “deindustrialization” of the colonial times). 

A mere transfer of funds from welfare projects for the poor towards “incentives” for the corporate magnates, not only does not expand markets but has the opposite effect of contracting them since it causes an overall reduction in consumption. The transfer would therefore make the corporate magnates simply pocket the money that has come to them, without their actually undertaking any additional investment. 

In fact this entire distinction between “doles” and “development” is a wholly erroneous one, which is propagated by corporate capital and by the media controlled by it and which is now being mouthed by Modi, precisely to bring about a transfer from welfare expenditures to “doles” for capitalists in the name of providing them with “incentives”. 

In order to boost investment in the economy, not just in the corporate sector but in the economy at large, demand has to increase. Welfare expenditure plays that role. It is a means of boosting demand in the economy, and thereby bringing about larger investment and higher growth as well. Welfare expenditure does not stand in the way of growth; it is a means of bringing about growth. It is therefore a means of bringing about growth in employment, and hence enlarging opportunities for the poor. 

PM Modi’s distinction between “creating opportunities for the poor” and undertaking welfare expenditure for their benefit, his pitting one against the other, his suggestion that the latter stands in the way of the former, lacks any theoretical basis. It betrays not only a lack of understanding of economics, but also an acceptance in toto of the ideology of corporate finance that what is good for itself is good for the country too, including for the poor. 

The “inversion of reason” that has characterized the Modi government is thus being carried further now. Demonetization which actually hurt the informal sector and the poor, was portrayed by it as being against the rich, as constituting, in the words of some journalists, a “class war” against the rich. 

Likewise a cutting down even of such meager welfare expenditure that is undertaken for the poor and a transfer of such funds into the pockets of the rich is being portrayed as creating opportunities for the poor themselves. We must brace ourselves for more such instances of “inversion of reason” in the days to come.

Courtesy: The Citizen

Perhaps no other public policy debate in post-independence India has seen as much of an “inversion of reason” on the part of the government as the demonetization debate. 

When critics were pointing, on the basis of government statistics themselves, to the palpable failure of the demonetization measure to achieve its purported objective, which was to cripple the black economy, the government kept harping, in its justification, on the extraordinary “boldness” of the move. 

Its position in effect amounted to saying that any move, no matter how irrational, is justified if it involves “courage”, i.e. invokes “shock and awe”, which was a sheer “inversion of reason”. 

This “inversion of reason” is carried much further now by the use the government is making of the latest GDP estimates. One just has to step out of one’s home to the grocery shop round the corner to acquaint oneself of the drop in business which the grocer has suffered owing to demonetization. 

The shopkeeper from whom I buy my grocery had told me that he had experienced a 50-60 percent drop in his business in the immediate aftermath of demonetization; he says that even now he is still facing a 20 percent drop in business compared to its pre-demonetization level. What he says about the drop in his business is echoed by countless other shopkeepers all over the country; and numerous journalists, academics and observers who have talked to shopkeepers across the country have testified to this fact. 

The recessionary effect of demonetization on the economy in short is an indisputable and established fact; if the GDP statistics of a government organization do not bear this out, then that should be an occasion not for asserting that there has been no recessionary effect, but for asking why they do not bear this out, i.e. what is wrong with the estimates. 

And yet this is not what the government is doing. On the contrary it is asserting that there has been no shortfall in demand and mocking its critics on this score, with the Prime Minster even targeting a person of Professor Amartya Sen’s eminence through some fatuous and meaningless remarks about Harvard and “Hard Work”. This constitutes an “inversion of reason”. It is like the naked emperor strutting around in his nakedness and ridiculing all those who had called him naked with the words: “See how wrong and stupid you were. My courtiers have shown I am fully clothed!” 

Arthur Bowley the renowned British statistician who had taught for years at the London School of Economics used to say: “The most significant facts of social life cannot be exactly quantified, but they can be directly observed”. In India today we are being asked to disbelieve what we directly observed in consequence of demonetization, on the basis of some totally spurious quantification. And that constitutes an “inversion of reason”. 

The issue that arises because of the latest GDP estimates provided by the Central Statistical Organization, therefore, is not whether demonetization has had a recessionary impact (which it indubitably has had), but why these estimates do not capture it. And three reasons have been adduced in the writings of some distinguished quantitative economists who are either working or have worked within the government. 

The first reason is a downward revision of the third quarter GDP estimate for 2015-16, which provides the base for calculating the growth rate in the third quarter of 2016-17. (Growth rates for any period are usually calculated over the corresponding period of the previous year). The GDP figure for the third quarter of 2016-17 (October-December) when the impact of the demonetization of November 8 is supposed to have been felt, is estimated to be Rs. 30, 27, 893 crores. How much of a growth it represents over the previous third quarter GDP depends upon what the latter is estimated to be. And here we come to the crux of the matter. 

The third quarter GDP estimate for 2015-16 announced on February 9, 2016, was Rs.28, 52, 339 crores, on the basis of which the growth rate for 2016-17 third quarter comes to 6.2 percent. On May 31, 2016, this figure was slightly revised downwards to Rs.28, 51, 682 crores, which still implies a 6.2 percent growth-rate for 2016-17. Since, with these estimates for 2015-16, the third quarter growth rate for that year, i.e. for 2015-16, comes respectively to 7.3 percent and 7.2 percent, there has clearly been a deceleration of growth in 2016-17, as the critics of demonetization have been predicting, by at least one percentage point. 

But the CSO on February 28, 2017, suddenly reduced the estimate of GDP for the third quarter of 2015-16 to Rs. 28, 30, 760 crores, which gives a third quarter growth rate of 7 percent for 2016-17. There is in other words a jump in the growth rate from 6.2 to 7 percent simply by revising downwards the base upon which this growth-rate is calculated, a point that has been made by Soumya Kanti Ghosh who is the Chief Economic Advisor of the State Bank of India. Why there should have been such a downward revision by the CSO remains a mystery. The obvious explanation that comes to mind is a “doctoring of statistics” on the part of the CSO at the behest of the government. 

The second reason why the GDP estimates do not capture the impact of demonetization, has simply to do with the fact that of late the GDP is being estimated not on the basis of value added figures taken from the producing units, but from company balance sheet data. This obviously means a lower coverage for informal sector producers who are not listed as companies and who are the ones that have faced the brunt of the impact of demonetization. The very method of estimating GDP that is adopted of late by the CSO therefore is simply tailor-made to underestimate the impact of demonetization. 

The third reason, put forward by Pronab Sen who had been until recently the Chief Statistician of the Government of India, is as follows. The GDP estimates at market prices, which are the centre of attention at present, are arrived at by adding to the gross value added the net indirect taxes. Because of demonetization the trade channels to which producers sell their goods and which make payments for these goods over a certain period of time, paid promptly to the producers through currency notes that had been demonetized, and the producers in turn made larger tax payments than usual to the government in the form of such demonetized currency. 

The net indirect tax collections therefore were far larger than usual, which, when added to the gross value added, boosted GDP figures significantly, and hence the growth rate too. The increase in growth rate that the CSO shows, far from showing the absence of any impact of demonetization, is attributable partly at least to a bizarre consequence of it. 

These three reasons are additive. The fact that there is a suspicious downward revision in the 2015-16 third quarter GDP estimate, the fact that the informal sector is inadequately represented in the GDP estimates, and the fact that demonetization brought in larger net indirect taxes than usual, conjointly contribute to an exaggeration of the growth rate figure for the third quarter of 2016-17. 

The 7 percent growth rate for the third quarter of 2016-17 claimed by the government which would come down to 6.2 percent if the base figure is not adjusted, would come down further if the under-representation of the informal sector in GDP estimates is taken note of, and would come down still further if the effect of arbitrarily large net indirect tax collections is additionally taken note of. 

Compared to the 7.2 percent growth rate in the third quarter of 2015-16 (over the previous year’s third quarter), if the unrevised figures are taken, the drop in growth rate in the third quarter of 2016-17, in the wake of demonetization, therefore could well be about 2 percent which is what many of the critics of demonetization had been anticipating. 

The Narendra Modi regime for many has been reminiscent of the Emergency of the mid-seventies, though even the Emergency, while witnessing the use of State power against opponents, had not seen the use of vigilante groups, consisting of hooligans, to stifle the freedom of thought and expression as we see today. But the CSO had been used by the ruling government of that time to doctor statistics in the run up to the Emergency, exactly as it is being used today. 

The only saving grace at that time in this shameful use of a government organization for propaganda purposes had been the fact that the doctored statistics had not flown in the face of direct observation; such alas is not the case today.
 

It will worsen the recessionary crisis unleashed above all by the demonetization measure; and it also portends an economic strategy that, in the face of the protectionism being introduced by Donald Trump, will further import unemployment into the economy. 

It is amply clear by now that while demonetization has been a complete failure in denting the black economy, it has severely compressed aggregate demand and unleashed a recessionary tendency in the “white” economy. The reason for this is simple: it has led to a transfer of purchasing power in the form of cash from the pockets of the people where it would have been used to buy goods and services, into the vaults of banks where it is just lying idle. The primary impact of this recession is on the so-called “informal sector” where more than 80 percent of the work-force is employed, producing almost half of the GDP. 

But the multiplier effects of the decline in output in the “informal”, or the petty production, sector are also felt on the “formal” sector that is dominated by big capital. The recession therefore gets generalized to the economy as a whole. This Modi-induced recession, it must also be noted, is occurring in a situation where there are other factors too which are contributing to a contraction in demand, namely the belated impact of the world capitalist crisis which has now spread to India and China, and the protectionism introduced by the Trump administration (on which more later). 

With the economy thus sinking into a recession the obvious course which the budget should have taken is to expand demand through larger government expenditure financed by taxing the rich or even enlarging the fiscal deficit. Instead what the budget has done is to further contract demand. The total government expenditure which had increased by around 12 percent between 2015-16 and 2016-17 (RE) is supposed to grow only by about 6 percent between 2016-17 (RE) and 2017-18 (BE). As a proportion of the GDP, government expenditure is supposed to decrease from 13.7 percent in 2016-17 to 12.7 percent in 2017-18. 

It is of course true that since the budget has been presented at the beginning rather than at the end of February, the third quarter data for 2016-17 were not available when it was prepared, so that the exact figures in the budget mean very little. But the fact that the budget is completely unconcerned about the recessionary tendency already underway in the economy, and, far from seeking to counter it, is actually more pre-occupied with “fiscal rectitude” which itself necessarily aggravates recession (since it entails that a reduction in GDP which lowers tax-revenue must also lower government expenditure), cannot be denied. 

An expansion of the fiscal deficit in the current juncture would have had unambiguously beneficial effects on the economy without the usual possible pitfalls associated with it. Purchasing power has been impounded from the people and is lying idle with the banks. It should not of course have been impounded in the first place; but since it has been impounded, if the government, at the very least, had used this purchasing power for its own spending, then it could have killed two birds with one stone. First, the demand contraction caused by the withdrawal of purchasing power from the economy could have been offset, and even more than offset (if government spending had been in areas which are more employment-intensive than the areas where the withdrawn purchasing power would have been otherwise spent). And secondly, it would have saved the exchequer resources that would otherwise be transferred to banks. This second point needs clarification. 

Banks will have to pay an interest on the deposits that have been forcibly extracted from the public and are lying idle with them. There is however little additional demand for credit from borrowers whom they consider “creditworthy”: such borrowers were not credit-constrained to start with, so that they have little incentive to borrow more in the first place; in addition, with recession threatening them, their incentive to borrow is further dented. 

Banks therefore are threatened with losses because of the Modi government’s saddling them with huge additional deposits: they have to pay interest on these deposits but they earn nothing from such deposits. The government under these circumstances is planning to put some interest income in the hands of banks out of budgetary resources. There are two ways in which it plans to do so. 

One is through the Reserve Bank selling them government securities which are already in its possession, so that they get an interest income which the RBI foregoes. But since the RBI’s profits come to the government budget (as it is fully owned by the government), this means a transfer from the government budget to banks. But lest the RBI runs short of securities, the government is taking recourse to another measure as well. This is to issue securities to banks on which it pays an interest but whose proceeds it does not spend. This too represents therefore a transfer from the government budget to banks. 

But compared to either of these channels of pure transfer, if the government issued fresh securities whose proceeds it actually spent, i.e. if it actually ran a fiscal deficit of the same magnitude, then, while the interest paid by it would be no different from in either of the cases mentioned above, the spending of the proceeds would benefit the economy. Not doing so in other words, i.e. avoiding a fiscal deficit would mean handing over an interest income to banks out of budgetary resources, without any benefit accruing to the economy. It would be the silliest policy to pursue; but that is exactly what the budget has done. 

True, with new notes being printed to replace the demonetized ones, the amount of deposits with the banks would come down, so that these resources would no longer be available with banks for the government to borrow. But the government has already said that it would not fully replace the value of demonetized notes, that it would leave a gap of Rs.1.5 to 2 lakh crores, in order to force people towards cashless transactions. At least this amount, of Rs.1.5 to 2 lakh crores, should be available with banks “for keeps”, and the government could have borrowed it; but it has chosen not to. 

Even the pitfalls generally associated with fiscal deficits would have been absent in the present context. The first pitfall associated with a fiscal deficit is the possibility of excess aggregate demand, and hence of a demand-pull inflation caused by it. But since the current situation is one of recession generated by insufficient demand, the question of inflation simply does not arise at present. 

The second pitfall is that government borrowing means a corresponding increase in private claims upon the government, and hence in private wealth, which typically entails an increase in wealth inequality in society. But in the present case, since the deposits have been mobilized from people across the spectrum, from the poor as well as the rich alike, the fiscal deficit would not mean an increase in the wealth mainly of the rich (who usually save a larger proportion of their incomes and with whom therefore government securities are mainly held, directly or indirectly); it would rather entail an increase in claims upon the government by all, so that there would not be so much of an increase in wealth inequality. 

Sheer commonsense therefore would have dictated an increase in the fiscal deficit in the current juncture, but the budget has kept the ratio of fiscal deficit to GDP at the same level as in 2016-17. And it has done so, while keeping MGNREGS expenditure at virtually the same level as in 2016-17 (Rs. 48000 crores in 2017-18 BE against Rs.47499 crores in 2016-17 RE), and while keeping social sector expenditures down (e.g. by pegging education and health expenditures as proportions of GDP at the same levels as in 2016-17). 

The reason it has adopted this silly course of pursuing “fiscal rectitude” in the midst of a recession is because it does not wish to offend global finance which abhors fiscal deficits. But appeasing global finance, which is anyway against the interests of the people, becomes particularly absurd against the backdrop of Trump’s protectionism. 

Trump’s protectionism in a context where no increase in aggregate demand is taking place in the world economy (and Trump himself is not visualizing any larger government spending in the U.S. but only large tax concessions to capitalists which does not per se increase aggregate demand) amounts to a “beggar-my-neighbour” policy, i.e. to snatching a larger amount of activity and employment from other countries including India. To protect employment in India against this policy of Trump, the Indian government should be imposing protectionism of its own, and, since any such move on India’s part might trigger a financial outflow, putting in place capital controls. In the shadow of such capital controls, the government can expand domestic aggregate demand without worrying about appeasing globalized finance capital. 

This has to be the response of the Indian government since there is no other possible response to Trump’s “beggar-my-neighbour” policy that is not merely silly. This being so, a start could have been made in the 2017-18 budget by increasing the fiscal deficit and turning away from the policy of appeasing international finance which neo-liberalism has forced on the economy. The government by not doing so has clearly indicated that it does not understand the new situation arising in the world economy because of Trump’s protectionism. 

The 2017-18 budget therefore not only has serious adverse consequences for the year 2017-18 itself, but also suggests that the government, trapped within a mindset that does not comprehend what is happening in the world economy, is bent upon importing the unemployment that Trump is trying to export to the rest of the world. 

Courtesy: The Citizen

Yet, in his New Year Eve speech, which came after the end of these 50 days, there was not a hint of contrition, not a whiff of self-criticism, not a reference to the grand offer to get “hanged” if demonetisation failed. Instead there was the usual word-spin, the usual swagger and the usual trotting out of yet another benefit that demonetisation would supposedly bring in its wake. This newly-added item to the list of benefits is inflation-control: demonetisation, it is now being claimed,would have the effect of bringing down the rate of inflation.

Modi gave a bizarre argument for why this should be so. High-value currency notes he suggested were used largely these days by those who are engaged in all sorts of nefarious activities, including hoarding and black marketeering; demonetisation by making these notes worthless had hurt such people; and since they are the ones behind inflation, demonetisation, it followed, made possible a reining in of inflation.

WRONG PERCEPTION
Modi’s perception that high-value notes are used largely by those engaged in the parallel economy, is completely wrong. Cash, including notes of the denominations that have been demonetised, is used primarily in the informal economy, rather than in the “black economy” whose cash-GDP ratio is no higher than that of the “white economy”. By associating cash-use predominantly with the “black economy”, Modi in effect suggested that the 85 percent of the workers who are employed in the informal economy are actually employees of the “black economy”, and that the entire Indian agricultural sector belonged to the “black economy” which is a calumny against the peasantry.

But let us ignore Modi’s reasons, and dispassionately ask the question: might it be the case that demonetisation would actually help to control inflation? To answer this question we must first be clear what inflation-control means, for which we must ask the initial question: why should inflation be controlled? In an economy like India where there is no catastrophic hyper-inflation that is destroying the economy, but rather a steady but low rate of inflation, of around 5-6 percent, the reason for concern over inflation is that it may nonetheless be hurting the poor. If money wages remain constant, then even a 5-6 percent rise in prices, entails an erosion of real wages and hence an increase in the distress of the poor. But if the evil of inflation is seen essentially in terms of its damage to the living standards of the poor, then it follows that inflation-control must be defined in terms of controlling the damage to these living standards.

Consider an example. If with money wages constant, prices rise by 5 percent, then we have inflation hurting the poor. But if with prices remaining constant, the money wages fall by 5 percent then too we have the poor being hurt, even though we have no inflation. Hence if the 5 percent rise in prices is sought to be controlled through a 5 percent reduction in money wages, then we do not really have inflation control, even though price rise has been controlled. The question to ask therefore is: would demonetisation cause a decline in inflation without using some means for doing so that would have the same consequence of squeezing the poor that inflation has? If it can cause a decline in inflation without using for this purpose means that achieve the same squeeze differently then we can indeed say that demonetisation can control inflation.

More specifically, control of inflation must mean controlling the fall in the real incomes of the working poor which inflation causes. Demonetisation can be said to have controlled inflation if it can bring down the rate of growth of prices without squeezing the money incomes of the working poor. Since the working poor in the country are largely concentrated in the informal sector, demonetisation can be applauded for controlling inflation if it does not reduce employment in this sector and if it does not reduce real wages in this sector even while reducing the rate of growth of prices in the economy. Can a reduction in cash supply in the economy achieve this?

I talk of a “reduction in cash supply” since if the cash supply remains the same as it was before demonetisation, ie, if all demonetised notes are replaced by new notes, then we are back to square one and there is no question of any change in the rate of inflation arising from this side. Indeed from Modi’s remark about demonetisation resulting in control over inflation, it is clear that the government has no intention of replacing fully all the demonetised notes. Mukul Rohatgi had already stated this before the Supreme Court, and Jaitley too had said as much. But now we have confirmation of this straight from the horse’s mouth.

Let us continue with the argument.A reduction in currency supply by say 10 percent in the informal sector, it may be thought, can bring down prices and money wages by 10 percent in this sector, in which case the  money wages deflated by prices would have remained unchanged, and in such a case no fall in employment need ensue. Both our conditions, ie, no fall in employment and no fall in real wages would appear to have been satisfied, while prices would have fallen by 10 percent, so that inflation-control would have been achieved through demonetisation. This however cannot happen for the following reason.

The working people in the informal sector also consume some goods from the formal sector. Now, with a 10 percent cut in currency supply there is no reason why the formal sector goods’ prices would fall by 10 percent, or why they should fall at all. Not only is there less currency use in this sector, but, what is more, the oligopoly firms that typically dominate this sector act as “price makers” rather than as “price takers”: they collude to fix prices. When their unit prime costs rise, they jack up their prices to maintain their profit margins; and when their unit prime costs fall, they tend not to lower their prices, at least not to the same extent. Hence even if the informal sector goods prices fall by 10 percent, in the above example, and even if some of these goods are used as inputs in the formal sector, the prices of the latter sector’s goods will not fall by 10 percent; indeed they would most likely not even fall at all. In such a case, the real wages of workers in the informal sector, ie, money wages of workers deflated by what they purchase, from both the formal and informal sectors, would actually fall, if their money wages fall by 10 percent.

In other words, in our hypothetical example, even if employment remains unchanged in the informal sector, the real wages of workers would fall because of demonetisation. And if real wages in this sector are not to fall, then the money wages must fall by less than 10 percent even while the prices of goods in this sector fall by 10 percent, in which case however employment in this sector must fall. This is because many marginal producers, when faced with a 10 percent fall in prices but less than 10 percent fall in money wages, would find their profit margins shrinking to negative levels. This would drive them out of business and cause recession and unemployment in this sector.

NO INFLATION-CONTROL
No matter how we look at it, therefore, demonetisation controlling inflation, in the sense of preventing a fall in both employment and real wages in the informal sector, is a sheer impossibility. The inflation rate may fall because of demonetisation but this would necessarily be accompanied by a fall in the real incomes of the working people of the informal sector, in which case this fall in inflation rate does not amount to inflation-control. It brings down the inflation rate by doing what inflation would have done through other means; and this, as argued above, does not constitute inflation control.

But BJP leaders are now so desperate, because all the claims made about the beneficial effects of demonetisation have turned out to be false, that they are simply clutching at straws. First they talked about a surgical strike against “black money”, but that turned out to be a hollow claim. Then they talked about the “extinguished currency”, ie, demonetised notes that do not get either deposited or exchanged against new ones, boosting the RBI’s profits (by reducing its liability), and hence enabling the government to spend more for the poor; the amount of “extinguished currency” however has turned out to be utterly trivial. They then talked about banks’ lending rates getting reduced because of the huge deposits of demonetised currency that have come into their coffers, but the reduction to date has been paltry, and could have been effected anyway through monetary policy, without any recourse to demonetisation. And now there is talk of inflation control, camouflaging the fact that such inflation control is accompanied by an identical squeeze on the poor through other means.

No doubt we shall soon be having much noise about how demonetisation has defeated inflation. In a regime where unreason reigns supreme, decibels become a necessary accompaniment of such unreason.

Courtesy: Newsclick.in