Economic Manifesto

Can India deliver economic growth while still being inclusive and an egalitarian society? Is welfare state the way to go? As the debate rages on, future of the country’s growth engine is at stake, says Team Inclusion

09 May, 2019 Special Reports, Economy
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Economy is the engine behind India’s growth and it fuels the country’s path to being a superpower. However, recent economic slowdown and the controversy around ‘jobless growth’ has raised tough questions for both the current National Democratic Alliance (NDA) government led by the Bharatiya Janata Party as well as the opposition in terms of the issues and focus, which have become election planks.

With elections around the corner, economic growth is becoming more and more important as a poll issue, while political parties are doling out handouts such as farm-loan waivers.

Apart from caste and religion, the most important thing is the economy. It matters how much money you have in your pockets. This is an example of felt-needs, which touch the common man everyday.

The governance achievements or failures as highlighted in regularly undertaken studies have a correlation with election results as well as more and more people now care about whether their basic felt-needs are being fulfilled by the policymakers and the government or not.

Going forward, poverty and unemployment are going to be bigger issues and not just in elections but in governance and policy circles as well. Analysts are in agreement that the current rate of 8-9 per cent growth a year isn’t going to suffice to bridge these problems and Indians have got to dream bigger with more ambition, if we are to fulfil our dreams of becoming a superpower.

The Data Divide

An ordinary citizen expects the government to fulfil felt-needs but those aren’t being fulfilled while the government bandies about data which shows that statistically the economy is doing well and India is one of the fastest growing countries. However, on the ground experience shows otherwise. There’s a lack of jobs on the ground, NREGA wages saw their lowest hike in five years and consumer spending is tapering off from capital goods to durables. The question then becomes is that why is there a dissonance between felt-needs and data?

“Indian economy is doing well only in terms of GDP growth but when we study the economy, we also look at other things such as exports, imports, car sales, job growth. It is unfortunate that all other indicators are not showing healthy growth. So there’s something going on in the statistics that we haven’t yet understood. In fact, a lot of economists including very reputed economists have been waiting for the CSO to tell us how they have computed the new GDP series and particularly the back-dated series that has come out,” said Ila Patnaik, an economist with NIPFP.

She added that this is not to say that India’s economy isn’t growing or it is shrinking, it means that the rate of growth isn’t exactly understandable at this point. There has been much controversy around the GDP numbers.

The Central Statistics Office, under the guidance of NITI Aayog, rebased the past GDP series last year, and the GDP growth rate of the four years of the Modi administration is now higher than even that under the boom years of UPA.

CSO argues that it has not just rebased GDP series, but has upgraded the methodology with new data sources to meet UN standards. The new methodology definitely improves upon the old one but there are questions about the slicing and dicing undertaken to recast the ‘back-series’ which has left it open to questions.

“If we grow at 7 per cent each year, we will double our economy size every ten years and that will have a huge dent on poverty. We’ll reduce poverty through GDP growth but not with just redistributing what we have,” Patnaik added.

So the first question to ask why is India poor? Why are Indian citizens poor and why can’t India do better? The per capita income of any country is nothing but the average productivity of its subjects. More specifically, it’s the average productivity of citizens in the working age group. Why can’t India’s citizens have a higher level of productivity?

“The answer boils down to lack of access of certain things what we call inputs. They may be in terms of physical infrastructure like roads, water, electricity etc. It can be in the nature of social infrastructure like health or education. It can be in the nature of access to financial products, land, markets, information and technology. If those things deliver, India would do better,” said Bibek Debroy, Chairman of the Prime Minister’s Economic Advisory Council (PMEAC).

The other way of slicing the problem is the way economists traditionally look at it, which is land, market, capital and entrepreneurship. How do we make each of these more efficient? All of these are to be addressed differently. The question that arises is what is the role of the government in doing this? There are certain public goods and the question is what role can the government play in delivery?

“Economics talks about markets but markets function in a certain institutional context. It can’t be delinked from the governance structures or the Constitution. I use the word government, which has three layers extending till the local government structures. Most of the public goods and services will be delivered by the local government but we are still obsessed by the union government. How obsessed are we with the union government budget and how much time do we spend on state government budget? Whenever we expect the government to do something, we talk about rationalising the civil services but we don’t debate what the Block Development Officers are doing and how their strength can be rationalised or improved” Debroy said.

Growth of an economy comes from not just state spending but other areas as well such as private final consumption expenditure, investment in national assets, private investment, consumer consumption and foreign trade. However, there’s been a severe lack of spending on the government’s part on crucial areas such as health and education as welfare delivery languishes with an intermittent slowdown in the investment cycle as well.

With the new, GDP series, there have been obvious inconsistencies in the data. 

The investment rate—defined as gross fixed capital formation over GDP—has declined from a high of around 36 per cent in 2007-08 and averaging 33.4 per cent during the UPA period (2004-05 to 2013-14) to a low of 28.5 per cent in 2017-18 and averaging around 29 per cent during the NDA period (2014-15 to 2017-18).

Increasing Governance Accountability

It is with this backdrop that N C Saxena, Distinguished Fellow, SKOCH Development Foundation said that two out of three major pillars of the economy are working very well.

“It is clear that the private sector is working very well and the contractors are also doing a good job, which is why we have so much investment in the power sector as well as the roads and highways. But the third element, which is grassroots democracy, is not working at all. Teachers are absent, doctors aren’t trained and any report by government officials at the lowest rung is completely fabricated and doesn’t reflect the true picture,” Saxena said.

Accountability of government officials has become a major issue within the policymaking circles. Even as the Comptroller & Auditor General (CAG) releases timely reports on the functioning and performance of various sectors in the government at the top, its reach simply doesn’t extend to the grassroots level where things go awry beyond anyone’s control or rather with the complicity of all involved.

“One should therefore expect considerable diversity in accountability of local governments in service delivery, with respect to the nature of the program, as well as locations varying with respect to wealth inequality, education, participation and awareness of voters and nature of civil society. It is no surprise that Panchayati Raj institutions are more effective and inclusive in Kerala compared with states in Northern India,” writes Dilip Mookherjee in a paper published in 2012 titled Accountability of Local and State Governments in India: An Overview of Recent Research.

This is where groundwork and grassroot research becomes so important because the reality of programmes and policies only becomes clear when there’s a mandate for the organisation to study its goals and objectives as well as carry out research on the outcomes as well.

“If you make a circle around Agra and Lucknow for 100 km, you will find that all doctors, teachers live in Lucknow. Accountability is completely missing from our system. Everyone knows that staff is absent but nobody is acting on the same. We have to see to it that education and health works for all Indians,” he said.

India’s governance systems are input based which measure the cost-benefit of a programme rather than the outcome of it which can range from quality of learning to retention of concepts. It is clear that enhanced devolution of powers to the Panchayats and local levels of governance needs to come with enhanced audits by higher levels of the government and the release of this information.

Delivering The Basics

How do economists who are a part of the establishment view this problem and seek to solve it?

“I simply don’t know what to say about the statistics conundrum. Nowadays we have two consumer price inflation indexes and two GDP numbers; so everything is duplicating. We can pick which GDP we want. Whether you grow at 7 per cent or 11 per cent, there are five things that all Indians should be able to consume at affordable prices unless they are in the bottom 500 mn of the population. These five are a decent meal, clothing, a house, some basic healthcare and a good education,” said Rathin Roy, Part-time Member of PMEAC.

Roy said that one can’t subsidise their way out of poverty. There’s demand in the economy but the demand is not there at prices which people can afford. A simple example of this is clothing imports which now increasingly come from Bangladesh and Vietnam. Even though cheap cost of labour is cited as a reason, the amount of unemployment in states like Bihar and Uttar Pradesh signals a market-distortion in terms of wages and labour productivity.

“We should have been making these products in India but instead we are importing them and I don’t know why,” said Roy. “Earlier, you could either afford a house in Gurgaon or not have one. This new scheme of affordable housing is very useful but it’s very difficult to deliver those houses without subsidy. Education and health are also undeliverable at their bad quality without subsidisation from the state. The bottom of the problem is that if you can produce for all Indians in India, we won’t have to worry about growth but we can’t.”

In this context, exports remain a moot point and somewhere, what Gandhi said about the Western civilisation rings true that “it would be a very good idea”.

Studies show that India has never been able to make exports an engine of growth. At best, what we have found is that when we grow well, our exports grow but the causality isn’t clear to the economists yet. If one is not able to capture the home market, then a business is stuck selling Maruti Suzuki while basic felt-needs like clothing, housing, education remain unfulfilled.

The amount of inequality is so high in the country that it’s difficult to bridge these divides easily or without considerable re-allocation of resources, particularly after a deep rethinking of how we distribute and deliver services. For instance, the per capita income in urban India is R2,90,000 which is 12.5 times that of rural areas.

“All economists talk about growth and globalisation but it won’t happen like that. You have to make India by Indians. We have to think about employment, decentralisation and equality. Without egalitarian growth, India will not prosper. We analysed the data from the Annual Survey of Industries and found that in 1991, compensation of employees was 78 per cent of the value addition. Today, it is hardly 45 per cent. The contribution of profit was earlier 19 per cent and now it is 52 per cent. How can you think of having inclusive growth with this kind of model?” asked Ashwani Mahajan, co-convenor of Swadeshi Jagran Manch.

Measuring Growth

At the same time, there’s a debate raging on about the time period of economic measurement. While some argue that we should bring in more real time data to ensure timely reportage of economic activity and correctional policies activation, the other side argues that too much data muddled the waters and there’s no need for real time data and larger time periods should be preferred to measure economic growth.

Ila Patnaik from NIPFP sought to clarify this issue. She said, “One has to think in the longer term horizon. When we look at any economy, we look at two components of its growth. One is the longer term trend growth and the other is the business cycle. So when we think about short term, we are really thinking about the business cycle. But there’s a cycle around a trend and we could actually be doing much better which means that there would be more jobs in the economy and income growth could happen too. We have to look at both because if we keep growing slowly but that could affect trend growth too in the long run.”

While many economists seek to solve the bigger policy problems in the economy and service delivery, what hurts each and every one of us is the price of commodities and ever-rising inflation in the country. As prices of onions rise, it makes everyone cry. While many major economists such as Lord Meghnad Desai argue that nobody speaks of vegetable prices in this country because inflation has been tamed, there are others who believe that inflation has merely gone out of focus because of sociological factors.

“Urban middle class doesn’t speak of vegetable prices on the dinner table because they can afford it but the low prices are creating huge distress in rural areas for farmers. But the other areas seem to miss out on the fact that we only focus on the urban middle class of the country and we don’t see the rural poor. The economy isn’t doing well at all for the 70 per cent people in the country. Another aspect that we miss out on is governance,” said Arvind Mayaram, former Finance Secretary, Government of India.

Rural Economy Concerns

The idea behind governance focused policymaking is not just to ensure a leakage free service delivery but also to ensure that policies are efficient in and of themselves and don’t result in distortions in the markets. One of the great examples for the same is the rural economy, which has massively suffered post the surge in cow protection agendas across the country.

In Rajasthan, in Pushkar fair and other cattle fairs are all depleted as nobody is looking to buy or sell cattle. What changed? Firstly, in the rural areas, farmers were dependent on agriculture and animal husbandry. So you have 50 per cent cattle which is male. Earlier bullocks were used for farming but now with tractors, they are no longer required. There was a lot of commerce and resource availability for farmers through cattle trade but now nobody wants to get involved in the transportation for the fear of cow-vigilantes.

Secondly, we have to ask what kind of climate is being created for investors if there are lynchings in the state? Investment rate in India is only 27 per cent of the GDP. Policymakers would do well to have clarity in their mind about the complexity of the Indian economy and one would have to look across the board for all possible ramifications.

Meanwhile, Ashwani Mahajan said that the problem in the rural economy isn’t because of the cow-protection agenda but due to wrong policies created to favour foreign breeds.

“Jersey cows are imported into India. Male offspring of these cows are not usable for India because they can’t be used for farming. This is the reason why Rajasthan is suffering. People are talking about A2 milk. Why can’t we use Indian cows? If we are aiming to sell our products across the world, why are we not selling our produce everywhere and only importing theirs,” Mahajan said.

Even as the economy is heating up running the course of its business cycles, outside events do create opportunities and threats for Indian businesses too. For instance, US is in a trade war with China as of now and the major narrative is that Indian companies should take advantage of it and start exporting more but that has simply not happened.

“You can take a sociological decision, it will normally cost you economically. Nobody in this environment will transport a cow, for instance. The second thing is that the relationship of the economy and bureaucracy with the citizens except in the times of elections is feudal. What you are looking for is favours from the bureaucracy which are discretionary in nature. Second problem is the assumption that government is paternal in nature but the government can’t afford to be. Central government doesn’t have money from taxation to pay for its current expenditure, it borrows for the same,” Rathin Roy clarified.

It’s clear in the context of the above remarks that the government has neither the capacity nor the capability to invest in infrastructure. So we roped in the private sector and lakhs of crores have sunk in infrastructure but where is the answer? 

Fixing the Problems

Mayaram suggested that infrastructure can’t be done by the private sector alone but it can become a valuable partner to the government in the entire chain of financing. It can finance and run infrastructure so that the operational costs aren’t borne by the private sector. Mayaram said that we have two problems that we need to fix. First is that there has to be a consistency in policy.

In Rajasthan, for instance, a large number of roads were done on toll basis but suddenly the government declared that no toll will be charged resulting in R100 crore a year burden on the exchequer. Payments are not being done in a timely manner because the revenue is not coming in the same manner.

Second problem according to Mayaram is the sanctity of contract, which is receding due to the judicial system’s interventions. He gave the example of coal auctions where licenses were given and the private sector made huge investments across mines but suddenly, all the licenses were cancelled.

“It is not because the private sector is a fraud or that the government wants it but it’s because the judicial system has started stepping into the contracts,” he said.

Are the things in the economy as bad as 1991? Ila Patnaik doesn’t think so.

“The rupee was crashing. Today, the rupee isn’t crashing. It’s showing healthy volatility which is happening of so many global factors. Inflation is low because of oil prices. If we look at the last five years, this government has more or less stuck to fiscal deficit targets. You’ve got a very big reform which is GST which is having teething troubles,” she said.

With the economic data showing red except the headline GDP numbers, stagnating spends on education and health, worry about fudged statistics and overall feeling of resentment amidst the business class, where do we go from here and provide basic necessities like education and health for all?

“To make the economic manifesto a broader manifesto, we also need to talk about the constitution, fiscal decentralisation, devolution, legislature, administration, seventh schedule. We need to reinvent and rediscover the constitution and understand what it means for India to be democratic, socialist and secular,” concluded Debroy.

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