Say’s argument was as follows. Whatever is produced generates an equal amount of income among those associated with its production. This income is either consumed or ‘saved’ (i.e., not consumed). Whatever is consumed generates an equal amount of demand for the produced consumption goods, and whatever is ‘saved’ is either directly used for purchasing capital goods, or offered as a loan to those who wish to purchase capital goods, namely, undertake investment, by borrowing. Whatever is ‘saved’ and whatever is invested are ultimately equalised through adjustments in the interest rate, so that through such adjustments whatever is produced gets ultimately demanded in the aggregate, and the capitalist economy has no reasons for not being at a state of maximum production, that is, at full employment. There may be demand-supply mismatches in particular markets, but never in the aggregate.

The problem with Say’s Law is that all demand out of incomes earned in the current period is seen to be for goods produced in the current period, whether for consumption or for adding to one’s wealth (i.e., investment). But if persons wish to add to their wealth in the form of money (and that would be the case if they hold their wealth partly also in the form of money), which is not a good produced in the current period (for instance if they wish to hold paper money out of their current incomes), then there is no reason why the supply of produced goods in the current period should create a demand equal to itself.

In the C-M-C circuit, if persons do not wish to convert M into C, then there will be an overproduction of C, i.e., of produced goods. And any reduction in the money-price of produced goods in such a situation of insufficient demand, would only strengthen the demand for money as a form of wealth and hence not eliminate the over-production tendency.

Mainstream bourgeois economics which assumed Say’s Law, held that persons never wished to hold money as a form of wealth, that money was only a medium of circulation but never a form of wealth-holding. This, however, was an absurd assumption. It was not only empirically untrue, but also logically untenable, which is why Say’s Law was an absurd assumption to make for a capitalist economy.

Karl Marx had been quite scathing about Say’s Law and about J B Say as an economist (whom he had called the “trite” Monsieur Say) and had expounded the possibility of an over-production crises under capitalism.

Why, it may be wondered, are we talking about such arcane debates in economics, which were settled not only by Marx but resettled in the 1930s by the Keynesian Revolution in bourgeois economics at the time of the Great Depression, when to argue that a capitalist economy can never experience a deficiency of aggregate demand for produced goods was ludicrous in the extreme.

Keynes wanted to save Western capitalism from a Bolshevik-style revolution, and to do so, he recognised, one had to first admit its failures and repair the system to overcome them so that a revolution could be forestalled.

The reason we are talking about Say’s Law is because it has made a silent return to economic discourse, a return whose very silence makes it as influential as it is insidious. In fact, the rationale for the entire neo-liberal economic order is based on assuming the validity of Say’s Law.

The intellectual groundwork for neoliberalism, and for jettisoning the dirigiste strategy that had been prevalent until then (in India the dirigiste strategy is often referred to as the Nehru-Mahalanobis strategy), was laid down in the early 1970s. The argument was advanced that four east Asian ‘tigers’ — South Korea, Taiwan, Hong Kong and Singapore — had shown remarkably high economic growth rates, much higher than countries like India pursuing dirigiste strategies; and that if other countries too abandoned dirigisme, or what the World Bank called their ‘inward-looking’ development strategy, and pursued ‘export-led growth’ instead, then they too could emerge as successful as these ‘Asian tigers’.

This was an absurd argument. If the level of world aggregate demand is expanding at a certain rate, then the output of all countries taken together cannot possibly expand at a higher rate. If the output of some countries is expanding at a higher rate than world aggregate demand, it is because the output of others is expanding at a lower rate.

If the output growth of the hitherto slow-growers accelerates then that can only be at the expense of those who were hitherto growing rapidly.

Hence, to dangle the hope that all countries could grow as rapidly as the ‘Asian tigers’ if only they pursued an ‘export-led growth’ strategy was absurd. It amounted to ignoring the constraint of aggregate demand, namely, to assuming Say’s Law. Behind the call to abandon the Nehruvian strategy, therefore, was an invoking of the absurd Say’s Law.

This invoking, however, was camouflaged, which is why it succeeded. The camouflage took the form of a ‘small country assumption’. A small country, precisely because it is small, can push out larger exports at the expense of larger countries without causing them damage on a scale that they would notice. For small countries, therefore, the assumption that they can export more if they wish, namely, that they face no noticeable demand constraint, makes some sense, and is often made.

But the neoliberal strategy of ‘export-led growth’ was sold to all countries by pretending that each of them could act as if it was a ‘small country’. This was utterly absurd, a flagrant case of the converse fallacy of aggregation, and a back-door entry for Say’s Law.

Of course, the success of the four Asian ‘countries’ was followed by more spectacular growth successes in China and South-East Asia; true, they were not necessarily examples of neoliberal strategy, nor of ‘export-led growth’ pure and simple. And to the extent that they had export successes, this was to a large extent because Western metropolitan capital chose to locate plants on their soil for producing for the Western metropolitan market.

The counterpart of their success, in other words, was the slower growth of metropolitan capitalist economies, though not of metropolitan capitals, not to mention the fact that other Third World countries were left out in the race. It was a race nonetheless among countries.

By falsely assuming Say’s Law, the ‘export-led growth’ strategy actually pitted countries, especially countries of the Third World, against one another. For example, India could export more garments only at the expense of Bangladesh, and so on. This, in turn, meant that the more a country could squeeze its working population by giving them lower wages, extracting from them longer hours of work, and withholding legitimate payments from them through fraud, the more successful it would be in its export drive. Inequalising growth, or even poverty-generating growth, was thus built into the very logic of ‘export-led growth’.

Inequalising growth, however, ultimately meant a slowing down of the rate of growth of demand in the world economy and hence the onset of a crisis for the export-led growth strategy. Even before the pandemic, the decadal growth rate of GDP (gross domestic product) for the world economy as a whole had been the lowest among all the decades since the Second World War; and this growth rate has slowed down even further after the pandemic.

This strategy, apart from being ethically repugnant, since it apotheosizes cut-throat competition among the oppressed people, has brought the world economy to a cul-de-sac. The only way that an economy of the Third World can get out of this dead end is by activating the State to undertake larger expenditures to enlarge the home market. 

Enlarging the home market requires increasing the rate of agricultural growth (which puts more income in the hands of the peasants and agricultural labourers), raising the level of minimum wages (which puts more income in the hands of the workers), and increasing welfare state measures (which improves the real living standards of the entire working population); and it requires financing such spending through wealth and inheritance taxation.

All this, however, would require imposing capital controls, especially on financial outflows, which in turn would necessitate trade controls. It would require, in short, abandoning the strategy of ‘export-led growth’ and hence overcoming the stranglehold of Say’s Law that has already done so much damage.

The writer is Professor Emeritus, Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. The views are personal.

Courtesy: Newsclick

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“The Government of India has decided to extend the pension benefit to about three crore retail traders and small shopkeepers,” said Finance Minister Nirmala Sitharaman in her maiden budget speech in July 2019.

As she announced the name of the scheme, Pradhan Mantri Karam Yogi Maan Dhan, amid the celebratory thumping in the House, the camera panned to Prime Minister Narendra Modi whose government pledged to spend Rs 750 crore in the first year of the scheme that promised a monthly pension of Rs 3,000.

However, as the attention faded, the commitment too died. In its first year, the government spent only Rs 155.9 crore, leaving a staggering funding gap of Rs 594 crore.

Over the next three years, spending projections plummeted to inconsequential sums. In the previous fiscal, a trifling Rs 3 crore was allotted, of which a mere Rs 10 lakh was spent for the programme, according to the latest budget data. Over a period of five years since its launch, the government promised to spend Rs 1,133 crore but actually allotted a measly Rs 162 crore – just 14% of the promised amount. According to official data, the scheme had just over 50,000 takers till January 2023.

In March 2023, the Parliamentary Standing Committee asked the government why the pension scheme failed. The government said this pension scheme clashed with another scheme with a similar sounding name.

According to the government, people mixed up Pradhan Mantri Karam Yogi Maan Dhan with another pension scheme called Pradhan Mantri Shram Yogi Maan Dhan launched just four months ahead of it, a rare admission of lack of imagination in naming new pan-India projects while attempting to deflect questions on government failure.

Pradhan Mantri Shram Yogi Maan Dhan was to potentially cover 42 crore unorganised sector workers. But this pension scheme too had failed, documents show. It had covered only 43 lakh of the 42 crore potential beneficiaries in three years since its launch.

When the Parliamentary Standing Committee questioned the government, it passed part of the blame to a third pension scheme of an older vintage — Atal Pension Yojana launched in 2015 for unorganised sector workers. This scheme had already in its scope those being targeted by the two pension schemes that came after it.

The Atal Pension Yojana also has a dubious record. Independent research, and investigation by The Reporters’ Collective showed that banks were forcefully enrolling citizens in the Atal Pension Yojana without their permission. This sparked intense criticism that the government was artificially inflating the number of enrollments to falsely showcase the scheme’s success.

The government tasked a think tank to evaluate its pension schemes. The think tank, in its report, recommended discontinuing Shram Yogi Maan Dhan and merging it with Atal Pension Yojana. Additionally, the Ministry itself was mulling merging the shopkeepers’ pension scheme with the unorganised workers’ pension scheme.

The three pension schemes may have failed to varying degrees, but they symbolise Narendra Modi’s penchant for billboard governance – highly visible headline grabbing governance initiatives that’s propped up long enough to regale commoners’ memory but gets defunded once the white heat dies.

The Collective reviewed budgetary allocations to 906 central sector schemes that the Union government listed in its budgets over five years from FY 2019-2020 to FY 2023-24 to find out how much the Modi government spent on them. We found that the government underfunded 651 or 71.9% of the 906 schemes.

For one in every five schemes, the government spent half or lower than what it had promised.

Of all the budget cuts, the harshest cut was reserved for welfare schemes. At least 75% of the welfare schemes got less money than what the government had promised.

The next major area the government focused on cutting back funds promised in the budget were infrastructure schemes such as track renewals, roadways schemes, renewable energy grid. The government drew down fundings promised in the budget for nearly 73% of the infrastructure schemes in the total schemes reviewed.

Defence, industry and PSU-related schemes came third, fourth and fifth in terms of budget and spending mismatch. The Collective segregated schemes into these categories based on a general understanding since these are not officially defined terms. For many schemes, the categories may overlap.

When the government eviscerates welfare schemes and draws down infrastructure funds, how does it still manage to set the perception that it has been constantly innovating, crafting new policies and doing more?

One trick up the government’s sleeve is to rebrand, rename, repackage and rebuild existing schemes, some of them decades-old, with some tweaks.

For example, The Collective’s previous investigation had exposed how the government used the much-vaunted PM AASHA as a showhorse during elections. The government spent money on the AASHA scheme brought in to ensure minimum support price for pulses and oilseeds only around the 2019 and 2024 elections and not a single rupee in between. The scheme even made its way to the 2019 BJP Lok Sabha manifesto as one of the schemes responsible for doubling farmers’ incomes. The actual workhorse was an age-old direct procurement scheme from the UPA era that was dressed up as a new scheme under brand PM AASHA. By 2024 the BJP dropped the promise of doubling farmers’ incomes altogether from its manifesto.

While the majority of schemes fell short of promised allocations over the period of five years, the total actual expenditure of all 906 schemes is higher than the total budgeted estimates. Data shows there are two reasons for this: Firstly, government spending on Covid-related schemes was disproportionately higher than the budgeted estimates. This, however, does not absolve the government of poor spending since schemes remained underfunded before and after the pandemic.

Secondly, as reported previously, the government hiked spending on some welfare schemes in the run-up to the 2024 Lok Sabha elections after years of plummeting budgeted estimates.

Let’s look closely at central schemes that are funded entirely by the Union government and find out how they fared and whether the government spent as much as it said it would. We focused on the central sector schemes because the Union government is entirely responsible for their success or failure, unlike centrally sponsored schemes that are partly funded by the state governments.

Agriculture

Multiple schemes brought in to ensure doubling of farmers’ incomes, saw deep cuts and minimal spending compared with initial promises outlined in the budgets.

The Collective analysed one of these schemes, PM AASHA, in an earlier report. The crop price support scheme saw real spending only in the months around 2019 and 2024 Lok Sabha elections. Three years in between the two general elections, the government did not spend a single rupee on the scheme.

A second scheme, Pradhan Mantri Kisan Maan Dhan Yojana, is a small and marginal farmers’ pension scheme. Much like the Karam Yogi Maan Dhan and Shram Yogi Maan Dhan, this scheme too has seen poor enrolment. Since 2019, only 7.8% farmers have enrolled in the scheme that targeted 3 crore farmers. For all the years except FY 2023-24, the government spent less than what it had budgeted, data shows.

Worse, since the launch of a scheme for Formation and Promotion of 10,000 Farmer Producer Organisations in 2020, the government has spent far less than what it promised in all four years. The scheme aims to help farmers work together to up their bargaining power, reduce production cost, and make more money by selling their crops together.

Health

Around the time of the second deadly Covid-19 wave in 2021, the Union government announced the PM-Ayushman Bharat Health Infrastructure Mission, touted as India’s largest scheme for public health infrastructure since 2005. The scheme is run in partnership with the states, with some components run entirely by the Centre. To fulfil its end of the promise, the Union government planned to spend in 5 years over Rs 9,339 crore to set up, among other things, national institutions for critical care and strengthen disease research centres, but has only spent Rs 1,373 crore, or 14.7% of the planned amount even after 3 years.

Pension schemes

The government promised to spend Rs 750 crore on the PM Karam Yogi Maan Dhan, a pension scheme for small shopkeepers, in the first year of its inception in 2019. Two years later, reality emerged: The government had spent only 20.7% of the amount budgeted, with Rs 155.7 crore expenditure. Even in the latest financial year, the government claimed it would spend Rs 3 crore but spent only 3.3% of that.

In the government’s own words, multiple pension schemes clashed and undercut each other. For example, the PM Shram Yogi Maan Dhan, launched four months before the Karam Yogi Maan Dhan, saw the government spending just 58.6% of the amount promised in the latest fiscal. This is despite the Parliament Standing Committee on Labour pulling up the Ministry of Labour for slack coverage under the scheme.

Education

In its 2019 election manifesto, BJP promised Eklavya Model Residential Schools in blocks with over 50% Scheduled Tribes people. The school is meant to improve access to education for tribespeople’s children. The Ministry of Tribal Affairs aimed for 740 schools by 2025-26, achieving 54% of the target with 401 schools by December 2023.

Despite the slow pace, budget estimates didn’t see an uptick until the 2024 Lok Sabha election drew close. It promised to spend Rs 5,943 crore in 2023-2024 but has so far spent only 41.6% of the fund, despite criticism from the Parliament Standing Committee.

The Committee said it was “apprehensive” that the government will achieve the target by 2025-26 since it takes 2.5 years to build one such school. The committee noted the ministry didn’t utilise all the money it had.

Similarly, the government underfunded the National Fellowship for Scheduled Castes meant to provide opportunities for students from the Scheduled Castes to pursue higher education. The Parliament Standing Committee flagged it in December 2023.

Data shows actual spending on the fellowship has been decreasing. While the government spent only 68% of the amount promised in the budget in 2019-20, by 2021-22 it had come down to 40%. Even the number of fellowships awarded saw a 30% drop in 2022-23 compared with 2018-19 even after including previous year’s backlogs.

Rural Economy

In her maiden budget speech, Finance Minister Nirmala Sitharaman outlined how the government would help develop 75,000 skilled rural entrepreneurs in agro-rural industry sectors through a scheme called ASPIRE. Over the next four financial years, the government committed to cumulatively spend Rs 137 crore. However, it has spent only Rs 31 crore in this period, that’s just 22.7% of the promised amount.

Alongside ASPIRE, Sitharaman mentioned SFURTI, a scheme for upgrading traditional industries. Spending on SFURTI steadily rose until 2022-23, when the government aimed for Rs 334 crore but only spent Rs 1.95 crore. Similarly, the following fiscal year, the government spent Rs 2.5 crore against a budget estimate of Rs 280 crore.

Courtesy: The Reporters Collective

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Results of city-wise trends on funding raised in first quarter of 2024, released by Tracxn, claiming to be a leading market intelligence platform, showo that Bengaluru topped with $247 million and 44% of all funding received, followed by Mumbai ($194 million or 35%), Hyderabad ($75.0 million or 13%), Gurgaon ($19.7 million or 3%), and Surat – the only Gujarat city to figure in Tracxn’s list of cities — ($5.0 million or 1%).

Yet, ironically, the report seeks to heap praise the Indian economy, which it says “showed a strong performance in the previous quarter with a growth of 8.4%.” Agreeing that the “this number is expected to decline to 5.9% in Q1 2024 as per government sources”, it insists, “The Government of India has always been focused on promoting the tech ecosystem in the country.”

The declining trend in the funding of the FinTech startup ecosystem has come despite “the announcement of the Startup India Initiative in 2016”, which came up with “multiple schemes and initiatives have been introduced to boost the growth of India’s startup ecosystem”, to quote from the report. Thus, “Around $12 billion was allocated in the Interim Budget for 2024 for providing interest-free loans for 50 years to promote R&D in the private sector in the country.”

The report quotes the IMF to say that India is “expected to become the third-largest economy in the world by 2027 with a GDP of over $5 trillion”, and “with a large consumer base comprising the world’s largest young population and rising urban incomes, India is set to see good growth in the coming years.”

It adds, “FinTech has consistently been one of the top funded sectors in the country. Increasing smartphone penetration, the push towards a cashless economy, and other favourable regulatory policies have helped the sector receive consistent investor interest.”

Making a comparison of funding in Q1 of 2024 and Q4 of 2023 instead of Q1 of 2023, the report says, “Banking Tech, the third-highest funded sector, received funding of $85.8 million in Q1 2024, which is a growth of 187% compared to the $29.9 million in funding witnessed in Q4 2023, benefiting substantially from record-breaking UPI transactions and digital banking’s widespread adoption due to rising internet and mobile device penetration in cities and rural areas.”

However, this comparison, which many would consider incomparable (as the compared periods do not match), also shows that, to quote from the report, “Q1 2024 witnessed a significant 75% drop in seed-stage funding, which was at $9.9 million compared to $39.2 million in the previous quarter. Early-stage funding saw a 35% drop from $227 million raised in Q4 2023 to $147 million in Q1 2024. Only late-stage funding rounds witnessed a phenomenal rise of 392% to $394 million, compared to $80.1 million in Q4 2023.”

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Economist Jean Dreze has played a pioneering role in shaping India’s public and social policy. He is most well-known for his advocacy for the employment-guarantee legislation MGNREGA and the National Food Security Act (NFSA). In this interview with NewsClick, he talks about India’s social and economic policies, including the relationship between Hindutva and the economic model pursued today. He says is difficult to see a coherent strategy in current economic policies, while in the social sphere, ‘Rights are out, duties are in’. Edited excerpts.

Economic nationalism informed the freedom movement, which meant Indians took control of the economic sphere. Also, it meant boosting the public sector. What was the purpose behind it, and have we realised the goals?

Economic nationalism, like nationalism itself, can take many forms. I don’t think that it provides much policy guidance unless we spell out how national interests are defined. When India became independent, the control of the economy shifted from the colonial power to an elected national government, and that was certainly a good thing. It also ended the economic stagnation of the first half of the twentieth century and paved the way to sustained development. But does this mean that ‘Indians took control of the economic sphere’? Some did, some did not. Landless labourers, for instance, remained landless labourers, except in Kashmir, where there were extensive land reforms. By and large, the levers of the economy remained in privileged hands. The transfer of power from the colonial government to a privileged Indian minority was a limited form of economic nationalism, with slim results on its own for large parts of the nation.

One problem for India is to reconcile the conflict between capital and labour. What does the state’s retreat from production and public sector sell-off mean for the majority of working Indians?

Public enterprises can resolve the conflict between capital and labour only for a minority of public sector employees. Contrary to public perception, India’s public sector is one of the smallest in the world in terms of employment—barely 5 per cent of the workforce, compared with 12 per cent in Brazil, 22 per cent in the United Kingdom and 28 per cent in China according to ILO data. There is certainly much scope for expansion, especially in sectors like health and education. The fact remains that the bulk of the workforce will be employed in the private sector in the foreseeable future. The conflict between capital and labour there cannot be reconciled, but the state can help workers to handle it by expanding their rights, for instance, the right to decent work conditions and social security benefits. Workers’ organisations are also important in this regard, especially in the informal sector, where they are still few and far between. 

Taking a longer view, a more radical change in terms of the conflict can be achieved by giving workers more say in the management of private enterprises, if not control of it. In principle, many enterprises could be managed by the workers or by managers accountable to the workers. The bosses, of course, are not going to bow out sweetly, but an organised working class could possibly overcome their resistance step by step.

Hindutva is also a form of nationalism, which is proving very destructive. What is the economic model of today promoting? Like in the social sphere, does it also have hidden motives? 

Hindutva is a political movement, and its toll is more political than economic, whether it is the end of democracy or the breakup of the social fabric. In economic policies, there is more continuity than change. If anything, business-driven policies have intensified because business and Hindutva stand in a relation of mutual support. Hindutva adds some new elements, like the devaluation of rational thinking, the obsession with superpower status, the passion for centralisation, and the suspicion of anything foreign. But the material interests that drive economic policy are much the same as before, at least for now.

In matters of social policy, we did see major changes in the last eight years. Rights are out, duties are in. This change is reflected, for instance, in the central government’s hostility towards social programmes like the rural employment guarantee, maternity benefits, social security pensions and even child nutrition schemes. All of them have been undermined in one way or another. Self-reliance for the poor and state support for business seems to be the real meaning of Atmanirbhar Bharat.

How do you see the control of magnates over the economy and the tax breaks they get? Is it that Indians feel their power is not exploitative because they are not British companies as in the colonial era?

I think a lot of people have a vague awareness of corporate power and the wealth of the super-rich without necessarily realising their enormity. In the latest Mood of the Nation poll, the majority of respondents felt that today’s economic policies benefit big business. On the other hand, when it was pointed out a few days ago that it would take one million years for a hundred workers working at the minimum wage to earn as much as Gautam Adani already has, there was a flutter on social media, suggesting that most people do not realise how rich and powerful the super-rich are. But even if they do, it makes little difference because the public has little influence in these matters. Most people in India would probably support a wealth tax on the super-rich or higher property taxes, but none of that is likely to happen in a hurry. The power of the super-rich includes the power to defend their privileges.

Are ordinary farmers aware of how the terms of trade go against them?

I doubt that most farmers have a clear view of the terms of trade. They are obscure enough for economists. And they may or may not matter much to individual farmers. Roughly speaking, the terms of trade capture what the agricultural sector can buy from the rest of the economy per unit of produce sold in the market. This would be a useful statistic for a surplus farmer. On the other hand, consider farmers in Jharkhand, where I live. Most of them are deficit farmers who grow some of their food and buy the rest, along with other items, from their earnings as wage labourers in the non-agricultural sector. An improvement in the terms of trade may or may not help them. They have many other things to worry about, starting with the drought that is sweeping large parts of the state right now.

What most farmers do understand, I think, is that farming is not a very rewarding occupation, especially in dry-land areas. Their job is full of arduous work, hardships and uncertainty, but at the end of it, they can barely make ends meet. And it doesn’t get much better over time because productivity growth barely compensates for the shrinking of per-capita landholdings. Meanwhile, the rest of the economy is growing relatively fast, so farmers tend to be left behind. It is this relative loss, I think, that creates frustration among farmers and makes them look for alternatives.

How do you view the talk about ‘handouts’ and ‘doles’?

We should not use propaganda terms like doles and freebies used by the corporate-sponsored media to attack whatever subsidies they dislike. We should assess subsidies on their own merit. Subsidies may be justified on various grounds, such as social equity, public health or the protection of the environment. If they have no justification, you could call them wasteful subsidies. The bulk of wasteful subsidies in India benefits privileged groups and the corporate sector, for instance, in the form of over-subsidised power, tax concessions, unrecovered loans and privatisation of natural resources. These are the big handouts if you insist on using that sort of term. Some wasteful subsidies may benefit poor people as well, but they are quite small in comparison.

Redistribution is an essential role of the state, and there is nothing wrong with assisting the poor by providing certain facilities or commodities to them for free. Politicians often make exaggerated promises for their own purpose, which is not always a healthy thing. But it is only by extracting these sorts of promises that the poor get anything in India’s lopsided democracy. Most of the big steps of social policy in the recent past, like the employment guarantee act and the National Food Security Act, were made possible by democratic politics. The idea of restraining this process, as the Supreme Court reportedly suggested, is quite dangerous.

Is India facing a crisis of what should be its next development strategy? And what is the way out?

It is indeed difficult to see a coherent strategy in current economic policies beyond the general love of business. The NDA government came to power with a clarion call for the return of black money stashed abroad, but this turned out to be a wild goose chase. A surgical strike on black money at home was the next move, but this backfired badly when demonetisation sent the economy off the rail. The trail of confused policies continued with Make in India, Smart Cities, Atmanirbhar Bharat, “one district-one product”, and quixotic goals like doubling farm incomes by 2022 (that’s today) or making India a $5 trillion economy by 2024.

The common denominator of these policies is that they leave a lot to the imagination, so the specifics are easily turned into business sops. Atmanirbhar Bharat, for instance, quickly metamorphosed into the so-called “production linked incentive scheme”, a Rs 2 lakh crore shower of subsidies for big business, including foreign companies like Ola and Apple. As Raghuram Rajan pointed out, we are in danger of a return to some sort of Licence Raj.

The way out is to strive for public policies that focus on improving people’s lives instead of being swayed by privileged interests. The expansion of human capabilities is not just a welfare issue, it is also a springboard for development. A modest increase in the tax-GDP ratio, cuts in wasteful subsidies and a big investment in health, nutrition, education and social security would be a good start. It would serve the triple goal of economic development, helping the poor and curbing India’s huge inequalities.

Courtesy: Newsclick

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Even though the primary objective of the Reserve Bank of India (RBI), as mandated by the Finance Act – 2016 under the Modi Government, is to “maintain price stability” through formulating appropriate monetary policies, the RBI has miserably failed to fulfil the same.

Its incapability has become more visible in the last few months. The inflation was beyond comfortable limit of 4% for more than a year now. While the 2016 act, stipulates the permissible inflation rate at 4% with a band of plus or minus 2%, the retail inflation in India had crossed 6% mark by January itself. According to the recent statement by the RBI, the retail inflation for the month of April has not only breached 7% mark, but also reached an all-time high of 7.69%.

Modi Model and Inflation

The inflation or the price rise, in generic term, is always bad news for the have nots. Inflation is an “indirect taxation” by which the market sucks extra money from the people without any legislation. Inflation becomes deadly to people’s lives and nation’s economy when the real wages and incomes, and hence, the demand, is in decline. Since the inflation cuts into the purchasing power of the masses, consumption decreases. This in turn results in fall in demand leading to decline of business. This may further result in unemployment, under employment and increased poverty. This is a vicious cycle.

India is facing such gory economic situation since demonetisation. This Modi-made economic disaster resulted in at least a fall of 2% of GDP affecting the informal sector, the MSMEs, and the farmers where 92 % of Indian work force is employed. Even before recovering from this shock, GST was imposed which further pushed the informal sector to big chaos. The consumption data partially released and later officially withdrawn from the Modi government, during that period, showed how these policies caused decline in consumption which was lowest in the last four decades. Thus, even before the Covid  pandemic, the real wages of the people and the demand in the economy was declining resulting in the continuous decline in the GDP growth rate.

This situation got aggravated in the wake of Covid pandemic and especially by the most arbitrary and unscientific lockdowns imposed by the Modi government. While more than 4 million lives were lost due to Covid, crores of people have yet to regain their livelihood and gainful employment due to lock downs. Even for those who are in the jobs and semi jobs the wages have been decreasing in its real value.

This situation has moved from bad to worse due to the continuous increases of the prices of essential commodities like rice, wheat, edible oil, vegetables, and above all the prices of petrol and Diesel, which is in fact inflation multiplier, in the last one year. The retail inflation which is calculated on the basis of Consumer Price Index, where food basket constitutes more than 45%, has reached intolerable level of 7%. Even the prices of cement, steel, and manufactured goods are also increasing. Most crucial is the increase of prices of petroleum products, of which 85% are imported by the country. Hence part of the inflation is imported.

Inflated ego and deflated Rupee

Now that the exchange rate of rupee against the dollar has fallen to a historical low of Rs. 77.40/-, and is likely to depreciate further in the coming weeks, Indian imports are certain to become costlier, since the dollar component dominates Indian foreign trade. Because of the slump in the international commodity market, Indian commodity exports are not picking up. In spite of high  claims of the Modi government about the record exports, the fact remains that while India exported USD 417 billion worth of goods in 2021-22, the imports were to the tune of USD 610 billion an increase of more than USD 200 billion than the previous year.

So much for the economy of Hindu Atmanirbharata.

This chronic import dependence has resulted in depreciation of the Rupee against the Dollar since Indian Independence which has become unmanageable after the neoliberal reforms initiated in 1991, where administered exchange rate regime was changed to partial convertibility of rupee rate and later to full convertibility.

Thus, while at the time of independence the exchange rate of rupee against the dollar was Rs. 4.70, it slowly raised to Rs. 17 at the beginning of corporate capital reforms in 1991. After the exchange rate liberalisation was implemented, the exchange rate rose to Rs. 43 in 2000 and to around Rs 55 before 2014.

One of the electoral planks of Modi and BJP was that during the UPA regime the value of rupee and hence the dignity of the nation was depreciated. It was caused not because of any economic compulsions but due to political mismanagement and corruption of the Congress party

The present state president of BJP in Karnataka, Mr. Nalin Kumar Kateel, even went to an extent of publicly claiming that if Modi comes to power, with in a span of two years, Indian economy will  become so strong that instead of an exchange rate of Rs 60 to a dollar, an exchange rate of USD 15 for a rupee will be realised!

Any way… no magic happened. Rather economy declined further, import dependence multiplied and hence historic decline of Rupee to Rs. 77.60 against dollar. Thus, the decline of rupee will make imports costlier which in turn would lead to higher prices and inflation.

Political risk and capital flight            

Another reason for the depreciation of the rupee and hence inflation is capital flight of foreign investors from the Indian stock market. It is said that after the “second coming” of Modi, more than 22 billion dollars of foreign institutional investment has been withdrawn due to the increasing political risk to their investment due to growing polarisation and violence in the country. After the war broke out the sentiment of uncertainty made the foreign investors pull out of Indian market further.

While these are the inherent reasons for the increasing inflation, there are also additional and immediate reasons like the Russia- Ukraine war. The war has poured salt to the wound of Indian  inflation.

Due to the war induced geo-economic situation, the international crude oil prices are increasing. On the other hand, Indonesia has declared ban on its edible oil exports and likewise Malaysia. India imports 60% of its edible oil from Indonesia, Malaysia and Ukraine. All these factors have increased the prices of food items so, says the Modi government to paint a helpless picture.

But the prices of both petroleum products and edible oil in India is exorbitantly high not only because of increase in its international prices but majorly because of excise duties and the cess imposed, primarily, by the Central government and state governments. 50 to 60 of prices of the petroleum products are taxes and cess and 40 to 50 of price of imported edible oils are import duties.

Modi Made Inflation

Thus, the inflation in India is:

1) Imported- excessive dependence on Imports, aggravated during Modi regime but has its roots in the neoliberal policies for which previous governments are also responsible.

2) Modi Made-

a) Because the prices of imported goods are artificially exorbitant due to Modi taxes

b) The capital flight of investors resulting in decline of rupee and costlier imports due to Modis politics of Hindu majoritarianism.

Hence the moot question is whether these politico-economic factors causing inflation be mitigated by narrow financial instruments available to RBI?

After the Financial amendment act of 2016, the primary objective of the RBI is to control inflation through monetary policies. That is by controlling money flow in the economy.

Myopic monetary instruments and Monstrous Political Economy

The monetary instruments available to RBI to control money flow are by controlling the interest rates through imposing flexible Repo rates and controlling money available for transactions to the banks by imposing flexible CRR – Cash Reserve Ratio.

When the economy is facing demand crunch, the RBI reduces Repo rate thereby effecting the interest rate on the loans there by encouraging spending and investing, which in turn is expected to stimulate demand. Likewise, the Cash ratio, the amount of cash per deposit each bank is expected to rest in RBI is also decreased so that more money is available with banks for transactions.

On the other hand, when the prices are increasing, RBI construes the reason behind it as the over supply of money in the economy. So, to suck back the extra money it increases the interest rates and the CRR so that money available for transactions are curtailed.

The underlying dogma of the central Banks like RBI, under neoliberalism, in controlling inflation is: the primary and sole reason for the inflation is over flow of the money in the economy.

This may be true in some circumstances where economy is over performing. But price rise also happens when there are supply side constraints., when cost of production is increasing due to mismanagement of the economy or chronic import dependence. The Interest rate increase or effecting the decrease of money flow in the economy would not result in inflation control in such circumstances because the root cause of inflation is entirely different.

Such myopic monetary policies may result in an economic disaster in countries where the real income and the demand in the economy is already hit badly and the growth is already declining. In such a situation policies like interest rate hikes may result in further decline of economic activities creating a situation of Stagflation and economic crisis also.

Indian economy is facing a situation similar to the second example. Indian economy needs more demand push, more money flow in the hands of MSMEs etc. The recent RBI measures in the name of curbing inflation by hiking the Repo rate from 4 to 4.4% and the CRR hike from 4 to 4.5% will lead to further demand crunch, further unemployment without decreasing the inflation. Because inflation  in India at present is mainly due to Petroleum and edible oil price hike, which is caused by the taxation policies of the Modi government and not due to overflow of money or excessive economic activities.

It is said that RBI has been suggesting the government to reduce the excise duties to tame the inflation but the Modi government is not heeding. Hence the RBI, in its extraordinary meeting resorted to repo rate and CRR hike.

Through this myopic monetary policy RBI might have satisfied the inflated ego of the prime minister, but these measures will deflate the living conditions of the broad masses of the people.

This might also satisfy the credit agencies who subscribe to neoliberal monetary policy of inflation control, price stability etc., serving the needs of finance capital. But these policies will only protect the billionaires of corporate finance, but result in total destabilisation of the lives of crores of people.

*Views expressed are the author’s own. The author is a Karnataka-based journalist and activist.

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Rural and urban household indebtedness was higher in southern states than rest of India between 2013-2019, found the India Ratings and Research’s (Ind-Ra) released on September 28, 2021.

The credit rating agency analysed the All India Debt and Investment Survey (AIDIS) data from 2013 and 2019 to understand which states suffered more household indebtedness – the combined debt of all people in a household.

Its report showed that not only did Southern states suffered higher household indebtedness, but also that the percentage of debt charted was higher than the All-India average. In 2019, Telangana had the highest proportion of indebted rural households at 67.2 percent. Similarly, Kerala recorded the highest incidence of indebtedness among urban households with 47.8 percent indebted households.

Meanwhile, North Eastern states reported lower proportion of such households with Nagaland reporting 6.6 percent of rural indebted households – the lowest in India. Meghalaya reported 5.1 percent of total urban household indebtedness – the lowest in its category. 

Among Northern states with low household debt were Uttarakhand and Chhattisgarh.

Households account for nearly 40 percent of the capital expenditure with around 72 percent investment in real estate. As such, understanding the state of household economy is essential to understanding government’s various policies.

According to the Ind-Ra, the per capita income in Southern states was higher than other states. It said the higher indebtedness can be understood by considering multiple factors such as the average amount of household debt, average value of household assets and the debt-asset ratio.

The variables showed that Southern states had a high debt-asset ratio in 2019. Andhra Pradesh, Kerala, Tamil Nadu and Telangana figured among the five states having the highest debt-asset ratio both for rural and urban households. Even Karnataka reported a debt-asset ratio higher than the all-India average for rural and urban households.

“On the positive side all southern states, except Kerala, show a decline in the debt to asset ratio in 2019 compared to 2013. The sharpest decline in debt to asset ratio both for rural and urban household was noticed in Andhra Pradesh,” said the report.

Cause for higher indebtedness among Southern states

Along with a higher incidence of indebtedness, the Ind-Ra also pointed out higher leverage for the aforementioned states. Leverage – the use of debt to undertake an investment – is interpreted as a sign of financial vulnerability. However, all Southern states have a per capita income higher than national average. Telangana, Karnataka, Kerala and Tamil Nadu even ranked in the top six major states in terms of per capita income in FY-20. Further, all states witnessed higher per capita income growth than the national average during 2013-2019. Thus, the Ind-Ra said that such data points has resulted in higher incidence of indebtedness and leverage among the households.

Both rural and urban households use both institutional and non-institutional debt for household or medical purposes. During the Covid-19 pandemic, household indebtedness aggravated. The RBI data, which tracks institutional debt, indicated that the household debt to GDP ratio rose to 37.9 percent in the third quarter of FY-21 from 33.8 percent in the fourth quarter of the previous year.

“Since the threat of Covid-19 pandemic is still not over and the economy may take a while to fully recover, it is unlikely that households will witness any meaningful acceleration either in their income growth or in the valuation of their assets,” said the Ind-Ra.

Since the agency was unable to predict any significant switch in household spending from an ‘essentials only’ approach to discretionary spending in the near future, it urged the government to support the economy through policy and fiscal spending to nurture the ongoing economic recovery.

The entire report may be read here. 

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The Government of India on March 24, 2020, announced a country wide 21-day lockdown. A total of 4 hours was awarded to those in Indian territory to prepare for the lockdown that would strictly remain enforced for three weeks. Prime Minister in his addressed called this a Mahabharata like war, which will be won in 21 days.  Immediately people rushed to stock groceries, masks, sanitizers, etc. 

Amongst other vulnerable groups, the government totally forgot to account 50 Million migrant labourers spread all over India, who rely on daily wages for their meal. With no work, scanty or no savings, and no place to stay (as majority of these workers live either at construction sites or at factories where they work), thousands of migrant labourers started their journey back to their villages on foot. The long serpentine trail of human beings, of all age, religion, region, united by their hopelessness and poverty, juxtaposed the 1947 post partition migration crisis. The visible humanitarian crisis forced the government to act, but the help arrived too late and too little. 

At the time of writing this article, we are amidst the 3^rd Phase of Lockdown, that is scheduled to conclude on 17^th May, and the government has allowed the stranded migrants, stranded students, tourists, etc. to return back to their homes, via government facilitated transport. This decision should have been taken much before announcing the first Lockdown, but albeit late, the decision deserves appreciation.

After the lockdown was announced, a humanitarian crisis unfolded, forcing people into starvation, joblessness, poverty, destitution, depression, etc. This is apart from the health infrastructural crisis where even doctors were not provided with Personal Protective Equipment (PPEs), but this article will stick to highlighting the issues that concern the economy. In my opinion, government’s economic response against COVID-19 is deeply inadequate and is akin to shooting at one’s own foot.

Economists all over the world are advocating the urgent need for a suitable stimulus package to revive the economy. The COVID-19 catastrophe is bound to be at least as bad as 2008 global financial crisis, if not worse. India’s current healthcare expenditure is below 1.5% of GDP, and the sector is marred with a paucity of Doctors, Primary Health Care Centres, Superspeciality Hospitals, Ventilators, Lab Technicians, Pharmacists, medical equipments etc.
 

What is the situation? 

As per the CMIE data, India’s unemployment rate has surged to 27.11% for the week ended May 3 from the level of 6.74% in the week ended March 15. The largest hit in employment is witnessed in unorganized sector and in MSMEs. Several Economists have predicted that India’s GDP Growth will be in negative territory. There is a strong link between disability, loss of employment and impoverishment. Disabilities today have quadrupled, because of destruction of long duration employment and it is now translating into rising poverty. 

India desperately needs an all-encompassing, well-structured and inclusive stimulus package. United States has announced a package of 10% of its GDP, and, close home, few Asian countries have announced a package of up to 15% of their GDP. While India certainly cannot risk spending in double digits for its stimulus package (because of inflationary risks), but a meagre Rs.1.76 Lakh Crore package, majority of which is repackaged, is woefully inadequate.
 

What the Government must do? 

A meticulous fiscal stimulus plan is needed to boost consumption demand, to cushion the shock and to help the economy revive. The fiscal package must aggressively target those in informal sector and MSMEs. MSMEs must be protected by providing it with a moratorium on loans for 3 months along with interest waiver. This will help the Bank’s balance sheet and the MSMEs will also stay afloat.

The fiscal package must include:

a)     A direct and unconditional cash transfer of Rs. 2000 per month for 3 months, to the bottom 60% of Indian population. This will create the demand in the economy, which is rapidly shrinking.

b)     RBI must devise a framework where there is no coercive action on bankers when they lend loans that later become NPAs. A balanced regulation is utmost required to unclog the impending liquidity squeeze in the financial system. Mere rate adjustments will not help. Every sector of the economy is in a dire need of credit.

c)     All State governments must immediately issue temporary Ration Cards to the bottom 40% of India’s population, and the Union government must order FCI to offload the grains and distribute it amongst the poor. The Current bumper Rabi harvest will refill the FCI godowns. 

d)     The Central government must reduce excise duties on Petrol (by Rs.20 per litre) and on Diesel (by Rs.25 per litre) and pass on the benefits of lower prices of Crude to the consumers ($23.86 a barrel currently).

e)     The government needs to incentivize the external sector of trade and commerce.

Is it fiscally doable? 

Yes, the government will have to delay certain gratifications to do that. The money can be made available if we reallocate some of the budgeted capital expenditure and rationalize expenses. We can certainly defer Central Vista Project and save Rs.20,000 Crore outright and we must stop all less important government advertisements. Beautification projects, statue building etc. must be deferred indefinitely. The Oil bonanza is helping the government have a huge windfall gain for the past six years. The Government has already suspended MPLADS, Dearness Allowances; now, it must bring in a COVID Solidarity tax and shall raise funds by issuing bonds to the public. If nothing, it can always print money. We also don’t have to worry much about the inflationary pressure right now because we have sufficient food stock, a stable foreign exchange and low fuel price. 

The government must suit up and announce a fiscal stimulus to the tune of 5-8% of GDP quickly. We have lost a lot of time already, and, we cannot afford being frugal or lackadaisical. Desperate times require desperate solutions. We need to break free from textbook fiscal norms and go beyond the standard practice.

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Mudhol’s Vittal Tolamatti is laughing his way to the bank, crying tears of joy after he earned a whopping Rs. 92.8 lakh growing onions on his 24 acres of land in the quarter of October – December, reported the Deccan Herald.

But Tolamatti seems to be the lucky one. A Reuters poll of economists has predicted that rising vegetable prices may have had pushed retail inflation to its highest at 6.20% in December for a third straight month, exceeding the Reserve Bank of India’s medium-term target of 4%.

Onion prices went through the roof, soaring tenfold, contributing to the surge in food inflation that has been spiking since March. Products like vegetables, eggs, meat and fish pushed the retail inflation higher.

The National Sample Survey (NSS) recorded a 3.8 percent fall in per capital consumption expenditure for the country, with the decline in rural areas being close to 10 percent; potentially pushing more people towards destitution and undernourishment.

India has been suffering from ‘stagflation’ or ‘recession – inflation’ witnessing a slow economic growth and a high rate of joblessness with unemployment rate being at 7.7 percent in December 2019.

The output of primary goods that include the industries of agriculture, fishing, mining and forestry fell by 6 percent, consumer durables declined by 18 percent, construction and infrastructure output declined by 9.2 percent and the production of capital goods (buildings, machinery, equipment, tools & vehicles) fell by 21.9 percent. However, the output of intermediate goods (partly finished goods used as inputs in the production of other goods) increased by 22.2 percent.

The current inflation, experts say, is caused by the decline in output of several commodities relative to the shrinking purchasing power in the hands of the people, who are spending more money on food items, leaving them with less to spend on industrial and other commodities thus enhancing the already soaring demand deficiency in such sectors.

Now, after the tensions between the United States of India and Iran, the already suffering economy could suffer a shock from the outside, weakening the already shaky economy.

India meets more than 80 percent of its crude oil requirements, importing 4.5 million barrels of oil per day; and since the killing of General Qassem Soleimani lead to an increase in the hike of petrol prices. Currently, petrol and diesel prices are at around Rs. 75.69 and Rs. 68.68 a liter in Delhi respectively.

Higher crude oil prices and the unstable situation means India will have to pay more for insurance of the oil tankers that come to Indian shores. Experts estimate that for every $10 rise in crude oil prices, India will have to end up paying an extra $1.5 billion every month. This will push retail inflation in the country by 0.4 percent transport runs on fuel.

In 208-19, India’s import bill was around $140 billion, the current food inflation and any further increase in oil prices could only end up stoking inflation at a time when the economic growth is at an 11-year low of 5.8 percent.

However, experts believe that India will not face a crude oil shortage if tensions escalate because many countries like Venezuela, Saudi Arabia and other Mediterranean and Middle East countries can ensure supplies to the nation.

With the current economic downturn, India is facing a risk of slipping back into the ‘fragile five’, making it dependent on outside investment to fund economic growth. Slower growth in the construction sector means lesser employment opportunities and lower income. Not only the decline in exports, but also the lower imports due to lower consumption pose a worrying scenario.

Stressed loans have exceeded 12 percent of total lending, food inflation has spiked, core industries – automotive, retail and manufacturing have contracted, consumer expenditure is dwindling and the GDP growth is in the doldrums. Will this turn for the better in 2020? Only time will tell.

(Information sources – Economic Times, India Today, Newsclick)

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“The government is wrong. It is wrong because it is clueless. It is unable to look for the obvious clues because it is stubborn and mulish in defending its catastrophic mistakes like demonetisation, flawed GST, tax terrorism, regulatory overkill, protectionism, and centralized control of decision-making in the PMO,” Chidambaram said.
 

Full Text of the press conference held today by former union finance minister PC Chidambaram:

“I am glad to speak to you exactly 106 days after I last spoke to you. As I stepped out and breathed the air of freedom at 8 pm last night, my first thought and prayers were for the 75 lakh people of the Kashmir Valley who have been denied their basic freedoms since August 4, 2019. I am particularly concerned about the political leaders who have been detained without charges. Freedom is indivisible: if we must preserve our freedom, we must fight for their freedom.

“I am grateful for the clear and comprehensive order yesterday of the Supreme Court. The order will clear the many layers of dust that have unfortunately settled on our understanding of criminal law and the manner in which criminal law has been administered by our Courts.

“I have never commented on cases that are sub judice and I shall continue to adhere to that principle. To many of your possible questions on the case, the answers can be found in the lucid order of the Supreme Court pronounced yesterday.

“In the last 106 days, I was strong in spirit and I have become stronger because of the following:

1. My record as Minister and my conscience are absolutely clear. Officers who have worked with me, business persons who have interacted with me and journalists who have observed me know that very well.

2. My family trusts in God.

3. We have total confidence that the Courts will, ultimately, render justice.

“Let us leave the matter at that and turn to the most pressing and explosive issue of the day — which is the state of the ECONOMY.

“The place to start is the diagnosis. If the diagnosis is wrong, the prescription will be useless, maybe even fatal. Even after 7 months into the fiscal year, the BJP government believes that the problems faced by the economy are cyclical. The government is wrong. It is wrong because it is clueless. It is unable to look for the obvious clues because it is stubborn and mulish in defending its catastrophic mistakes like demonetisation, flawed GST, tax terrorism, regulatory overkill, protectionism, and centralized control of decision-making in the PMO.

Please reflect on each one of the charges that I have made. In the days to come, I shall speak, give interviews and write elaborately on each of them.

Nothing sums up the state of the economy better than the following series of numbers: 8, 7, 6.6, 5.8, 5 and 4.5

Those are the quarterly growth rates of GDP in the last six quarters. The third and fourth quarters of 2019-20 are not likely to be any better. We will be lucky to end the year if growth touches 5 per cent. And please remember Dr Arvind Subramanian’s caution that 5 per cent under this government, because of suspect methodology, is not really 5 per cent but less by about 1.5 per cent.

The Prime Minister has been unusually silent on the economy. He has left it to his ministers to indulge in bluff and bluster. The net result, as The Economist put it, is that the government has turned out to be an ‘incompetent manager’ of the economy.

The investors of the world — and the bankers, the rating agencies and the Boards of Directors of companies — read The Economist, The Wall Street Journal and TIME.

They also pay close attention to numbers. Every number — and I repeat every number — points in the direction of a floundering economy. Here are some.

There are many more. You have reported many of them, just go back and look at your data. The government alone is in denial.

Rural consumption is down according to NSSO. Rural wages are down. Producer prices are down, especially for farmers. Daily wage earners get work for no more than 15 days a month. Demand for MGNREGA is up. FMCG — both durable and non-durable — are selling less. Wholesale prices are up. CPI is going up. Onions sell at Rs 100 a kg. What do these point to? There is less demand among the people because they have less money and less appetite to consume due to uncertainty and fear.

Unless demand increases, there will not be increased production/output or increased investment. PLF of all thermal plants is 48 per cent. If one-half of installed electricity capacity is shut down, there can be no greater disaster.

Government is calling the present slowdown ‘cyclical’. Thank god they have not called it ‘seasonal’. It is ‘structural’ and the government has no solutions or reforms that would address the structural problems.

The UPA lifted 140 million people out of poverty between 2004 and 2014. The NDA has, since 2016, pushed millions of people below the poverty line.

The economy can be brought out of the slowdown, but this government is incapable of doing that. I believe that the Congress and some other parties are better equipped to pull the economy out of the slowdown and push economic growth, but we have to wait for better times.”

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It has been almost three decades since India liberalised and integrated with the global economy. It was the seventh largest economy in the world by gross domestic product (GDP) in 2018. But this growth has slowed, and is expected to shrink further in 2019-20, according to multiple global institutions. 

“The data that I have seen reinforces very strong concerns [about the economy],” Stiglitz told IndiaSpend in the course of an interview. “I do not know anybody who is not in the government who is not worried.” Governments tend to “suppress data when it is on shaky grounds”, he added.
While India has been able to benefit from globalisation, there is a view that is “not an uncommon view but an unpleasant one”, that in a regulated market like India foreign players “have a disadvantage because the insiders know how to play the game”.

Stiglitz won the 2001 Nobel Prize in economics for his analyses of markets with asymmetric information. He was a member of the Council of Economic Advisers in the US from 1993-95, during the Bill Clinton administration, and its chairperson from 1995-97. Between 1997 and 2000, he served as chief economist and senior vice-president of the World Bank.

Stiglitz has authored multiple books on economics including People, Power, and Profits: Progressive Capitalism for an Age of Discontent; Globalization and Its Discontents Revisited: Anti-Globalization in the Era of Trump; and The Price of Inequality: How Today’s Divided Society Endangers Our Future. In 2011, he was among Time magazine’s 100 most influential people in the world. He is a professor in the department of economics at Columbia University and founder and president of the Initiative for Policy Dialogue, a think-tank on international development based at the university.

In this interview, Stiglitz explains the impact of globalisation in the last two decades, and of populism, the rise of the gig economy, and the problem of inequality in India and the world. Edited excerpts:

How has globalisation changed in the last couple of decades, particularly with the rise of protectionism and populism and what impact have you seen on emerging economies like India?
Twenty years ago the common wisdom was that trade would benefit all. It was a contested view in both the [global] North and South. While it was held by a lot of elites, it was not universally held. Many developing countries only liberalised with the threat of the International Monetary Fund as a condition of getting aid in the structural adjustment programme.

I wrote papers in the early 1980s pointing out that [global markets] are not perfect risk markets and trade can make everybody worse off. Trade exposes countries to risk without risk insurance, producers of risky products may contract production that might hurt people in other parts of the economy, and similarly, many people in all countries could be worse off.

It was meant to be a warning against naive globalisation. Although it [paper] did not ask people to not go ahead with globalisation, but it says that those people who think that everyone will be better off have not proved the case. Under certain assumptions, it would make some better off while others would be worse off. The gainers could compensate the losers, but they never did. The other problem is the assumption that markets are perfect, which was not true.

When I wrote this nobody in the policy world paid any attention to it, even when I was in the White House and the World Bank. Eventually (by the time I wrote Globalisation and Its Discontents), there were examples of jobs being destroyed and not as many being created. It showed that we had to learn to manage globalisation better. It was not that globalisation was necessarily bad, but it was not good either.

India has gained a lot with its integration into the global economy (US and western Europe), including the technology sector, modernisation, [new] universities, etc. Though it is not so clear that better managed policies with respect to importing cheap Chinese manufactured goods would have led to a robust manufacturing sector [in India]. 

Young people seem to have found opportunities in the gig economy through cab aggregators like Uber and Ola, and other food delivery applications in India, often working long hours with inadequate benefits. In California, new legislation has made it harder for gig economy companies to treat their workers as contractors instead of employees. Similarly in India, there have been protests demanding labour benefits for workers in the gig economy. How do you assess the gig economy globally and its effect on economies like India?
At one level you can celebrate that they make it easier for people to enter the labour force, but clearly part of their business model is exploitation and circumvention of existing regulation, most of which have a good purpose.

In New York [city] there was a study on the wages paid to the taxi cab drivers on [such] platforms which said that they received $6 per hour which was below the minimum wage and a livable wage. This is also a dangerous wage because of the increased number of hours that a person would have to drive. New York city has passed a law that tripled the wage to about $18.

Knowing where your cab is and being able to call them has efficiency gains, but this could have been done even if it was regulated by taxi cabs. I think there are efficiencies that the gig economy can bring, but the business model is driven by exploitation and circumvention. We have to maintain the advantages the model offers but at the same time restore more bargaining power and regulate the bad aspects.

While you have maintained that “GDP is not a good measure of wellbeing”, India’s GDP growth has been revised downwards by multiple agencies. Further, there are issues of data suppression. Abhijit Banerjee, one of the 2019 Nobel Prize winners, believes that the “Indian economy is on shaky ground”. Would you agree?
One of the problems when there seems to be data suppression is that you cannot precisely know what the state of the economy is. But usually governments suppress data when they are on shaky grounds. They will suppress data when there is weak growth.
There are a number of indicators like consumption which are, to say the least, worrisome. It is hard to have a robust economy when the basic data for consumption and investment are weak, as they are [in India]. So, the data that I have seen reinforces very strong concerns [about the economy]. I do not know anybody who is not in the government who is not worried.

The pre-tax national income of the top 10% in India increased by nearly 23 percentage points to 56.1%, while that of the bottom 50% declined nearly 8 percentage points to 14.7% over 25 years to 2015, according to the World Inequality Database. The nine richest Indians now own wealth equivalent to the bottom 50% of the country. Why is there an increasing accumulation of wealth globally, and what are the solutions?
There are many dimensions to this problem. The people at the top figure out ways of not paying taxes, so their wealth multiplies in a way ordinary people’s cannot. The largest Foreign Direct Investment source for India for a long time has been Mauritius, which is a tax haven. A lot of the wealth [in India] has to do with special deals in telecom or defence, where the government gives a license or contract. It becomes difficult to know if the price is competitive.

In the US, real estate developers get zoning variances that allow them to do things others do not (through political connections). Two of the richest contributors to the Republican party were people who run gambling establishments globally. Gambling is a part of the money laundering industry.

Even in China, a lot of billionaires are part of the real estate industry with connections to local party officials and have access to land. In a natural resource economy, getting favourable access to it brings wealth. But there are also people like Jack Ma of Alibaba who have been really entrepreneurial.

In India, wealth was created in telecom and there is a very strong view that players did not do so in a regular and competitive way. I knew some of the [multinational] companies that wanted to play by the rules, and they said that it was just not possible. They had the technology and expertise but they said that India was a “dirty place”.

Was it the corruption and bureaucratic red tape? Are there solutions?
They could manage the red tape. It was a combination of corruption and thuggishness, although I never got a clear view of the nexus between outright thuggishness and corruption. But they left. These were honest and brilliant people [US companies], who would have brought talent.
It was not an uncommon view but an unpleasant one, which was that in a highly regulated country with big players, outsiders have a disadvantage because the insiders know how to play the game.

The solutions are that with the right government you establish rules of transparency, oversight, independent procurement agencies, independent corruption agencies. Singapore and Hong Kong have managed it to a good extent.

How does the rise of populism and majoritarian governments worldwide perpetuate the problem of inequality? And what changes do you observe in democratic institutions in India and the US, particularly in the role of civil society?
When people see unfair outcomes they get disillusioned with the system. Things can go a couple of ways. You could get a demagogue like [Donald] Trump who knows how to exploit the discontent but not cure the problem, [which can] make things worse. Then you have the other side where you have reform movements (which is hopefully happening in the Democratic party) where policies are being put in place for more competition, stringent ethics, oversight, among others.

The central governments of India and the US have taken measures to detain illegal migrants. Amit Shah, India’s home minister, has talked about a nation-wide expansion of the National Register of Citizens while the US is planning to take DNA samples from asylum seekers and other migrants. What is the fallout of such measures?
When things are not going well, people always want to blame somebody else. This may be foreign trade [for example]. But we made that trade [deal]. India may make the excuse that the US forced it to sign, but the US cannot make that excuse because we were the ones who wrote the deal.

Immigation is not the source of the problem in the US. The parts of the country with a lot of immigration love their immigrants. We could not function without our immigrants. It is a problem in the country where immigrants do not want to go, and where there is emigration and not immigration. The issue is that [in these parts] societies are collapsing as there is no economic opportunity, reduced life expectancy, and issues of drug overdose, alcoholism and [high rates of] suicide. This is the problem, not immigation.

(Paliath is an analyst with IndiaSpend.)

Courtesy: India Spend

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