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Mainstream Weekly, VOL LVI No 15 New Delhi March 31, 2018

Tribute to Dr Ajit Mozoomdar

Saturday 31 March 2018


Dr Ajit Mozoomdar, 94, who breathed his last in New Delhi’s Apollo Hospital on February 12, 2018, was a brilliant academic. A distinguished economist, he joined the IAAS in 1946 and was an eminent member of the Indian Administrative Service. He served in top positions in the Government of India’s Ministry of Finance and Planning Commission. He retired as the Secretary of the Planning Commission. Subsequently he was the Executive Director of the Asian Development Bank and also appointed the Executive Director of the World Bank’s Economic Development Institute. Since the mid-eighties of the last century he was a Visiting Professor at the Centre for Policy Research, New Delhi.

Having retained interest in all academic activities he used to write occasionally on various issues in different periodicals, including this journal, and websites.

While remembering him and offering homage to his abiding memory we are reproducing here, for the benefit of our readers, two articles he wrote for Mainstream and The Wire. The first appeared in the February 16, 2002 issue of this publication and the other one was used in The Wire on March 30, 2017. Both are indepth, incisive and highly thought provoking.

Exaggerated Expectations of Growth 

There is a general public expectation—fostered by the economic spokesmen of successive governments in Delhi in the late nineties, and supported by media commentators and leading business organisations—that the Indian economy is poised for transition to sustained growth of seven per cent p.a. or higher. Recently, in all apparent seriousness, policy-makers have proposed a ‘target’ of nine per cent growth by the middle of the present decade, contingent on the realisation of vaguely defined ‘second generation reforms’.

The fact is that an early and significant rise in the overall rate of economic growth above the present levels of six-6.5 per cent is highly unlikely. In our view much effort will be needed just to sustain the growth rate recorded since the mid-nineties. This more realistic assessment of growth prospects is based on:

1. the stagnant rate of domestic savings, leading to an inadequate rate of investment growth;

2. problems of sustaining and improving the ratio of agricultural and industrial expansion;

3. the incresingly skewed regional distribution of GDP growth.

How the rate of economic expansion beyond the year 2000 is likely to be affected by these factors is considered in more detail below:

Savings and Investment

The rate of growth over a period of years depends on the extent of new investment and the improvement of productivity of existing investments.

On the basis of the macro-economic parameters of the late nineties, the Planning Commission has calculated that to sustain a rate of growth of seven per cent p.a., the annual investment has to rise from the average of 25 per cent of GDP recorded in 1997-2000 to 26.7 per cent. The Commision assumes that domestic savings would provide for 25.3 per cent out of this. But these savings, which rose from 19 per cent of GDP in the mid-eighties to 23 per cent in the early nineties, averaged only 23.5 per cent in the last three years.

Of the constituent elements of domestic savings, those of households (including unincorporated businesses) has declined from an average of 19.6 per cent of GDP in 1987-92 to 18.8 per cent in 1993-99. Corporate savings rose from 2.3 per cent to 4.1 per cent of GDP. Public sector savings steadily declined from 2.7 per cent in 1986-87 to zero in 1998-99 as a result of growing revenue deficit (due to subsidies and Pay Commission salary increases) and declining surpluses of public enterprises (especially State Electricity Boards).

This trend in domestic savings is obviously inconsistent with optimistic projections of a sustained rise in the GDP growth rate beyond year 2000.

Foreign Capital Inflows

Some who confidently project an early rise in the growth rate to seven per cent or higher, despite the inadequacy of domestic savings, argue that the necessary investment rate can be achieved through much higher inflows of external capital. However, for the reasons explained below it is not likely that the savings-investment gap would be bridged this way, and any atempt to push too hard to enlarge foreign capital inflows could endanger economic stability.

In the last five years (1995-2000) the average annual inflow of foreign capital in different forms—excluding short-term borrowing—has been just under US $ 10 b. This has come in by way of:

These capital inflows do not all translate into additional investment or capital formation. Only FDI and a part of external commerical borrowing and foreign aid do so directly. Thus in 1999-2000 while total inflows were about $ 8.6 b—over two per cent of GDP—less than half ($ 4.2 b) contributed to capital formation; the rest went to raise our foreign exchange reserves. Additions to the reserves are in principle available for future imports of capital goods, provided domestic savings (the capacity to invest) rises to create the demand through new projects. In the near-term the savings-investment gap can be filled effectively only by FDI.

If the domestic savings rate does not quickly rise above 22.5 per cent of GDP, the net foreign capital inflow would need to rise by 3.2 per cent of GDP, or $ 14.5 b. The level of FDI would have to be about $ 7 b.

Not only is a level of FDI inflows of $ 7 b a year unachievable at an early date, the implied total level of capital inflows—of the order of $ 15 b a year—could not be sustained by the Indian economy. All foreign capital, whether it comes as debt or equity—and a considerable part of FDI is debt—has to be serviced eventually by the growth of export earnings and ‘invisible‘ incomes. The planners had calculated that these earnings would need to grow by 20 per cent a year to service net foreign capital inflows of even $ 10 b a year. As we have seen, the present rate of export growth is below 10 per cent p.a.

The clamour in the media and other forums for higher capital inflows to stimulate growth usually does not distinguish between FDI and the other forms, which tend to be destabilising. Of the alternative forms, increased external commerical borrowing would entail higher interest outflows immediately and increased repayment liabilities in the medium term. More portfolio investments would not only increase current dividend outflows (now at $ 1 b a year) but also greater vulnerability of the balance of payments because the flows are easily reversible (as was evident in 1997-99). Encouraging the rise in NRI deposits has the same drawbacks.

FDI : Problems

Even reliance on the growth of FDI is not unproblematic, and a selective approach continues to be necessary (some system of prior govern-mental approval of new foreign investments exists in most countries).

FDI flows cannot easily be channelled into the activities where domestic public and private sector investments are proving inadequate.

Consider the main areas of FDI approvals in the last few years


The areas of the economy where substantial infusions of FDI and domestic private capital are most needed are in the development of power, ports and roads, construction; oil exploration; capital goods. Not even 15 per cent of FDI has actually gone into these high priority sectors. In the case of infrastructure projects, returns are inadequate or uncertain except for telecommunications, and potential investors have sought guarantees which governments canot easily offer. There are many organisational problems involved in enlarging FDI inflows into these areas.

If in an attempt to maximise foreign capital inflows, the government were to remove all restraints by way of prior clearance, FDI would be directed towards banking and financial services, domestic trade, petrol, oil, and lubricants, distribution, the entertainment industry and real estate development, where returns are likely to be the highest. These are all sectors for which adequate domestic capital is available, and any technology input from FDI would be marginal. FDI inflows into these high-profit sectors would simply mean higher out-flows through profit remittances. Unrestricted FDI inflows would also result in the acquisition of existing enterprises, again adding to profit outflows with little or no net increase in domestic investment.

It is notable that there has so far been very little FDI in export industries. The most recent study of FDI companies by the Reserve Bank found that net outflows of foreign exchange from the operation of these companies (input and dividends less foreign earnings) had risen from $ 535 m to $ 7.8 b between 1994 and 1997.

Other Sources of Growth

In principle GDP growth may be sustianed despite a falling investment rate, perhaps even improved, if there is a fall in the Incremental Capital-Output Ratio (ICOR). This could happen in three ways:

a) by more rapid growth of sectors where com-paratively greater output is obtained from investments;

b) by rising productivity of capital in different sectors (agriculture, industry, infrastructure);

c) by rapid technological change outside the traditional sectors.

Each of the theoretical possibilities has to be rejected in the case of the Indian economy for the near future.

The Planning Commission’s expectations of overall growth of seven per cent p.a. for the late nineties were based on a certain pattern of sectoral growth: actual performance of the economy in the last three years has fallen short in most sectors, namely,

A sudden jump in trade growth, independent of agriculture and industry, is obviously not likely. A higher than now growth in private construction and financial services is possible, but would have little effect on the overall rate of GDP growth.

It is possible that the GDP growth rate could be pushed up for a year or two by higher rates of personal and public consumption, for example, by a large increase on poverty-related expenditure, expanding consumer credit, salary and wage increases. This sector (Administration and social services) accounts for 16 per cent of GDP. But obviously such a consumption-led ‘growth’ would not be sustained, apart from its inflationary effects.

As for any early increase in productivity (beyond that already assumed in the Ninth Plan projections of sectoral growth), the signs—as we have seen in Sec II—are to the contrary. We have noted there the falling yields in the production of staple crops, and slowing down in the growth of the traditional manufacturing industries. In the case of basic infrastructure, there is some evidence of improving operational efficiency in the power, rail and ports sectors, offsetting capacity constraints to an extent, but not enough to produce higher growth if investment in these sectors is not significantly stepped up.

Finally, except in telecommunications and IT, liberal technology import policies do not seem to have had significant impact in any sector, raising productivity or inducing innovation. In pharmaceuticals the new international patents regime will mean a setback to technology development.

The hope that overall economic growth will somehow accelerate as a result of a new set of ‘economic reforms’ is hardly realistic. What these policies should have been is suggested in the Mid-term Appraisal of the Ninth Five Year Plan and a recent report of the Prime Minister’s Economic Advisory Council. Apart from fiscal consolidation and improving the viability of enterprises in the infrastructure sector (which, though central to sustaining growth, are scarcely new ideas), the policy initiatives proposed are:

a) the removal of any remaining restrictions on the movement of agricultural commodities and controls over input prices, and promotion of large-scale food-processing units and seed companies;

b) further reduction in import duties (except on products competing with our small-scale producers);

c) at least partial dereservation of products for manufacture only by samll-scale industries;

d) changes in the labour laws to facilitate the reduction of surplus workers in industry and freedom to employ short-term contract labour;

e) reforms in laws relating to sick companies and bankruptcies to facilitate closures and acquisitions;

f) transfer of all public sector undertakings (other than those in the Defence sector) ti private ownership and conrol.

These policies are already in different stages of implementation. Some, like small-scale industry dereservation and legislation to reduce job-security in industry, carry with them some risk of disruption of existing levels of economic activity. That privatisation of the larger profitable public enterprises would lead to higher level of output through greater productivity—for example, in the petroleum and telecommunications sectors—is open to doubt.

Whatever the merits of these ‘reform’ policies may be, it is difficult to see how—even if they can all be pushed through—they would raise the rate of growth of the economy in the early years of the present decade.

[Excerpted from The Indian Economy: 

A Different View by Dr Ajit Mazoomdar

(published by Har Anand Publications,

New Delhi)]

(Mainstream, February 16, 2002)

Losses from Demonetisation far Outweigh the Gains

With the end of the crisis in right, the gains and losses from from demonetisation can be assessed with some confidence.

Normal cash flows will be restored in stages. Rs 15.4 trillion in Rs 500 and Rs 1000 notes were demonetised on November 8, 2016. By the end of March 2017, new Rs 500 and Rs 2000 notes worth Rs 12.4 trillion would have been supplied, and the RBI has removed all restrictions on cash withdrawals from banks and ATMs. However, considering that for much of 2015 and 2016, the normal level of currency circulation was Rs 16.5 trillion, an adequate level of cash availability may be attained only by the end of April. Even then, there could be problems in remote areas of a disproportionate share of Rs 2000 notes. Early holders of new notes would have also tried to hoard them. Normal functioning of the cash economy may be resumed only in the second quarter of 2017-18. The end-date for the repatriation of old high value notes from Nepal and Bhutan is also June 30.

Economic activities that were impaired would also recover in phases. Low-income groups would pay off emergency debts and replace stocks of essentials before using cash to buy clothes or footwear—investment in consumer durables would be postponed. Traders and small businesses would wait for sales to improve before restocking. Lost livelihoods of urban wage labour, migrant workers and petty traders would be slow to return to earlier levels. Demand for agricultural labour would revive only with the sowing season. The lack of demand for consumer durables—reflected in current decline in output of a number of organised industries—would continue into the second quarter.


That the sudden withdrawal of 86 per cent of the currency would disrupt the cash economy could have been foreseen—demonetisation in 1978 affected less than one per cent. The worst sufferers have been the lakhs of urban and rural labourers and migrant workers who were left jobless because employers had no cash to pay their wages. Then came street vendors and petty traders who were left without customers. Small farmers lost heavily on perishables they could not market. Many transporters, rural and urban, had to stop plying. Small businesses in hundreds of trades—ranging from dhabas and repair shops to makers of bidis and jaggery— closed in the absence of buyers and a lack of working cash.

Middle class households, more vocal in protest, suffered extreme inconvenience in getting their money out of banks. As weeks passed, the organised sector—especially construction and real estate—felt the effects of a loss of liquidity. Then slackening demand led to cut-backs in consumer goods production, including durables like three-wheelers. Wholesalers’ stocks of cement and fertiliser rose.

Losses of income of vulnerable groups, and declining sales and output, do not show up in our economic statistics. Various projections have been made of aggregate losses from demoneti-sation—a plausible estimate would be a loss of one per cent of GDP, which is about one lakh crores—spread over three quarters.

Combating Corruption

Demonetisation, the government said, would weed out corruption by eliminating black money from the economy. The reasoning was unclear. Corruption includes, besides bribery of public servants and electoral malpractices, illegal activities like drug trade, gambling, trafficking, hawala operations and unauthorised mining. Black money is partly the proceeds of crime and illegal activities, but also income from legal businesses concealed from the tax authorities. Illegal businesses do not depend on hoarded black money for their operations, with a few exceptions like property dealing and hawala. Unearthing black money would reduce corruption, at most, by deterring those detected, from further wrongdoing.

Even this would have limited impact, because demonetisation affects only one class of black money holders—small businesses which deal in cash, like jewellery, and money-lenders. Only three per cent of black money is generated as cash. Larger entities—corporates and firms of high-earning professionals who work through banks—escape detection. Demonetisation also cannot touch another class of black money— tax-evaded funds held by Indians in bank accounts and fixed assets in tax-shelters abroad.

Economic Benefits

Expectations of direct economic gain from demonetisation have proved illusory. Some, misled by electoral rhetoric, had believed that black money unearthed by demonetisation could be confiscated by the government and distributed to the poor through Jan Dhan accounts. Later there were hopes of windfall gains to the RBI from unreturned notes, which could be transferred to the government for distribution to the poor. Most of the old notes have been returned; if, say one per cent remains unaccounted for, the gain to the RBI would just about offset the cost of printing new notes.

The extent to which investible resources with the banks have risen in the process of demonetisation will be known after some time, when households and small business have withdrawn their cash requirements. The net increase in bank deposits will be a one-off gain; it will not mean a higher domestic savings rate.

Fiscal Gain

Attention is now focused on a single attainable objective—identifying individuals and small businesses who have concealed their income from the tax authorities—and recovering taxes and penalties. By December 30, deposits of Rs 5 lakhs or more in demonetised notes had been made into 1.8 million bank accounts. Pre-liminary notices are being issued to these depositors. Possible tax evaders will be identified on the basis of responses. Verification, detailed scrutiny, possible searches and seizures will follow. Thereafter taxes and penalties will be assessed and collected after appeals. The procedures will take two years or more. For comparison, the IT Department detected Rs 31,000 crores in unaccounted income in the two years before demonetisation.

Revenue gains in the financial year 2017-18 will come only from the income disclosure schemes, optimistically estimated at Rs 1 lakh crore. The extent to which the tax-base will be raised is uncertain. Many offenders will go out of business or change identity. Further, tax compliance will depend on deterrent penalties.

Clearly the losses from this ill-conceived exercise outweigh the likely gains.

(The Wire, March 30, 2017)

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