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Mainstream, VOL LI, No 35, August 17, 2013 - Independence Day Special

Indian Economy and the Crisis of a Borrowed Development Strategy

Sunday 18 August 2013, by Arun Kumar


Introduction: The Current Situation

The economic growth rate has been falling continuously while the consumer price inflation, current account deficit in the external sector and fiscal deficit in the Budget remain at high levels. The lack of confidence in the Indian economy is manifested by the sudden and sharp decline in the value of the rupee vis-a-vis the dollar in spite of the steps taken by the government and the Reserve Bank of India. The stock markets are also fluctuating wildly reflecting the uncertainty in the minds of the investors— both Indian and foreign. The policy-makers appear to be helpless.

The government has tried to talk the markets up but with little effect. The PM, Finance Minister, Deputy Chairman of the Planning Commission and Economic Advisor to the PM have all made pronouncements that the economic recovery is around the corner. These predictions over the last two years have been belied as the data in the Table shows. The rate of growth has fallen quarter after quarter since the fourth quarter of 2010-11.

It is true that the rate of growth is still good compared both to that of most other countries in the world or to the projections by the IMF (and others) of the expected rate of growth of the world economy. This growth is also comparable to India’s historical growth rate since independence. However, the current growth path is not comparable with that prior to 1991 because that was not creating inequality and unemployment which the current marginalising growth has been doing.

Post-1991, growth has been fuelled by the private corporate sector with highly capital intensive technology which does not generate much employment and also increases inequality in the economy. Most of the gains have been cornered by a few leaving little to trickle down to others. This is especially true for the marginalised sections like the unorganised sectors and especially the agricultural sector which still deploys more than half of the work force. The impact of the slowdown in the growth rate is that what trickles down becomes even less and those at the bottom of the pyramid suffer even more.

Coupled with the declining economic growth rate is a stubbornly high rate of inflation measured by consumer prices (roughly 10 per cent per annum). While the wholesale price index (WPI)-based inflation has moderated, it does not reflect the burden of price rise on the consumer. The WPI-based inflation rate does not reflect the rise in prices of services, like school fees or rents or telephone calls and so on. The consumer price index has only a few services; so it also under-represents inflation. The price rise results in shifting purchasing power from the consumers to businesses and thereby reducing the trickle-down and accentuating disparities.

Add to this the rising black income generation in the economy with corruption spreading and growing in scale. Since the black economy is concentrated in the hands of three per cent of the population, inequalities rise. By raising costs allround, the rate of inflation is raised. Further, the inefficiencies associated with the black economy result in wasteful use of capital and lower employment generation than is poten-tially possible. Through flight of capital it increases the shortage of capital and aggravates the current account deficit on the external sector and leads to BOP problems. Last but not the least, it results in the failure of policies so that targets are not achieved. It affects the collection of taxes and that raises the government’s budgetary deficits which leads to a cut-back in essential expenditures, say, on health and education.

In brief, under the New Economic Policies (NEP) with their pro-corporate sector bias and with a rising black economy, the combination of low rates of economic growth and persisting high inflation results in poor employment generation and mounting inequality. This is a dangerous mix since it can only lead to growing social tensions and political strife in the country 66 years after we achieved political indepen-dence.

Consumerism and Environmental Decline along the Path of Development

Sixtysix years after independence, we have the largest number of poor people, illiterates and so on in the world. It is not that India has not made progress after independence but it is much less than what was expected. It is much less than what many other nations have achieved in a comparable time-span. India appears to be a case of many missed opportunities.

Further, at a very low level of consumption, India has one of the most polluted environments in the world. The pollution of water in the rivers and underground aquifers is phenomenal leading to increased incidence of various diseases. The pollution of air is also very high compared to even the developed countries and this is also resulting in health problems. The tragedy is that this is at a very low level of per capita consumption. What would happen when with growth consumption rises?

The causes of this high level of pollution are: a) the strategy of ‘growth at any cost’ without taking the environmental factors into account; b) the rampant corruption which leads to cutting corners in every economic activity with environ-mental protection getting the least priority; c) international division of labour which is resulting in polluting industries getting located in the developing countries; and d) rapid increase in consumerism.

Recycling of ships, plastic waste, lead acid, computer waste and so on is taking place in India. Dirty production of heavy chemicals and metals is also occurring here. Massive denudation of forests is the result of open cast mining, large projects for producing power, setting up of airports, expansion of road and rail networks and so on. It is said that development requires all this. Is this true? Not quite since environmental destruction lowers the welfare gains of material growth. It is like digging holes and filling them where there is activity without productivity. One needs to question the development model which postpones the costs to the future generations.

Underlying consumerism is a political strategy of the Indian ruling elite to divert the attention of the population from the present problems by involving them in consumerism. Those who can afford to consume more are happy at the availability of goods in the markets. Those who cannot afford can dream of one day buying these goods. There are those in the middle who aspire to lay their hands on the more exotic ones while buying some of the less exotic ones. Everyone is happy to live in the moment and the future be damned—a very short-term strategy and one that is inimical to building a strong nation and creates atomisation and alienation amongst the people.

The Internal and the External
Economic Problems

The external environment for India’s economic development has deteriorated since the global crisis began in 2007. Due to the ongoing indiscriminate globalisation initiated in 1991, Indian markets have become more closely integrated with the world markets. The ratio of our exports and imports to the GDP have risen dramatically. Movements in the financial markets (like the share market) are now governed by those in the international markets. Commodity prices move in tandem with international prices like in the case of petroleum products and foodgrains. The result is that a crisis in the global markets leads to a crisis in the Indian economy.

Since the recovery from the recession starting 2007 was tepid in the OECD countries, the Indian economy also faltered soon after the recovery stalled there. The green shoots in the US economy in 2009-10 withered after 2010. Unemployment there has remained high and so has underemployment. Eurozone has gone back into recession and so has the British economy. The Japanese economy has been growing slowly and the Chinese economy has been slowing down recently. Thus, all the major economies of the world have been growing slowly or slowing down.

India’s exports have consequently suffered. (See Table) Imports have remained high because of the high prices of energy and India’s rising demand for energy. Further, due to uncertainty the demand for gold in India has remained high in a period when gold prices have risen globally. Thus, the gold and energy import bills have been high keeping the import bill high. This is the reason for the continuing high trade account and current account deficits. The problem has been aggravated by the high debt ($ 365 billion in September 2012) in relation to the reserves ($295 billion in January 2013) the country holds, and this prevents the RBI from intervening more aggressively. Further, the proportion of short-term debt in the total debt has increased since 2008 and this is the one that can evaporate quickly destabilising the position of the country’s foreign exchange reserves.

With the slowing down of the Indian economy, high rate of inflation and fiscal problems, the international community has been losing confidence in the Indian economy. Thus, the credit rating agencies have been threatening to lower India’s rating. This would lead to a higher cost of borrowing abroad and devaluation of the currency adding to the repayment burden. These would lead to an increase in the current account deficit. This sets up a vicious cycle of declining growth, higher current account deficit and lowered credit rating for India.

The rating agencies monitor the fiscal deficit of the country. So, the government has been trying to keep the fiscal deficit low. How is that being done? By cutting back on Plan expenditures (two years back by about Rs 1 lakh crore and in the last fiscal by more than that) and other essential expenditures. This is like chopping the nose to cure a cold. Cutbacks in a period of a slowing economy and demand shortage lead to further demand shortage and a further slowing down. Thus, the fiscal deficit target is being met by cutting back expenditures and not better management and in this sense the fiscal situation is out of control in spite of the fiscal deficit not rising dramatically. This strategy, which keeps the growth rate low, is bound to make the rating agencies lower India’s rating.

The savings and investment rate of the Indian economy fell after 2007. It has not recovered and, as the Table shows, it has fallen further in the previous two years. This is a cause of the slowdown in the economy. Both the private corporate sector and public sector companies are flush with funds but are not investing since the demand is limited. Thus, the government’s strategy of dealing with the problem has become the cause of the problem.

The current problem facing the economy is the external orientation of the policy-makers. They are sensitive to the wishes of the discredited rating agencies and multilateral agencies. This outward orientation of the policy-maker has marginalised the Indian population at large. No wonder, economic experts being appointed in the government are being imported from the US.

The External Orientation of the Indian Policy-makers: A Historical Perspective

India started in 1947 with a borrowed strategy of development which propagated the top-down approach. It was a mixed economy model based on the market economy in the West and the path of central planning from the Soviets. India’s ingenuity lay in combining the two paths but both were copied and based on trickle-down. This is called the Nehruvian strategy of development. The indigenous path suggested by Gandhi based on a bottom-up approach was rejected because the Indian elite wanted to quickly copy Western modernity and join the Western elite. Consequently, while a small elite did well, the rest had to plod along with the little that trickled down. This strategy paid lip-service to the poor and poverty removal. It met with crisis after crisis since the mid-1960s—failure of agriculture and consequent food insecurity, Naxalism, Emergency, rising strife, alienation and black economy and growing inefficiencies, repeated approach to the multi-lateral agencies for help/adjustment and support at high national cost and so on.

The path met its waterloo in 1991 and the strategy was changed from the mixed economy to the market economy with the state retreating strategically in favour of the private sector. The trickle-down declined further. This was characterised by the World Bank (earlier) as the ‘market friendly state intervention’. In the Indian context with its large black economy and high level of corruption this led to the strengthening of the ‘crony capitalism’ model of investment being followed in the country since independence. With the lowering of the priority to public sector the private sector became the dominant sector and it extracted huge concessions—like ownership of natural resources and cuts in taxes. The new strategy based on marketisation stopped paying even lip-service to the poor. We are embroiled in the numbers game of counting the poor without eliminating poverty which has constantly changed its face with growing consumerism and commercialisation of every-thing.

While the earlier strategy produced growth which was much faster than during the colonial period prior to 1947, it also kept the growing disparities in check (not that it reduced them). The post-1991 strategy does not even claim to reduce disparities because now growth is the key to development; distribution does not matter. The policy-makers recognise this factor and, therefore, have put into place policies to mitigate the ill-effects of the ongoing marginalising growth: MGNREGS to get some employment for the underemployed and for those who migrate from the poor areas to richer areas; mid-day meal scheme to get children into schools otherwise their parents will set them to work to supplement their family income; loan waiver scheme for farmers so that the indebted farmers can get relief and do not commit suicide in large numbers. Now there is the Food Security Bill which will hopefully provide more nutrition to the poor. Today 40 per cent of the women and children are malnourished and face disability and permanent poverty.

So, even after 66 years of independence, the government—dominated by the elite—remains insensitive to the problems of the people of India. It is continuing with the borrowed path of development which leads the nation from one crisis to the next without a solution—in fact, only non-solutions abound which result in the accumulation of more problems. To divert the attention of the people, the policy-makers have promoted consumerism in a big way leading to a huge environmental crisis and other problems. Thus, what the colonised mind of the Indian elite thinks is the solution has been the problem since independence and that is why the policy-makers currently appear to be helpless.

[Based on the author’s new book, The Indian Economy since Independence: Persisting Colonial Disruption, published by Vision Books, New Delhi]

The author is the Sukhamoy Chakravarty Chair Professor, Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi. He can be contacted at e-mail:

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