By M N Buch (Guest Writer)
The mantra of the votaries of economic liberalisation is growth and growth rate. The market is the only factor which should guide the economy, market competition is beneficial to consumer, producer and society at large and growth is the only way to achieve economic prosperity. Missing from the argument is the word equity. Under the present government till about a couple of years ago a projection of 8.5 per cent per annum growth of GDP had been touted. What is not mentioned is that with this high rate of growth the increase in employment is less than 0.3 per cent. Normally one would have thought that as more money is generated a commensurate number of jobs will also be created, but the fact is that the rate of growth of jobs indicates a stagnation in the formal sector. If a very healthy growth rate does not generate jobs, where is the money going?
The Western economies, especially the US, have always used consumption as the means of promoting economic growth. The theory is that money which goes into consumption finds its way to the productive, secondary sector and encourages both the growth of the sector and additional employment. This is the model India has opted for. When Rajiv Gandhi was the prime minister on one occasion Mani Shankar Aiyar boasted that India was now a nation of a 100 million consumers. Our population then was 800 million, which means Aiyar inadvertently admitted that 700 million people were outside the consumer market. I told the prime minister that both Aiyar and the government should be thoroughly ashamed of the fact that they could see only a miniscule section of middle class consumers and that the 700 million people outside the market had no place in their reckoning.
In 1949, after the revolution, China opted for a policy in which manufacturing received highest priority. This included the backyard furnace that produced small ingots of pig iron, uneconomically, at high cost and at the risk of pollution. But it did create a mindset of produce or perish. China decided on domestic austerity, reserving production for export. The Chinese adopted labour laws that made labour disciplined and restricted to low wages. This created a competitive advantage and a great deal of industry from the developed world was outsourced to China. As offshore production picked up the US, unwisely, decided to raise the share of the tertiary sector and a situation soon developed in which manufacture took place in China but consumption in America. In the long run China has proved that he who controls the means of production can call the shots on any economic issue. That is what makes China such a strong economy today.
India, on the other hand, had an open society and whereas there has been substantial investment in infrastructure development, by and large our post-liberalisation growth has been in the service or tertiary sector, with information technology being the main provider of jobs. The net result is that our manufacturing capacity as compared to China is very low. The internationalisation of the Indian economy, though still limited, has exposed us to global fluctuations.
One of the reasons why we had a healthy foreign exchange reserve is funds flow from abroad which, however, largely went into the financial sector rather than long-term investment in infrastructure or manufacture. Our present woes about a rapidly devaluing rupee are because of changes affected by the Federal Reserve in the US which have caused foreign investors in India to withdraw funds. Y V Reddy, as governor of the Reserve Bank of India, because of his conservative policies was able to cocoon the Indian banking system from global meltdown. Our present policies have only exposed our weaknesses.
The government’s response to the crisis has been totally populist and is not based on sound economy principles. The two main culprits are the NREGS in its present form and the new Food Security Ordinance. Investment in generating rural employment is an excellent idea, provided the money is used to create permanent gainful assets. The scheme as presently framed aims at providing 100 days of employment to those below the poverty line, with the result that the programme is entirely muster-based. If assets are created, they are only consequential.
We have no well-planned priority list of assets which must be created. The watershed management programme has succeeded in reducing seasonal migration in tribal areas, improving water availability and boosting agriculture. There are few leakages in the programme because of its tight design. Instead of such programmes the government has opted for a highly corrupt and wasteful muster-based employment programme in which not more than 30 per cent of the money is going into any productive use.
Malnutrition is a problem and its scale in India is bound to be the product of poverty. Creating gainful employment that generates income is the only way to ensure adequate nourishment for our children. Instead, the government opts for the so-called food security programme aimed at covering a majority of the population by supplying foodgrain at a highly subsidised rate. Estimates of what this will cost range from ` 1.25 lakh crore to ` 3 lakh crore. Whatever the figure it is so high that if the money were wisely invested in creating gainful employment we would break the back of poverty within a few years. By creating infrastructure and giving a boost to manufacturing India’s economy could be strengthened to a level higher than China’s.
Most of the money that boosts inflation comes from the parallel economy, which includes corruption. This is not amenable to the Reserve Bank’s control. The white economy, from which industry and business draw capital, is now subject to so much regulation and the cost of that money through interest rate hikes has risen so high that it is beyond the capacity of legitimate business to borrow or repay. It has pushed cost of our manufacture to levels where the product is now not competitive in the global market. Is this what we mean by financial management?
A falling rupee, rapid fuel hikes and the growing cost of energy have all pushed prices through the roof. Incomes, however, continue to stagnate. This high-cost, low-income economy, whose rulers cannot look beyond populism for electoral purposes, is poised on the brink of disaster.
(About the Writer: M N Buch, a former civil servant, is chairman, National Centre for Human Settlements and Environment, Bhopal.)
