Few of Thoughts and Ramblings on Poverty in India

In the United States of America, every Presidential election campaign rests on the pillar of an Economic ideology whereby the candidates would try to woo the electorate en-masse with articulate expressions of their vision to take the American Economy to a newer height than ever before. We saw that in Barack Obama’s emphasis on economic democracy and economic justice at almost every speech during his campaign and we saw an en core during the 2012 Presidential elections with a very emotional speech about Democracy, the marginal voter and the will to fix this economy for that marginal voter, taxpayer, father, mother, child and so on. We saw a similar phenomenon recently in India, with the recently concluded general elections where the debate on “Secular Development vs Secularism” dominated the mainstream media and captured the minds of the average Indian voter. What is common between the 3 strands of events that I just mentioned is the bleeding economy that one could see at the backdrop, reeking with inequality and thirsty for growth.

The growth narratives that are being drawn by a lot of developing and emerging market economies today are very common in principle of predominant financialization of the economy where the stock markets are more important to the policymakers than the real economy outside. The recent reactions of the global economy to chaos in the Chinese Stock Markets with Sensex leading the charge, dropping from almost 29,000 points to 25,000 points within such a short period of time have put policymakers on such alarm that the Prime Minister had to convene an ad hoc summit of “India Inc.” to restore economic confidence in the business class and among investors in the fact that although all may not be well in the country’s economy, the “ache din” are surely on their way. Paradoxically this reminds of a prominent work among leftist-economic circles by Paul Sweezy (which was a result of one of his debates on Economic Policy with Keynes) on how Capital was redistributing the contours of growth among economies which were on the path. I used the word paradoxically because Sweezy very eloquently and lucidly opposes a lion’s share of the indicators of Economic Growth in most capitalist economies such as the stock-market as a yardstick of the growth story, rebutting the fundamentals on which they rest.

What Sweezy does in his treatise is to point out the Marxist ideology of the base and superstructures and give it an economic twist by exploiting the dichotomy of the real and the financial sector of the economy. He points to the real (industrial, manufacturing etc.) sector as the base and the financial sector as the superstructure of the economy, and in doing so points out that most growth stories which occur in the world rest on a tiny base and an ever expanding super-structure, which makes this growth increasingly shaky and unstable as it goes on with time. Why I refer to Sweezy is because the Indian economic story of growth has come into a dangerous similarity with this brand of growth with financialization at the helm, seeming to pull the economy forward. The dichotomy takes a starkly ugly form here when we incorporate the spectrum of poverty within this framework of growth that India is indulging itself in.

India as an economy has never quiet been able to come to terms with the rampant spread of poverty within it’s polity and no amount of plans have actually been able to impede this snowballing increase in poverty throughout the country. The dichotomy of the real and the financial sector have almost translated themselves into a debate on whether there are two versions of India that seem to now co-exist within a common territorial unit, which for an objective observer is nothing but shocking. The quintessence of growth and poverty lies in the observation of a city in India housing a structure in excess of twenty storeys for just a family of four, while the same city also houses the largest and most densely populated slum in the world. This may seem rhetoric but these are just facts to put to the forefront where the base and the superstructures of this economy have been divergent in the growth experience of this country. For such a shockingly disparate scene to exist at the heart of the financial system of our country, Mumbai, shows where the rampant financialization has been taking our growth dream in sync with the policymakers at Lutyens. The problem with the current perspective of growth in India is reflected somewhat in the words of Nobel Laureate, Ronald Coase when he observed : “The entities whose decisions economists are engaged in analysing have not been made the subject of study and in consequence lack any substance. The consumer is not a human being but a set of preferences…. Exchange takes place without any specification of its institutional setting. We have consumers without humanity, firms without organizations, and even exchange without markets”. These words essentially sum up the anatomy of the Indian story of growth and to any objective analyst of such a story, the scenes would not only be sordid but the reviews would also be shocking.

What this scene of disparity does is to remind me of a very interesting tract by Thorstein Veblen where he departs from the conventional text-bookish economics taught to us, to examine the processes of capital utilisation and accumulation in the economy from a rather refreshing angle. What Veblen said almost a hundred and ten years back was that Capital, rather than being a produced means of production is rather a social phenomenon; a phenomenon where possessing Capital implied possessing power over the means of production in an economy. This is a classic departure from the neo-classical school of economics that we are taught in Economics 101 lessons of treating capital as a means of production, a variable which can quantified and treated with a set of assumptions in a multitude of numerical problems that we solve in the classroom. I do not want to sound heretical here but these again, are just plain observations that I am making to develop the grounds of my reasoning in this nuanced debate growth and prosperity in the Indian Context.

Veblen’s political economic treatment of capital opens up a whole new angle in this analysis if we are to look at how in the current scenarios, the Indian state is trying to engineer its growth to a globally competitive level. It is no secret that the policies of the yesteryears in the country post liberalization and 1991 have been to promote growth and an export-oriented approach to the same, through the promotion of private enterprises in the economy where the business environment in the country was created to cater to needs of the individuals and organisations who could take the mantle of the changed economy and create a new path towards sustained economic growth. The Bombay Stock Exchange and the National Stock Exchange became the beacons of privatisation in the economy with new private corporations getting their shares traded for capitalisation almost on a regular basis. Hence the power over these major productive processes in the economy created a nexus of the private entrepreneurs and the governmental officials which came together in sync to add up to the numbers and carry the growth story forward for this new emerging India. However what was left out of this nexus was the percolation of this power over productive resources in the economy to the people who were relatively not well off. The growth story of our country began to rest more on the financial superstructure than on the bases on which this economy was built. This structural change became visible in the redistribution of the GDP from agriculture and more toward manufacture and even more towards the service sector of the economy.

The anatomy of this growth, though the need for India to increase the rapidity of its growth is something which was required, I would cast my serious doubts over the question of whether it was desired. If we look back at Sweezy’s analysis of economies we see that “monopoly capital” thrives in two ways – capital deepening and capital broadening. The former is when the core capital (or the people who possess the principal power over the productive resources of the economy) thrive to extend their grip over the resources possessed by others and capital broadening is when capital as a whole expands to take newer resources into its ambit. If we look at the context of the Indian economy and the growth it has undergone, we will see that this has given rise to a new group of super-rich who are being looked at to help carve out a niche for India on the global map. The second aspect is something rather similar to Baumol’s analysis of entrepreneurial capitalism in the Philip that is now being given by the government and by the big corporations to the smaller corporations and startups to contribute to the growth story of India.

In this case, when the growth of the nation is being so heavily concentrated on this amalgam of capital in the hands of a minority when we consider these people in the spectrum of the total demographics of the country, we are increasingly led to the question of whether growth indeed is a zero sum game in the Indian context. In the Indian context of resource distribution the answer would be a shocking affirmative. Let us not mistake that the GDP pie has not been growing. It has been, but the share of the limited number of people who matter in the economy over the pie has been growing at a much faster rate than the norms of trickle-down economics would imagine it to be. 

In such a case of zero sum growth, we can look at the case of poverty from two different spectrums. One view is that the poor are just like the non-poor in terms of their potential (that includes ability, preferences), and they simply operate in a more adverse environment, in terms of individual characteristics (e.g., factor endowments) or economy-wide characteristics (e.g., prices, infrastructure, various government policies). The best known statement of this view is Schultz’s phrase “poor but rational.” Modern development economics has extended this view to what Esther Duflo calls “poor but neoclassical” by studying various frictions that impede the smooth functioning of markets as well as technological non-convexities that make it disadvantageous to be poor or operating at very low scales. If we look at both these cases from an Indian perspective we see much social light being shed on both these strands of poverty to analyse a largely common afflicted mass. premise of this view is that poverty is a consequence of individuals operating at very low scales. The implicit premise of this view is that poverty is a consequence of individuals operating with an unfavorable external environment. To the extent this can be fixed by placing a poor individual in a more favorable external environment, it will be a transient phenomenon but otherwise the poor may be trapped in poverty. In a sense, in this view the phenomenon of poverty, other than being inequitable, is also inefficient: a combination of individual rationality and market forces should work to utilize any potential gains (e.g., lost income from insufficient investment in human capital).

The first strand of analysis ties in well with the earlier ideas of my essay on the rampant spread of monopoly capital throughout the Indian economy with little emphasis being given to the poor in terms of giving them an opportunity to move up the social ladder. Infrastructurally in most parts of the country these sections of the population have been impoverished and left with not much to bank upon. The fact that the political jibe of Narendra Modi in the Lok Sabha about the poor still requiring the MGNREGA to dig up holes in almost 70 years of independence depicts a shocking reality about the state of affairs prevailing in this nation currently. Casual employment opportunities, lack of proper safety nets and misguided welfare schemes have been the norm of the day and the poor in our country are the ones to have paid the price. A major chunk of the growth in this country has taken place without their inclusion and the trend of the future growth process seems to be nothing less. Schemes such as “Make in India” may exist and flourish but will they be able to lift these poor people who really form a major chunk of our economy, out of the entrapments of poverty? That remains the big policy debate on a lot of schemes introduced by a lot of governments – whether this increasing GDP will ever have a wider base.

What we must realise as a body polity is our priorities between a solely growth perspective and one which incorporates Growth with distributive justice. Our nation seems to be in a mania of surpassing China in terms of the growth figures. However what we have ignored over the past is the distributive justice of the fruits of this growth that we must ensure. Even though people may say that the relative percentages of poverty have dropped over the years, India still houses a large share of the world’s poor and it only seems that things are in no mood for improvement. What needs to be understand is that the plank on which this modus operandi of our growth is standing is nothing but temporary and we must find ourselves an opportunity as a nation to get out of this looming prospect of stagnation and chart a new way forward for ourselves.

Amartya Sen’s approach towards poverty through the spectrum of capabilities play a key role in this nuanced evaluation of the state of affairs in our economy. The capability approach focuses on what people are able to do and be, as opposed to what they have, or how they feel. Sen argues that, in analysing well-being, we should shift our focus from ‘the means of living’, such as income, to the ‘actual opportunities a person has’, namely their functionings and capabilities. ‘Functionings’ refer to the various things a person succeeds in ‘doing or being’, such as participating in the life of society, being healthy, and so forth, while ‘capabilities’ refer to a person’s real or substantive freedom to achieve such functionings; for example, the ability to take part in the life of society. Of crucial importance is the emphasis on real or substantive – as opposed to formal – freedom, since capabilities are opportunities that one could exercise if so desired. The capability approach places particular emphasis on the capabilities a person has, irrespective of whether they choose to exercise these or not. Hence from the spectrum of this capability perspective, if we now once again make a qualitative judgement of poverty, India presents a rather dismal picture which ties in with the earlier strands of poverty that I had spoken of. Most people in the country who are labelled under census qualifications as “poor” do not possess these capabilities and much of the economic thinking has been away from providing them with these capabilities to move out of this vicious circle of poverty that generations have found themselves in. For instance, much of the insistence on privatisation has led to basic welfare facilities in the country being privatised such as education and healthcare with the government in an age of fiscal prudence being unable to logistically support this burgeoning population any further. Unsubsidised healthcare and extremely poor quality of subsidised healthcare has become a huge constraining factor on the poor, along with the lack of proper and quality education at subsidised rates. If we are to measure capacity formation in the economy, we must turn our attention to human capital and when we do turn our attention to human capital, we should ideally be seeing a labour surplus economy such as India on a promising note, but what we do see is a shambolic state of affairs for a potentially rich resource for our country.

The story of growth carries with an accompanying story of convergence which we must address as well. If we do look at the statistics we see that the top 10% of our country now has almost 40% of the country’s wealth and combined resources according to a credit-suisse report which was recently published. Conventional growth theory does state that the farther you are from our steady state, the faster does the growth occur. If we however, do look at convergence from the angle of the Poor-Non-poor binary in the Indian context, we find that this convergence has somehow not been taking its optimal impact. The Growth has arrived and the convergence effect has also arrived for a section of the population which seems to be well on it’s way to achieving its optimum levels of growth. However for the larger section of the population which the latest Indian census recognizes as poor, this convergence seems to have tragically cast itself into a form of divergence where the farther they are from their steady state, the farther they keep progressing, other things remaining or not remaining constant. It is a cruel analogy to a sacrosanct theory of growth but that is exactly what has dominated the Indian economic contours in an age where Millenium Development Goals seem to be carrying the headlines at a lot of international conferences. What does this lack of convergence seem to reflect? In a recent paper published at the Jackson Hole Economic Policy Symposium held by the Federal Reserve Bank of Kansas City, Dani Rodrik suggested that the lack of convergence stems from misallocation of resources whereby resources are not allocated to the sections of the economy which would actually utilise or benefit from these resources the most in carrying the vehicle of economic growth forward. Looking at our demographics, our allocation should be geared majorly towards eliminating poverty while ushering in the fruits of growth so that this tale of convergence does take its effect in the Indian system. A structural redistribution and re-evaluation of the economy in terms of governance, institutions and policies is a much needed prescription for the economy to improve the quality of its growth and to make growth actually sustainable in the long run.

The anatomy of our growth has been far from just and the structure of our growth has been one that has expanded the grips of poverty over the population of our country. From an ethical perspective, this essay was more about exposing the roots of economic growth and the basic Economic DNA of poverty in the country rather than a number-crunching exercise on whether we are succeeding or failing. Even if we are, until the basic DNA of the nature of poverty in our economy is exposed nothing much can actually be done by any of our targeted policies to get the economy alleviated from a state of rampant poverty. I did not entail this piece to be a numeric/mathematical analysis because there is already enough literature on that for us young and not-so-young minds to read up from, but again, a qualitative piece which seeks to understand poverty and growth from a politico-economic perspective of financialization, growth and capital in a 21st century emerging market economy. Poverty, from a capability approach translates and fits very beautifully into the framework of the lack of “capital” for a major chunk of our population. Our aim as a state should be to immediately take stock of this phenomenon underlying our growth and manipulate it in a manner whereby growth and the quantum of poverty enter into a strongly inverse relationship with each other, all the more increasing the quality of our growth as an economy on the principles of sustenance, equity and justice in the long run.

Reflections on Modi@365: Perspectives on Economic Expectations

The National Democratic Alliance has completed a year in office and the media seems to be capturing its TRP ratings through all the snap polls and Surveys that they have painstakingly conducted across the country to commemorate the turn of the year for the current government in power. What also began for me in the last week was when I wielded my pen (keyboard rather) after a long time to begin to write again on the current state of India-this time albeit not from a predominantly Foreign Policy standpoint but from the perspective of a proponent of Economics. This came about thanks to a rather interesting blog which I had come across from my friend, Ritinkar Dasbhaumik about the priorities of the current government. In my previous blog I had tried to address a few issues that he had raised in principle to why I was countered in a subsequent response ,or inquiry (as I would like to put it) that he had penned over the weekend. It is purely coincidental that I am drafting this reply at a time when almost the entirety of the nation is debating on the successes and failures of the Government on a variety of fronts. However this debate, being a more nuanced one, deliberates on the very basic priorities of the government that is at the helm of affairs today. To put in more simpler terms, is this a “Suit-Boot” Sarkar or is this a “Ganji-(Bina)Chappal” Sarkar.

I would obviously have to thank Rahul Gandhi for the former jibe which seems to have struck the Nations mind more successfully than he can or ever will probably be able to achieve but why I gave the second coinage was for a reason. And that was to emphasise the presence of the other end of the spectrum-The “Aam Admi” in common Indian lexicon. It is absolutely foolish for any government to be completely engrossed in the matters of the swank corporate offices and not remember the open fields where the farmer is pondering whether to commit suicide or not. And that is what the crux of the face-off has been about.

Does this Government think about Growth alone? Is this government not really concerned about “Sabka Saath, Sabka Vikaas”? How has this government faired on inclusivity, economic growth, social welfare and equitable distribution of the fruits of growth over the past year? These three questions will be the backbone of my argumentation trying to defend the turn of events over the past year or so in India.

Before I answer this question, let’s take a very quick analogy. I have just decided to refurbish the house that I have been living in for the past 10 years. Now the task of refurbishing is one which is very cumbersome because it entails a bit of new furniture, applying primers on the walls, re-painting of the walls, renovation of bedrooms and probably replacement of old furniture with new ones to match the renewed interiors of the house. The Indian Economy and State is primarily in the midst of this state of renovation which our Prime Minister has initiated. We are seeing a lot of rethinking about the growth-path, development objectives, foreign policy objectives and economic outlook that India should be projecting, over the course of the past 1 year. And our economy is like this house going under renovation. For a renovation to proceed, old furniture needs to be removed out of the house, old walls probably need to be broken down as per the owner’s convenience and a lot of other things happen simultaneously. That has exactly been the state of the Economy over the past year. A lot of people have called the Indian Economy, a new lab-rat for the Neoliberal Experiment, but I would put it more as a “Work In Progress” area of the Global economy (much like that room in a house which is torn apart to give it a new look).

In the midst of this “Work in Progress” phase that I have just spoken about a lot of shifts have been taking place in the Indian Economy has also not been left behind. In fact it has been the area where the Government has begun its work and is in the midst of refurbishing the vital essences of the same in its own fashion. During this process, I was faced with a debate on “Pro-Corporate vs Pro-Poor” ideologies of the Indian establishment which in my previous blog I tried to put across by saying that this “vs” sign should be replaced with a “-“ to indicate the State of flux that the economy is in. Having once again introduced this contextualisation of the economy let me now get down to a few key fundamentals of the Prudence-Welfare debate again.

The NDA Government has inherited an economy in absolute tatters. Not only had people within the country lost faith on the ability of the India Growth Story to gain real footing in the global economic corridors but investors had also begun to be sceptical of the future of the Indian Economy in the midst of almost a decade of “Policy Paralysis”. However in electing this current government, where we as a state did go wrong is in the limbo of over-expectation which we decided to take ourselves into. Narendra Modi, Arun Jaitley, Arvind Subhramaniam and Arvind Panagriya are definitely not the names of magicians. They are the names of people at the helm of affairs of an Emerging Market Economy with one-sixth of the global population and a miniscule fraction of the global GDP. We sadly expected them to be magicians which I had indicated in the latter parts of my previous blog. Let me tell you why this has been an overestimation.

The development agenda, described in the annual budget as “Vision 2022”, seeks to ensure employment, economic opportunity, housing, electricity, water, sanitation, connectivity, medical facility and schools for all its people by 2022, the 75^th year of India’s independence. This is taken from the very first page of the “India Development Update” of the World Bank, published very recently. What is interesting to note is the timeline of 2022. This is because pragmactically speaking, none of this can be achieved by any Government (Leftist, Rightist, Utilitarian, Majoritarian, Neoliberal etc.) within a couple of years. What the very first full-fledged budget of this Government set out to do is to clear the air between pragmatism and lofty expectations. I am happy that they did. Because to promise all of these things to a population of over 1.2 billion within a year would be as foolish as Congress expecting to retain power in April 2014. Hence to confuse long term targets with short term expectations is a folly at its very least. And all of these aims that the Budget did set out were development oriented aims whose main recipients would be the people in the hinterlands and the conspicuous corners of the country today, and I will tie in this long term agenda of the Government with the subsequent takeaways that I have had in the latter parts of this piece.

My second key takeaway from this Government would be its emphasis on Fiscal Prudence and trying to manage the Fiscal Deficit. In dealing with these two issues very briefly as I have already dealt with them majorly in my previous blog, I would like to draw inferences from the Kelkar Committee Report on “Roadmap for Fiscal Consolidation” which ushered in a new era of debate on Fiscal Prudence in India. High fiscal deficits tend to heighten inflation, reduce room for monetary policy stimulus, increase the risk of external sector imbalances and dampen private investment, growth and employment. The consequences of not quickly taking credible effective measures for correcting the current fiscal deficit is likely to be a sovereign credit downgrade and flight of foreign capital. This will invariably further weaken the rupee and negatively impact the capital markets and the banking sector. The growing fiscal deficit also leaves limited monetary space for lowering interest rates to stimulate private investment and growth. Now the Twin Deficits hypothesis implies that given a certain level of private savings, the deficits will have to balanced either through a reduction in Private investment or through an increase in the Current Account Deficit (CAD). The Government cannot simply print money or buy back its own debt when it is a part of an open macroeconomy, particularly when legislatively the FRBM Act of 2003 clearly states the Government cannot borrow money from the RBI for purposes such as social welfare schemes. This leaves us with the path of using available fiscal space to generate funds und plough these back into the economy.

So now we have two choices ahead of us. We either go into a case of fiscal prudence which would gradually give us more fiscal space to increase revenues and thus expenditure in the social welfare schemes that we have spoken about or we may as well begin to raise government expenditure and raise taxes enough so as to recover the money lost in this expenditure under status quo. The situation under a Keynesian IS-LM model would look something like this: 

PHASE 1: INCREASE EXPENDITURE ONLY

You can clearly see that if the Government increases its expenditure although Income levels are going to increase, there is going to be an increase in the rate of interest which is going to crowd out private investment to a degree. To plug in this crowding out of private investment there will probably have to be a slight increase in government expenditure which may increase the interest rate even further thus necessitating greater government spending and gradually marginalising private investments to a bare minimum in the economy, which may put significant strains on government exchequer and higher macroeconomic imbalances and ramifications in the long run.

Now a government will not be able to sustain this level of increase in expenditure if the Central Bank does not lend it money for such expenditure. It will have to use its fiscal instruments. Government expenditure can’t be reduced since it was required to be increased in the first place. But what can be done is to increase the rates of taxation in the economy which will usher in phase 2 as shown below: 

PHASE 2: INCREASE TAXATION TO COVER FOR EXPENDITURE

So what happens in this phase is the economy contracts from Y’ to Y” with the falling interest rates which are only reducing the quantum of contraction by slightly crowding in private investment, although that is not much use in such a fiscal policy where the disposable income in the hands of the people are reduced and the aggregate demand in the economy is lowered because the Government after all will have to fund this increase in welfare expenditure from somewhere.

So we see that this cyclical reliance on expenditure and taxation is only going to make the economy like a Ping-Pong ball between higher and lower GDPs and none of us want that, as we have established. So since the Government cannot adopt such a procedure very regularly or wait for too long after massively increasing government expenditure in order to recover its debt burden, that the Government is going in right now for this case of Fiscal Prudence by cutting down initially on welfare schemes for the time being.

However let us look at the other side of the picture - Investment in Infrastructure and railways. Now the Economic Survey spells out very clearly that what the Government and the economy need at this point of time to get it on the growth path is greater injection of money towards greater public investment expenditure rather than emphasising on consumption priorities. Hence the motive to stress on investment towards railways, and infrastructure development. It is very clearly spelled out in the Economic Survey that an increase in the investment in railways by a single unit has the capacity to increase output in the economy by 3.3 units (phenomena of forward and backward linkages in operation). Modernization programmes, increasing efficiency and tonnage capacities are only going to make sure that the railways are up to scratch with regards to the needs of the people of the country. Increasing railway efficiency will also make sure that transport of goods and raw materials across the country is quicker and there are less delays and hence wastages in the production process. Hence Railways have become a priority. The other priority is infrastructure through investment in roads, ports and so on to give greater connectivity to the different parts of the nation and previously unconnected areas to make sure that the producers are brought into closer contact with the markets, and there is greater mobilisation of resources in the economy.

People may actually counter my claim stating that by reducing expenditure on social welfare schemes the Government may actually be curtailing generation of additional demand in the economy if we follow the above model. However here lies the catch. The Cumulative expenditure of the government in the Railway and the General Budget on investment generating activities has in the net gone up creating a situation somewhat similar to the one below: 

PHASE 1.5 : NET INCREASE IN EXPENDITURE

So what we see here is what I was indicating for a lion’s share of my argument. The net increase in the Government expenditure as per Budget estimates over the previous year is to the tune of 94,965 crores. I first drop Government Plan Expenditure to the level of IS’ and then increase the Government expenditure through the net increase in expenditure and also railway expenditure to the level of IS” which sees not only creation of additional demand in the economy but also some additional crowding in of private investments into the economy despite the overall increase in the interest rates which may bog down investment sentiments slightly in the economy. Even if from this stage the Government does decide to slightly raise taxes we see that the net effect will still remain positive, the central exchequer is only going to have a greater influx and the economy will not be at the previous Ping-Pong state which I had spoken of above. And that is once again what the Economic Survey has spoken about – Where Public Investment takes a lead to bring in additional private investment into the economy to solve the major roadblock in the Indian growth narrative which is lack of domestic demand in the economy.

This influx of private investment is being aimed at through a whole lot of measures such as a policy of single taxation, Make in India (which I shall talk about in subsequent blogs), easing up of doing business and increasing the positivity in investment sentiments across the country.

My final takeaway from the government’s 1 year in power has been the GST and the change in the tax regime which has a lot of scope to alter the dynamics of the fiscal policy that the government currently undertakes. The current system of a layered tax structure whereby multiple taxes are charged at different rates during the system of production has often made it cumbersome and very costly for manufacturers across states in the country. Where the GST fits into this bill is that a unified tax across the country for most commodities makes taxation far more effective and simpler for the people to understand and afford in the economy. When a GST unifies the total markets in the country as one single market with a whole tax structure, it makes it very convenient for enterprises as well as consumers to begin to be less apprehensive of this tax structure. One of the major concerns in the economy is the tax-GDP ratio which also is being slated for increase with this GST implementation, if it lives up to its promise of an increase in the tax-base in the economy, which would thereby increase the financial resources at the disposal of the centre and the state to invest more heavily in welfare schemes in the coming years to meet its social sector targets and Universal coverage of all welfare schemes by the year 2022.

After all this, we may still be worried about Education, Universal Health-care coverage and a lot of welfare schemes which are essential to the not-so well disposed people of the country. What we must realize, and I once again cannot stress on this enough is that the current Government needed to identify one or two priority sectors which it felt could increase the potential in the Indian Economy. Unfortunately what we fail to prioritize is the long term needs and structure of the economy over the short term schematic relief that the poor in the economy may be given. I had spoken of microfinance and the increasing impacts of incentives to mobilise the savings in the economy and I will not go further ahead once again on that.

However what I would like to conclude with is that the rational acumen that the people in the country have today, we must realise that to gauge a government on revamping the structure of an economy which has been essentially following the same underlying principle since the inception of the Planning Commission is fallacious to say the least. Structural reforms need more time and in the long term I see these structural reforms that are being undertaken by the current government paying off. There still needs to be detailed discussions on issues like the Land Bill, Labour Laws and a lot of other schematics that the government finds itself on the backfoot in, but consensus and positive, constructive inputs and criticism transcending party line politics for the people of the country is probably what the need of the hour is. The adage of “Good Economics, Bad Politics” is probably clearly visible in the Indian Economy today on multiple indicators and that could only change for the better in the coming 4 years of the NDA tenure.

Welfare-Business Priorities for the Indian Economy

The recent fixation of the Indian electorate with the state of the economy is an extremely unprecedented situation for the Indian Democracy because in the past the electorate mostly worried about cult figures, legacies, religion and so much more. Not that the latter constraints have all evaporated from the face of Indian politics, but the sense that the economy is wriggling into the centre-stage of 21^st Century Indian governance is heartening for an aspiring economist to say the least.

I think it is amid this fixation of the various sections of the electorate and the rest of the world as a whole, that we set ourselves very high expectations of the current NDA Government and its economic outlook and policies. Of course, we have seen as to how an Economy makes and breaks an election in the case of the recently concluded UK elections where one of the chief USPs of the Conservatives was the improvement on economic fronts since the time they took over realms from the Labour Party. And the Modi Government has come in to the fray in slightly similar situations with albeit a fundamental difference: The Indian Economy is an “emerging” economy while the British Economy is well past that stage of being tagged an “emerging economy”. And it is this tag of an “Emerging Economy” (others including “Emerging Market”, “Developing Economy”) that make the trajectory of the Indian Economic performance so crucial for the Indian polity and electorate. We voted Narendra Modi into power with a decisive mandate for reform in the Lok Sabha and it is this hunger for reform and performance that made economists of the common people who all began to astutely follow the budget and give ratings to Arun Jaitley, which according to them would be equivalent to a Moody’s or an S&P rating.

The making of happenstance economists out of the Indian population is not the main point of this piece but serves as a crucial contextualization and a background to the certain apprehensions of the current schemes of the government that a student of economics gets to see in the social media emanating from among his peers. That cogent and reasonable debate and not direct confrontational ridiculing is what economists believe that their modus operandi is, I have undertaken a similar effort.

A sense of unease has crept into the different sections of the economy and this aware electorate that I previously spoke of, when it comes to the direction of the policies of the current NDA government. To aptly put it, the debate concerns A Predominantly Leftist/Socialist Past vs A More Free Market future that have been time and again pitted against each other (most famously when Narendra Modi remarked that the NREGA Is a reminder of how the Indian National Congress created a population of land-diggers in the past 60 years of their governance of this country). And this debate has essentially now taken a new turn about the Welfare-Business Dilemma that the Modi Government seems to find itself in.

At a first glance through the Indian Economy’s current status quo (whether that be through opinion articles or newsroom conversations) it becomes certainly clear that the Welfare-Business anti-thesis is not something that the current government is aiming for. It is not a case of welfare and business being substitutes to each other as a lot of people seem to construct them to be. The economy does not face this sort of a production possibility curve as I am constructing below:

 

                

                                                                                             
What a production possibility curve is to put the economy into that perennial guns-butter debate where you have 100 units of resources in the economy and can use it to dole out either welfare schemes for the poor or make the economy friendlier for Business entities i.e make welfare and business compete with each other. It is however common knowledge that the Indian economy faces many challenges as it wriggles out of inertia as I opine on its current status but this Welfare-Business Dilemma is definitely not one of those challenges that I would rank very highly on my priority list (given that I assume that it exists).

The first concern that I would like to address is the myth about the Debt-GDP ratio of our economy. Ritinkar points out that the people who scare the masses with these figures of a high Debt-GDP ratio are selfish and want to subsidise themselves by reducing the welfare spending on the poor. That is not the case. The Debt-GDP ratio is a very important cog in the wheel of an economy, more so of an emerging market economy such as that of India. The counter may come that Japan has a debt-GDP ratio going well in excess of 200% and many other countries have a really large Debt-GDP ratio but continue to dole out welfare schemes for the poor. It is a legitimate counter when we just keep it to those figures and not look at the core of their economy such as demographics, trajectory of economic growth, investor confidence and so on. When we start looking at those cases we see that the Indian Economy begins to give a rather dim picture about itself. So why should we bother about this ratio? The answer is simple. For India, as calculated by the Reserve Bank of India, the threshold level of Debt-GDP is 61% and currently we are dangerously close to that level. What happens when you start crossing that threshold level? Growth and Debt begin to take an inverse relationship with each other.

Ritinkar very rightly in his blog out that a major share of our debt is to the Indian populace and not to the rest of the world which in this case is a major strength for India of used properly – We don’t have to depend on an external country to finance our existence on 4 out of the 6 days that the Stock markets are in operation. But this is also a major constraint for the Indian state. The path of growth which the Indian economy currently is on, a major share of the people in the country do not have the means to education or are currently allowing the subsequent generation to indulge themselves in the education provided by the state. This is where the welfare spending comes into the picture. In a state of unemployment and lack of means for the poor people, Ritinkar advocates expanding the reach of welfare spending measures, ceteris paribus (My takeaway from his blog). But this welfare will have to be financed by someone – either by external sources or internal sources. It is nothing but policy to ask a population which is grappling with its own sources of income to finance your welfare measures for them because they may not have the additional money to do so under status quo. If they end up doing so, you push them greater into the pangs of indebtedness which only compounds the situation you’re put in because this translates into a Debt-Welfare Upward spiral. The second stream would be to go knock on the doors of external organizations or agencies which would not only push up that economic figure of external debt from 20-odd percent but would also alarm the so-called Leftists in the country that India is being sold out to the Capitalists and the West, which would only spill-over to the rest of the populace. The first situation is definitely undesirable and the second one is only desirable if you want an economy to be indebted to the rest of the world to the tune of trillions of dollars. Seeing both as unfeasible, what the current government has done is to move toward a partial roll-back of the enormously expensive welfare schemes to make sure that it doesn’t go into that level of debt where Economic Growth becomes an impediment and the very same people for whom it took on the debt, start criticising it without knowing the actual reasoning.

But two things have happened simultaneously with this contraction in welfare spending. Firstly, we have seen steps toward inclusive microfinance being taken by the Government whereby close to 15 crore poor people have set up bank accounts of their own and the government has been able to mobilise almost 15,800 crores for the same if my recollections are correct. What is important is the digitization of finance in the economy has been propelled under this initiative through a lot of new insurance and other pension schemes that are starting to be rolled out by the government. And why is this important – because digitization of accounts helps you to avoid those middlemen that are existent in the current PDS system.

The Indian economy at this point of time is fraught with a maze of subsidies and expenditure programs which in their current forms have contributed heavily to a drain on the Central Exchequer:

1. LPG – With Rs. 23,746 crores of fiscal expenditure on subsidies we see that the bottom 50 percent of households only consume 25 percent of LPG while the rest is benefitting the rich

2. Kerosene – With expenditures of Rs. 20,415 crores on subsidisation we see that 41 percent of PDS kerosene allocation are lost as leakage, and only 46 percent of the remainder is consumed by poor households.

3. Sugar - 48 percent of PDS sugar is lost as leakage. Households in the bottom 3 deciles consume 44 percent of the remaining 52 percent that reaches households. The total subsidy on sugar as a part of Fiscal Expenditure is Rs. 33,000 crores.

A change is slowly being initiated from this PDS system toward a more inclusive financial infrastructure for the population of the country which seeks to connect the people in the economy directly to the agencies in charge of welfare measures. What could happen then is that the current corpus under each scheme could be more effectively distributed by the Union through these banks rather than the current PDS system which is filled with leakages. To comment on the effectiveness of this idea is moot and I agree to that because this is something which has just started on a mass scale under the current government. However from what we did see during the pilot projects of Cash transfers in the 100 districts of the country, spearheaded by Nandan Nilekani (credit given where due) is that it did lead to increase in the nutritional rates of the people in those districts, giving a somewhat limited yet bright hope for a system of microfinance and welfare based on direct cash transfers in the future.

The thrust of the government has been to prioritize the banking sector performance and that of Fiscal Deficit in the country. The banking sector is crucial to our economy at this juncture because banks have become a major source of savings-mobilisation from the people in the economy who had idle physical currency lying around with them. This sort of storage of physical currency would not benefit the economy because it is not injected into the economy for subsequent productive purposes. If we consider a basic Solow growth equation in the economy:

We will see that the numerator which represents savings in the economy will create a higher GDP and output when the quantum of savings are increased in the economy, other things remaining the same. And this is essentially what the focus of the government has been throughout the previous year – to tap into the previously untapped savings of the Indian populace which was previously excluded and thus create a path of savings-induced growth in the economy for the initial phases of the economic roadmap of the current tenure.

The thought of not giving much weightage to the Fiscal deficit is not one without its demerits because as we all saw in the case of the English elections, one of the game-changing elements of the Conservative Party was their emphasis on getting their extent of Fiscal Deficits in order through measures of targeted austerity from Mid-2010 which did induce an increase in the average wage rates of the employees in England from the 2014 onwards. Keynesians like Paul Krugman were definitely not happy with this talk of Austerity but then this injection of policy did attract greater degrees of investments in to the British Economy and have produced desired results to a degree thus far, with the British economy showing considerable signs of improvement through growth rates which are some of the most impressive among the G-20 economies.

The second interesting development that has taken place along with this contraction is that of the renewed attention of the global entrepreneurial class towards India as a source of investment over the past year. This is crucial because India has been suffering from what a lot of people brand as “Jobless Growth” over the past 3-4 years. The push to brand India as a destination for business and as a manufacturing hub with conditions conducive for the ease of conducting business is something that we did not see a whole lot during the previous UPA regime. To solve the issues of unemployment we need different avenues of generating employment and the attraction of global investments is just one of them. The USP on this front comes from the cheap and abundant labour that we have as a country in our repository which would only help to enhance a company’s profit under the given conditions of prices. The second source of employment generation that we are seeing is the modernization of Indian infrastructure which is being given a filip under the current government. When new roads are laid down and new railway lines are created for high-speed state of the art trains, the source of labour will have to be domestic in most cases. The creation of smart cities from scratch will also require a massive amount of effort in construction where the labour will also be from the Indian labour force. This at first may not seem striking to the eye but on careful reconsideration we see that it begins to solve the problem of unemployment that we spoke about initially while introducing the case of welfare schemes and its constraints on implementation through a modicum of debt.

What must be seen today when we consider the case of welfare schemes such as education is the payoff from a case of education or no education. When you consider a household which has Rs. 25 worth of daily income and whose daily expenditure on food is Rs. 20 on an average, we see that free primary education for the children is not a bad idea. But here comes the case of choice-based payoffs. What would the head of the family decide about the future of the child that we are talking of? The first choice would be to give him education and wait for the long term greater payoffs from education. The second would be to get him into the family business or any other source of income which would increase the average daily income to Rs. 30 and thus give the payoff of greater short term benefits. When we have these choices faced it depends on what a family considers more important (or with higher perceived payoffs) that will determine the decision of enrolment into education.

The last point that I would like to talk about is the case of Cooperative Federalism and Competition among the states that has been revived under the current NDA regime. It saw its initial genesis through the Niti Aayog which has begun to serve as a guiding organization to the states in terms of their expenditure through welfare measures. What is being seen is that with the recommendations of the 14^th Finance Commission and with the guidelines of Niti Aayog, there is greater emphasis on the states to begin developing their mechanisms of welfare expenditure (which the Centre has now begun outsourcing). Of course politics will play a key determinant in this sector but what we are seeing now is that with greater finances beginning to be handed over to the state through the recommendations of the Finance Commission (I would avoid the details at this point due to paucity of space) and with the greater increase in the clarity of the mandate of the Niti Aayog, we may see in the future that states begin to start taking the mantle of Social Expenditure upon themselves, and plug in the Centre’s contractions in the Welfare Expenditure that we might see till the Fiscal Deficit has been controlled to the targeted levels by the government.

What we fail to understand in this mad rush for figures, growth, development, welfare, social security and the likes is that a Government is not a spell-caster or a wizard. It is foolish to think of it as a body which would go in and cast a spell of Wingardium Leviosa to lift the economy immediately out of the doldrums that it had inherited. Repeatedly time and again, the Budget and the Economic Survey have pointed out that Big Bang Reforms is not the need for the Indian Economy but a phased process of incremental reforms is the way forward. In tune with that, it would be foolish for us to expect a lavish social security measure right within the first year of governance when a lot of transitions are taking place within the governance structure at this point of time. 

Transforming the economy and placing mechanisms of social security and welfare in the economy not only demand time but also prudence in terms of the other key aspects of the economy which we have to keep in mind.