FOCUS NATION Dr Bharat Jhunjhunwala
While there are some positive aspects to Modi’s governance, his policies are failing to enliven the markets
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Modi could have printed money and continued to invest in highways. That would have led to price rise but the economy would have chugged along
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The Narenda Modi government is completing a year in office this month but there is gloom all around. Shopkeepers say sales are down by 20 per cent. Property dealers say prices are down by 30 per cent. This, despite a huge reduction in corruption at top levels of governance. The government has also garnered huge revenues from the auction of coal blocks and spectrum. Global oil prices are low. Yet, there is no growth except in statistics. The problem lies in the policies that are being implemented by Modi.
The first problem is that there is no thrust on public investment in infrastructure. We must use the opportunity provided by low global price to jumpstart investment in infrastructure. Finance minister Arun Jaitley has increased allocations for roads by Rs 14,000crore, and for railways by 10,000crore in this year’s budget. These figures are deceptive. The allocations should increase more than the rate of inflation to be effective. Rs 100crore last year should be increased to Rs 107crore this year to maintain the same level of actual expenditure if the rate of inflation is seven per cent. The increases in allocation for road and railways are less than the rate of inflation. As a result, the real expenditures on these heads is declining. Former RBI governor C Rangarajan has estimated that the capital expenditures of the government this year will remain at the level of last year. It was necessary to increase expenditures in roads, drip irrigation systems, net connectivity and other infrastructure to jumpstart the economy.
The government is making efforts to encourage domestic and foreign companies to make big investments in manufacturing. Problem is that the global market for manufactured goods is down. China has already made over-investments in manufacturing capacity. They are unable to sell their goods in the global market. There is a glut. Multilateral agencies have reduced their forecasts for global growth for the current year. Trying to penetrate the global market in such circumstances is a difficult proposition.
Moreover, this thrust on manufacturing is leading to a slowdown in the economy. Manufacturing by big companies with automatic machines is killing jobs as well as small and medium enterprises. I was recently to Varanasi. A sari manufacturer told me that 90 per cent of the weavers have already lost their jobs. Cheap duplicates of Banarasi saris from Surat have virtually taken over the market. The same process is taking place in other areas like paper envelopes and soft drinks. The result is that jobs are getting lost and small enterprises are closing down. This is leading to lack of demand in the market and a decline in sales and property prices. If weavers in Varanasi do not have jobs, how will they purchase shoes and clothes? Modi does not recognise the loss of jobs due to Make in India. He is hooked to the 1,000 jobs created by the textile mill and oblivious to the plight of 1,00,000 weavers that lost their livelihood.
Big scale manufacturing cannot deliver for another reason. India does not have the land, water or power to become the global manufacturing hub. On the other hand, we have the mind. Our culture such as applying tika on the forehead invigorates the mind. The correct policy was to import goods, and export services like software, translations, health tourism, and designing.
It is difficult to fathom the reasons for Modi’s stress on manufacturing. It is true that the manufacturing sector provides many opportunity to ministers and bureaucrats to collect bribes in allotment of land and licences, and in regulations such as those of labour, factory act, weights and measures etc. But I hesitate to attribute Modi’s penchant for manufacturing to opening routes for collection of bribes. Modi has shown the determination to weed out corruption by ministers and bureaucrats alike. It seems he is blindly trying to copy China. Modi is not realising that China’s growth is down precisely because it is focused on manufacturing.
Modi seeks to take the Goods and Services Tax (GST) forward. Indeed, its implementation will smoothen movement of goods and add some to the growth. At what cost, though? GST aims to impose the same rate of tax on the rubber slipper worn by the poor and the designer shoe worn by the rich. Both will be taxed at the same rate. GST is contrary to Modi’s commitment to state autonomy. The authority of the states to vary the rates of tax as per their requirements will be taken away. The government keeps on harping on the benefits that will accrue to the economy from smooth movement of goods. But the government is not taking into account the loss of growth from lesser incomes to the poor and lesser autonomy to the states. The poor will have to pay more for the goods under the GST regime. This will reduce their purchasing power. They will buy less from the market.
On the other hand, the increased incomes in hands of the rich will not translate into demand. Reason is that the poor spend nearly 95 per cent of their income in consumption while the rich spend about, say, 50 per cent. Let us say Rs 100 is transferred from the poor to the rich on account of GST. This means that demand from the poor will decline by Rs 95 while demand from the rich will be generated by Rs 50 only. There will be a net loss of demand in the market. The benefits from smooth movement of goods will be cancelled by this reduction in the income of the poor. Remember that the European Union was formed precisely on these considerations but that has not helped them much.
Another possible reason for stagnation in the economy is the remittance of large amounts for defense purchases. Think of the economy as a bubble. It collapses if air is let out. The same holds for the economy. It collapses if money is leaked out to foreign countries. This leakage was taking place in the form of hawala remittances by politicians and bureaucrats in the UPA period. The same leakage is taking place under Modi’s rule for purchase of defense equipment; and also for increasing our foreign exchange reserves. The demand for steel and engineering consultancy will be created in France if India buys Rafale Fighter Jets. That demand would be created in India if the money was spent on making highways. The recent decline in value of the rupee points to large official remittances made from India. I am not opposing these purchases. But there was a need to put in place compensatory policies.
Modi could have printed money and continued to invest in highways. That would have led to price rise but the economy would have chugged along.
The writer is a former Professor of Economics at IIM Bangalore.
