People's Democracy

IN the entire period since Independence the Indian economy has never faced a demand constraint as severe as it is facing now. This is a contribution of "liberalisation". Prior to "liberalisation" the very nature of the Indian economy was such as to rule out the possibility of its being systemically demand-constrained. This is because it was a "planned" economy, and even though the "planning" was partial, invariably off-target, and meant to consolidate capitalist development through the building up of a State capitalist sector, the interventionist role that the State played as a producer and investor for building up this sector precluded any demand constraint. In fact the pre-"liberalisation" economic system was perennially plagued by the opposite problem of shortages, excess demand and inflation.

The noted Marxist economist Michael Kalecki had once remarked succinctly that classical capitalism was a demand-constrained system while classical socialism was a supply-constrained system. The Indian economy in its dirigiste phase, though building capitalism, was not classical capitalism; and, though not building socialism, it was characterised by planning and large-scale public investment which kept any demand-constraint at bay. All that has changed with "liberalisation": the withdrawal of the State from its role as producer and investor (which represents not a "retreat of the State" but a new role for it in conformity with the needs of international finance capital) has brought in its wake a demand-constrained economy.

Let us consider the actual economic situation first. At present in the country there are at least 65 million tonnes of foodgrain stocks. Since no more than about 20 million tonnes are required as buffer and operational stocks for the Public Distribution System, the magnitude of surplus stocks is at least 45 million tonnes. Industrial growth has dwindled sharply. The rate of growth of the index of industrial production (over the preceding year) which was 13.0 per cent in 1995-96, came down to 6.1 per cent, 6.7 per cent, 4.1 per cent, 6.7 per cent and 5.0 per cent respectively in the subsequent five years. The figure for the current fiscal year, 2001-02, is likely to be even smaller, since the rate of growth during April-November 2002 has been a meagre 2.2 per cent over the corresponding period of 2001, compared to 6.0 per cent during April-November 2001 compared to the previous corresponding period.

These rates are way below the rates observed during the 1980s, and even the rates which obtained during the heyday of the much-maligned Nehruvian dirigiste planning. The industrial sector, especially the capital goods segment of it, is saddled with substantial unutilised capacity. Even the tertiary sector which has been the fastest-growing component of the economy has witnessed a marked deceleration of growth in the last quinquennium. At the same time however the country has (as on January 4) foreign exchange reserves amounting to 45.44 billion dollars. Even though a large chunk of this consists of short-term capital inflows of the "hot money" variety, the economy can by no stretch of imagination be called foreign exchange-constrained.

In short, India today presents a classic case of a "demand-constrained system". None of the usual supply-side constraints on the macroeconomy, namely, food, foreign exchange and industrial capacity, is binding. There is, to be sure, a shortage in some critical areas of infrastructure like power, but an expansion of activity in non-power-intensive areas is perfectly feasible; what is more, an expansion of activity through an increase in investment in the infrastructure sector itself, which can be managed through stricter rationing of infrastructure inputs in the short-run, would ease the availability of these inputs over time. The level of activity, and with it the rate of growth, in the Indian economy today would pick up if there is an increase in the level of aggregate demand.

The need for such an increase is pressing. Employment in the organised sector has been virtually stagnant for some time; of late, even rural employment expansion has begun to stagnate. Between 1993-4 and 1999-2000, the two NSS Quinquennial Surveys, the annual rate of growth of rural employment was a mere 0.58 per cent which is way below the rate of growth of rural population. The observed decline in work participation rate in this period can be explained only by the "Discouraged Worker Effect" in the absence of employment opportunities. What is more, the process of diversification of rural employment away from agriculture which was such a marked phenomenon during the eighties has got reversed during the nineties.

All this has had an impact on rural poverty. The headcount ratio of rural poverty which had declined noticeably during the eighties has ceased to decline over the nineties, and might have marginally increased (Table 1).

The poverty ratio figure fluctuates a good deal, is based (in the Table) on large sample data for some years and thin sample data for others (which affects comparability), and has to be interpreted with caution at the best of times. One thing however stands out clearly, namely, the rural poverty ratio declined sharply until the end of the 1980s, after which the decline stopped and there was even a marginal increase (even if we leave aside the 54^th round figure).

Of course the NSS 55^th round gives a remarkably low figure for poverty, of only 26 per cent, a figure used by the finance minister in his last year’s budget speech to claim success for the neo-liberal economic policies of the nineties. This figure however is erroneous. The data on which it is based, as everybody including the Planning Commission accepts now, are "contaminated" and unreliable. The NSS however has also collected employment data in its 55^th round, with supplementary information on consumption, which is not "contaminated". This shows a rural poverty ratio of 36.35 per cent for 1999-00 and an urban poverty ratio of 28.76 per cent (Sundaram, Economic and Political Weekly, August 11, 2001). These figures , namely 36.35 per cent for rural India and 28.76 per cent for urban India, show no decline in rural poverty in the nineties. While there might have been a small decline in rural poverty between 1993-4 and 1999-00, there is no decline in 1999-00 relative to 1990-1.

Larger government expenditure of course can be financed through increased taxation of the rich (the tax-GDP ratio has declined significantly in the "liberalisation" years). But even if the government lacks the will to garner larger taxes from the rich, it can nonetheless finance enlarged expenditure with impunity through a larger fiscal deficit. This is not to say that a larger fiscal deficit is the best way of overcoming the demand constraint. But the usual arguments against it do not apply at the moment, and it is certainly better to use a larger fiscal deficit to increase public expenditure in certain avenues than not to do so, or to curtail public expenditure in the name of reducing the fiscal deficit.

An example would clarify the point. Let us assume, for simplicity, that employment generation programmes require only labour and that labour spends its wages only on foodgrains. If Rs 100 are spent on employment generation through an increase in government borrowing (i.e. the fiscal deficit rises by Rs 100), then these Rs 100 would be spent on foodgrains and hence (ignoring minor complications like transport costs) the FCI’s stocks would go down by Rs 100. The FCI can then repay Rs 100 to the banks from whom it had taken credit for stock-holding. It follows that as government borrowing increases by Rs 100 for financing employment-generation programmes, it reduces by Rs 100 as a consequence of such programmes, so that the net government indebtedness does not change. What appears as an increase in the fiscal deficit in this case is no actual increase: it is only a consequence of the fact that FCI transactions do not figure in the budget as a matter of convention (indeed they used to figure in the budget until the early seventies). And if there is no actual increase in the fiscal deficit, but only an apparent one, then it cannot conceivably have even the adverse consequences that the protagonists of financial orthodoxy associate with larger fiscal deficits.

To be sure, I assumed above that the employment-generation schemes required only labour and that labour demanded only foodgrains. But dropping these assumptions only means that in addition to foodgrains there would be some extra demand for non-food wage goods and for material inputs for the employment programmes. Given the fact however that industry too has been afflicted by a demand constraint of late, this would only mean that Rs 100 of spending on employment-generation would clear less than Rs 100 of foodgrain stocks, while creating extra demand for industrial goods, and bringing forth larger industrial output, from the remainder, which can scarcely be frowned upon. True, in this case not all of Rs 100 would accrue back to the government via the FCI; a part would materialize as private savings and hence would entail an increase in the government’s net indebtedness. But objecting to this in a demand-constrained system is theoretically illegitimate.

Overcoming the demand constraint therefore is easy in this sense. What prevents it is the fact that any such increase in government expenditure would be opposed by international finance capital, which not only dislikes government activism in this form, but also has a vested interest in deflation and stagnation. Deflation both removes any inflationary threat to rentier interests, and allows the purchase of domestic assets "for a song".

The question thus arises: how long can the people be kept in misery, when the means of overcoming that misery are lying idle, merely to appease a bunch of international financiers?

Source: Upto the 46^th round the figures are taken from a World Bank document. The 50^th round figures are from Abhijit Sen who uses the same method. From the 51^st to 54^th rounds the rural figures are from S.P.Gupta of the Planning Commission, and the urban figures are from G.Datt of the World Bank.