Economic Agenda: Global Crisis Calls for Fresh Thinking

The Congress as the dominant partner of the UPA is back in saddle in New Delhi. It is being argued that there is a mandate for the new government to carry out some of what it wanted to do in its previous term but could not—privatisation or labour or insurance reforms. Has the public endorsed the UPA’s dominant economic agenda? Economic issues hardly came up in the election campaign because the Opposition lacked clarity on their importance.

The only economic issue that stirred the pot was the more than a trillion dollars of black wealth stashed abroad in tax havens by corrupt Indians—politicians, businessmen and others. As such, claiming endorsement is an overstatement. The mandate for the UPA is made up of victories in different States for different reasons. In West Bengal, it was the anti-people attitude of the ruling Left Front on the SEZ issue (like in Nandigram), the anti-farmer attitude in Singur and, more recently, in Lalgarh. In Kerala, it was the internal divisions in the CPM that helped.

In Tamil Nadu, it was the Sri Lankan situation that tilted the balance. In Andhra Pradesh and UP, the multi-cornered contests helped and in Maharashtra the undermining of the Shiv Sena by the MNS and so on. This is not to argue that there was not a two per cent swing of votes in favour of the Congress and that this is important in multi-cornered contests, but that this is not a massive swing as is being made out and used to push for pro-business policies.

The business lobbies are reading in the victory a chance of getting more concessions. However, if anything, the swing in the rural areas is due to the implementation of the NREGA and loan waiver schemes in the last phase of the UPA regime. It may be recalled that these schemes were launched under pressure from the liberal and left opinion in the country and were opposed by the corporate lobbies in the UPA. So, the mandate is for the pro-poor and not pro-business policies.

The mandate is being misinterpreted deliberately but worse, the policies being pushed for by the vested interests are a prescription for aggravating the economic crisis which has deepened globally. We cannot escape it because we are far more integrated with the world today than earlier. The government has managed to keep under wraps the actual economic situation by repeatedly harping on the rate of growth being above 6.1 per cent and that things would improve in six months—keep the lollypop dangling.

Currently, large parts of the economy are experiencing negative growth—the industrial sector, exports, agriculture and major segments of the services sector like transportation, retail trade, real estate, finance and tourism. Thus, the current (and not the average) rate of growth will be close to zero, if not negative. If any projections are to be made, these need to be made from the current trends and not the average of the past year.

Recent reports indicate that the US, Japan and the Euro zone are going deeper into recession, and the IMF in its last report suggested that currently we are at the beginning of the crisis. So, things are likely to get worse in the coming year(s). Chances of a recovery seem to be slim, in spite of the massive fiscal deficits created the world over. The recent sharp rise in the stock markets does not necessarily reflect a turn-around because they have not proved to be good indicators of the health of the economy. They have risen several times during the last one and a half years only to fall steeply.

The work of the new government is now cut out—to stop the economic slide and the steeply declining employment. While inflation rates are low, food prices are still rising. This is bad when wages are under pressure due to rising unemployment. The retrenchments started with the ad hoc and temporary workers which do not show up in the statistics. After the Jet Air fiasco of mass retrenchments, now companies are retrenching permanent staff members piecemeal.

Today the fiscal deficit is over 12 per cent of GDP and likely to climb as the tax revenue collection falls short. According to the RBI data, the corporate sector’s post-tax profits fell by 17 per cent in April-December 2008-09 while they rose by 28.6 per cent in the comparable period of the previous year. Worse, in the third quarter of 2008-09 they fell by 53.4 per cent, indicating a deepening slowdown. A few sectors may be doing well, but one swallow does not make a spring.

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Due to the slowdown, corporate tax collection, the largest source of taxes now, is likely to fall short of the targets. It would also mean less excise duty collection (in addition to the decline due to the duty cut announced). Further, due to the rapidly declining imports, customs duty collection would also fall short. For the states there would be less sales tax collection, etc. Due to the decline in the real estate activity, transfer changes will also show a drop. Therefore, there would be little scope for the government to offer more concessions to businesses without worsening the fiscal deficit further.

It is also known that concessions (including in taxes) may not increase the demand but a rise in government expenditure certainly does so and especially in labour-intensive sectors. For this, taxes need to be increased, otherwise deficit would rise further. This strategy would also mitigate the difficulties faced by workers. As argued in these columns last year, preventing unemployment from worsening is important to control social and political problems because once they take hold in a society, economic policies become ineffective.

Indira Gandhi in 1971 got 352 seats and Rajiv Gandhi in 1984 got 414 seats but both lost the mandate within three years. Today, the Congress has only 200-odd seats and if problems grow the UPA allies have shown that they can quickly act pricey and/or switch sides, aggravating the situation.

The deepening global crisis requires new thinking. US President Barack Obama has already argued for creating jobs in Buffalo rather than in Bangalore. There is a rising tide of protectionism and this is not going to end soon. There is also talk of reform of the IMF and World Bank, and re-architecturing of the global financial system. We have to work out our stand on all this. There is no time to make mistakes and learn from them because of the speed of the evolving global crisis.

Alan Greenspan, who was considered “God” by the financial markets and who was the Fed chief from the late eighties onward, has admitted that he was wrong and that financial markets are not self-correcting. So, the free market ideology is in for a major overhaul.

Further, in the US and elsewhere, assets are getting socialised with the government buying into major companies both from the financial and real world. This can only rise as bankruptcies increase. So, if we do not have policy makers whose mindset is different from that which has been in evidence in the last 18 years, we quickly race towards a deeper social crisis.

(Courtesy: The Tribune)

The author is a senior Professor at JNU, New Delhi.