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Mainstream, VOL LII No 29, July 12, 2014

Analysing Economic Survey 2013-14

Monday 14 July 2014, by Girish Mishra

Normally, the Economic Survey is presented during February, a few days before the General Budget, but this time it has been brought in the second week of July. Not only this, but there has been a regime change at the Centre that has led to different perceptions of the problems and tasks facing the country. A cursory glance at the Economic Survey2013-14 convinces one that the Modi Government’s perception and the line adopted by it does not differ from what Dr Manmohan Singh’s neo-liberal dispensation spelled out in July 1991. Both the Vajpayee Government during 1998-2004 and now the Modi Government are following the same path with greater vigour.

The Modi Government wants to cover the agricultural sector too. To quote: “The liberali-sation of 1991 focused on the industrial sector. While industry was liberalised and allowed to buy from, and sell to, anyone in the world, Indian farmers in many States are still required to buy and sell only in the government-designated Agricultural Produce and Marketing Committees (APMC) to licensed entities. Farmers are not allowed to sell their produce directly to consumers. A national market for food is yet to develop.”

The agenda of the Modi Government is supposed to have three elements, namely, “short-term stroke-of-the-pen reforms, medium-term reforms that can be undertaken through executive decisions or the Finance Bill, and long-term reforms for institutional change”. The aim of the Modi Government consists “of building capacity and institutions that provide the foundations of a market economy. This, for example, includes changes in the legal and regulatory environment for factor markets, businesses, financial-sector regulation, capital flows, and food markets.” Obviously, there is an emphasis on changing the labour laws and giving to both foreign and Indian investors the right to hire and fire.

On June 9, while addressing the two Houses of Parliament, the President spelled out the policies of the Modi Government. The Modi Government believes in “minimum government, maximum administration”. Obviously, the government intervention in the day-to-day running of the economy will be minimum. The main task of the government will be to remove the obstacles coming in the way of running the economy. It will entrust running the economy to the market forces. It is obvious that the Modi Government has opted for the supply-side economics, which indicates a particular kind of approach. To understand this one must look at the last years of the 1970s when the American economy was suffering from stagflation (this term occurs in the Economic Survey also). On the one hand, unemployment was increasing and, on the other, inflation had also reached a very high level. Normally, both inflation and unemployment do not go side by side. John Maynard Keynes attacked the French economist, J.B. Say, and rejected his thinking that the government must concentrate only on the supply side. Modi believes that there should be more and more investment in the economy and the government’s job will be only to remove the difficulties coming in its way. The market forces alone should decide what, how or for whom to produce. Say believed that be it labour or suppliers of raw materials or landlords, everybody will get adequate return and they will go and spend it in the market and there will be no problem of unsold goods.

In May 1979, Margaret Thatcher became the British Prime Minister and around the same time Reagan became the US President. Both of them faced the problem of stagflation. Both of them took to the neoliberal path. One of the leading theorists, Milton Friedman, advocated the sale of public sector undertakings and said the duty of the government should be to make the private business outfits to flourish. He wanted education, too, should be given into private hands.

If one looks into the Economic Survey, it becomes quite obvious that the only duty of the government should be of clearing the way for both the FDI and Indian tycoons. The remains of the inspector raj and bureaucratic strangle-hold must be banished forever. It is believed that increasing investment will lead to increasing production and more employment opportunities. Obviously, the inflationary press-ure will lessen. Vivek Dahejia, an Economics Professor at Carleton University in Ottawa says: “Given his mantra of ‘maximum governance, minimum government’, it is clear that Modi’s rhetoric, at the very least, is closer to Mundell than it is to Keynes.” Robert Mundell, a Nobel Laureate, though teaching at Columbia, is inspired by the Chicago School of Economics which is the main centre of neoliberalism.

Narendra Modi thinks that by following the supply-side economics he will be able to boost growth and create jobs for the one million people who enter India’s workforce every month. Bitter medicine is needed to nurse the economy back to health so that it can get rid of high inflation and the worst slowdown since India openly adopted the neoliberal path. By pursuing the supply-side economics, India will enter an era of rapid growth. Attacking his predecessors as “Left-of-Centre” and pursuing “mindless populism” have hurt the economy. It is not without reason that, with Modi in power, the BSE stock index has reached a record high. Once the State elections are over in Maharashtra and Haryana, he will carry forward his reforms without any hindrance.

As the Economic Survey states, the emphasis of the policy should be on wide-ranging structural reforms to ease supply-side constraints and sector-specific incentives to boost demand. In order to revive growth which plunged during the global recession, a number of steps need to be taken. To begin with, utmost emphasis has been placed on the revival of investment. For this “acceleration in project clearances and streamlining of implementation procedures, apart from sector-specific investment policies” are needed. The stranglehold of bureaucracy needs to be broken. “Over the medium term, structural reforms that boost productivity are crucial for sustaining higher growth.”

For quite some time, the manufacturing sector has not received sufficient investment. It has been emphasised that tax policy and adminis-tration must be simplified and outdated laws that govern market access, expansion and entry or exit of firms need to be discarded. Swifter steps need to be taken to resolve commercial disputes. “An environment of policy, certainty, continuity, and transparency, will help boost business sentiments further.”

In recent times, the GDP growth rate has gone below the five per cent mark. This year efforts will be made to keep the growth rate somewhere between 5.4 per cent and 5.9 per cent. It is said that there have been a number of factors responsible for it. If suitable steps had been taken, the things could have been set right. The global outlook seems to have been lately improving and in 2014-15 there may be some recovery in advanced countries that may help the GDP growth rate in India. Yet there are developments, leading to uncertainty in certain Arab countries. They may affect the flow of crude oil to India. During the current year, that is, 2014-15, the growth rate may not pick up because of certain developments including the fear that the monsoon may be below normal and in West Asia the present conflict may not be over so soon.

India with a large and young population has a demographic advantage vis-à-vis China and a number of European countries. The proportion of the working-age population is likely to increase from around 58 per cent in 2001 to more than 64 per cent by 2021. This certainly provides certain advantages if the young population is productively employed. Proper attention needs to be given to these people to educate them and make them skilled besides keeping them healthy.

As the United Nations Human Development Report 2013 shows, India has slipped down from the global ranking of 136 to 134, The Survey says: “The existing gap in health and education indicators in India as compared to the developed countries and many developing countries calls for much faster spread of basic health and education. Life expectancy at birth in India was 65.8 years in 2012, compared to 75.1 years in Sri Lanka and 73.7 years in China.”

Chapter 2 of the Survey spells out the issue and priorities for the Modi Government. Obviously, its reliance is mainly on private investment. To quote: “The defining challenge in India today is that of generating employment and growth, Jobs are created by firms when firms grow and invest. Hence it is important to create an environment that is conducive for firms to invest. ... Reviving investment is, therefore, on top of the government’s priorities.” Those days are gone when the reliance was placed on public sector. The industrial policy resolutions of 1948 and 1956 have been consigned to the dustbin. We may pay homage to Nehru but his legacy has been discarded and this began when Dr Manmohan Singh brought in the neo-liberal dispensation.

The aim of the Modi Government is three-fold. First, to have a low rate of inflation; second, public finances must have stability by bringing in tax and expenditure reform; and, lastly, the goal is to build a free market economy with no unnecessary intervention by the govern-ment. Thus, efforts must be directed towards “creating the legal and regulatory framework for a well-functioning market economy.”

The 1991 liberalisation initiated by Dr Manmohan Singh needs to be carried forward and beyond its confine to industry and spread to agriculture as mentioned earlier.

It is obvious that the days of small farmers are over. They will have to sell or lease out their holdings to big landlords who can employ modern methods of cultivation and continue in the market. The Modi Government wants to look into the various kinds of subsidies being given to stimulate agricultural production. Simultaneously, it wants to look into the schemes like the MNREGA.

The present government wants to dispense with all elements of Central planning so that entrepreneurs are free to decide what to produce and how to produce. Once the Central planning is dispensed with, it will “unleash the entrepreneurial spirit of millions across the country by strengthening the economic freedom of the people”.

The Survey holds the existing labour laws as one of the impediments in the way of “the creation of large-scale manufacturing”. The sooner they are banished, the faster will be country’s industrialisation. It also maintains that labour laws prevent firms from hiring a large number of low-skilled workers. Already a beginning has been made by the Rajasthan Government by taking away unnecessary protection to labour.

Obviously, the Economic Survey presents a vision of a free market economy where the role of the government is limited only to clearing the path of private entrepreneurs. Modi and his advisers forget the fate of the supply-side economics.

The author, a well-known economist, used to teach Economics at Kirorimal College, University of Delhi, before his retirement a few years ago. He can be contacted at: gmishra@girishmishra.com