Dr Bharat Jhunjhunwala
The global economy is running downhill. Greece has failed to repay $1.5 billion to the IMF. More payments are due to the European Central Bank and others on which that country is certain to default as well. The Chinese stock market has fallen 30 per cent in the last month. Investors are worried that this trend may continue although the market is still well above the levels attained last year.
These crisis are rooted in the overall decline of the group of developed economies. Few countries like Germany and the United States are doing well, while the larger group is in trouble just as a batsman of a losing team may score a century.
No wonder there are no signs of revival of growth in India. Shopkeepers and property dealers are lamenting the absence of customers. Prices are about 20 per cent down since last year. This is happening because exports are down and Indian companies are pushing their manufactured goods in the domestic market. However, the lower prices at the factory gate are not translating into lower prices in the retail market because wholesalers and distributors are adding higher margins to compensate for lower volumes. This slowdown in the Indian economy is surprising in the light of control of corruption at high places, reduced price of imported petrol and diesel, and e-auction of coal blocks and spectrum having begot the government huge revenues. What has gone wrong?
It is in the nature of a child to put on weight. A child becomes stunted only if the food earmarked for him is given away to another. The economy is no different. Growth is held up only when there is leakage from the economy.
Previously leakage was taking place through political corruption. Money that should have gone into the coffers of the government was siphoned away to tax havens in foreign countries or to buy shares in the New York Stock Exchange. Another part of the money was invested in real estate. That led to some growth but only for the corrupt and the rich. An unholy nexus was operating between businesses, bureaucrats and politicians who were jointly bleeding the economy. Yet the economy was pushing ahead because of the demand generated from the ever increasing circulation of black money.
Corruption at high places has been curbed under the Modi government. The UPA government had decided to pay a rate of `14 per British Thermal Unit to Reliance Industries for gas from KG Basin. Modi reduced this to `5. E-auction was introduced for coal blocks and spectrum leading to huge revenue gains for the government. These monies that were previously going to corrupt politicians, bureaucrats and businessmen have now became available to meet government expenditures. The government could have used it for making highways. That should have led to higher growth rate. That has not happened. Why?
The answer seems to lie in the nature of government expenditures. The increased income of a family can be used for buying liquor or a luxury car. In this case, the health of the children will continue to suffer. Or, the income can be used to buy organic food and to buy sports equipment for the young ones. That would lead to growth. The impact on health of the children will depend upon how the money is used.
Modi is overly focused on controlling inflation. Government expenditures are being cut. I was recently told by a senior bureaucrat that he has been subjected to a 20 per cent cut in the budget. The little government revenue that remains is used to pamper the bureaucracy. As a result, investment in infrastructure is suffering. Bleeding of the economy by corrupt politicians has been replaced by reduced expenditures and bleeding of the economy by a bloated bureaucracy. The economy is like the malnourished patient being but on a weight reducing diet!
Former Reserve Bank governor C Rangarajan writes that capital expenditures of the government in 2015-16 remained unchanged from the previous year at 1.7 per cent of the GDP. Bulk of the public investment, he says, is coming from public sector institutions such as Coal India and the Indian Railways. This means that the money garnered by the government from e-auction of spectrum and coal blocks has not translated into increased investment. Modi is like the head of the family whose earnings have increased but expenditures on organic foods for the children remains unchanged. No wonder growth is stagnant.
Modi is trying to jumpstart private investment without bothering to create demand. It is like asking the homemaker to invest in a new pressure cooker when she does not have money to buy the rice to cook in it. Bankers are unwilling to lend because they do not see demand in the market. The way out is to put more money in the hands of the aam aadmi. Businessmen will be running over each other to make investments if there is demand. Bankers too will be happy to lend.
Employment in the manufacturing sector is shrinking. Wages of the unorganised workers have been stagnant lately. Modi may indeed build a bullet train from Delhi to Mumbai but he is clueless about ways to increase incomes of the poor. In fact, his “Make in India” riding on the back of large companies will lead to a huge loss of jobs as these companies bring automatic machines to replace workers.
Previously the politicians were investing their ill-begotten wealth in real estate; now the bureaucrats will do the same.
Growth will come only if the money is spent for building infrastructure. Only time will tell if Modi makes this happen. As stated by Rangarajan, the signals are not very favourable at the moment.
The international economy has not helped. We have gained much from low prices of oil but lost equally due to weak exports. Christine Lagarde, managing director of the International Monetary Fund (IMF), has repeatedly warned that advanced economies are facing high debt, high unemployment, and low growth, and low inflation. The IMF has recently reduced its forecast of global economic growth from 3.5 per cent to 3.3 per cent. That source of growth, therefore, will remain elusive in the immediate future.
Modi must embark on fiscal expansion for funding infrastructure projects. Let there be some increase in inflation but let roads be built. Two, he should disband most welfare schemes like education and health that are providing benefits to the government servants rather than the people. He should transfer this money directly to the households. That will insulate the poor from inflation and also generate demand and push up growth.
The author was formerly professor of economics at
IIM Bangalore
