People's Democracy

TRUTH ABOUT LIBERALISATION EFFECT

Bonanza For The Rich, Misery For The Poor

 Sitaram Yechury

The media reports that the prime minister has spoken during the recent election campaign to the effect that the impressive performance of the   Indian economy has silenced the critics of liberalisation. 

At the outset, everyone who has the interest of India and its people at heart would wish the Indian economy to grow robustly. Further, they would also hope that the benefits of this growth would reach all sections of our people and not  be cornered by a few. 

The latter aspect has, obviously, not happened during the course of this decade and half of economic reforms and liberalisation. The fate of the “India Shining” and “feel good” campaigns at the hustings recently, resoundingly underlines this fact. The simple truth of the matter is that the gains of such a process of liberalisation have been confined mainly to a small section of our population, while for a majority, the living conditions have deteriorated, at best stagnated. The agrarian distress that continues to sweep across the country is testimony to this fact.

Having said this, let us now examine the experience of our economy during these years of liberalisation. There are three disquieting factors that need to be taken note of.  (All statistics in this article have been taken from the official website of the finance ministry: Public Finance Statistics.)

First, during the  course of these years, the gross central taxes to GDP ratio has declined from 10.62 in 1989-90 to 8.26 in 1998-99, increasing marginally to 9.5 in 2000-01 (the last year for which revised estimates are available).   Before we come to the decline in this ratio, it must be noted that the levels of this ratio in India are one of the lowest in the world — even  the “Asian Tigers” have a tax GDP ratio which is over 20! Advanced countries of Europe have a ratio over 30 and close to 40, while Scandinavian countries like Sweden have a ratio which is above 50.

Given this, the objective in India ought to have been to    increase this ratio, so that the government would have greater revenues at its disposal to fulfill the constitutionally mandated social obligations to the people.  Instead, what we have is an actual decline in this ratio which means the government’s revenues, instead of growing, are actually contracting.  A    decline in tax GDP ratio means that those who pay the taxes are now paying less than before.  This is evident in the series of tax concessions given to the rich and to the corporate sector over  these years of liberalisation. These were done in the name of providing incentive for investment and, therefore, for economic growth.

Such concessions are, actually, subsidies that are provided for the rich.  There are two types of subsidies:  one, where the government spends in order to  provide relief for the poor by subsidising items of mass consumption; the other, where the government does not collect from the rich what it used to collect in the past, thus, providing them relief to the corresponding amount.  The former are categorised as subsidies by the liberalisation pundits  and considered as burden on the exchequer. The latter are called incentives, thus, giving a veneer of  respectability for subsidising the rich.

Now, one per cent point of our GDP is close to Rs 30,000 crores.   A drop of 2 per cent points in the tax GDP ratio means a loss in government revenues to the tune of nearly Rs 60,000 crores annually.  If this amount had not been foregone, then the government of the day would always have substantial resources to undertake expenditures aimed at improving the well-being of the vast mass of the Indian people.  Thus, the years of liberalisation have seen a process where the rich gets subsidised at the  expense of the poor.

Far from silencing its critics, these years of liberalisation had brought into currency the famous “anti-incumbency” factor in Indian politics.  If, indeed, the critics of liberalisation were silenced, then  neither Chandrababu Naidu nor S M Krishna would have lost the elections. Or, for that matter, since the initiation of the liberalisation policies, no incumbent prime minister in India, from Narasimha Rao downwards, has ever been re-elected.  Thus, the shrinking revenue base of the government will have to be reversed if the people’s discontent has to be met.  Any such reversal, which must be done under popular pressure, amounts to the vindication of the critics of liberalisation, such as us. 

Secondly, the entire claim of liberalisers has been on strengthening the industrial sector in our country particularly domestic  manufacture.  Any hope of India emerging as a post-industrial society is contingent upon India first becoming an industrial society. India, by any measure, is not yet a fullfledged industrial society. The thrust of liberalisation was, thus, to strengthen domestic manufacturing, in order to transform India into a modern industrial society.  What has been the record on this score?  The share of manufacturing to GDP (factor cost) which stood at 18.7 in 1990-91 declined to 15.6 in 2003-04.   Now, if the share of manufacturing has, actually, been declining instead of growing, then there is something seriously at fault.  What is required is an earnest  introspection and not rhetorical thunder. The reason for this (decline in the share of manufacture GDP ratio) is not far to seek.

Any economist worth his salt will tell us  that the crucial factor which  determines the growth of the manufacturing sector is the domestic demand at any point of time in the economy. If the domestic demand is not growing at a sufficient pace to sustain industrialisation, then serious bottlenecks appear for the growth of domestic manufacturing sector. 

This is precisely what is happening in India.  The emphasis so far, during the years of reform, has been the pre-occupation to provide easy access to capital. This is both in terms of its cost (interest rates) and its availability. But the mere availability and accessibility of capital does not automatically transform into increase in production. For, the simple truth is that unless what is produced is consumed, production cannot increase.   If the overall purchasing power in the society remains stagnant, if not declining, then the domestic demand fails to grow. Thus, despite easy access and availability of capital, production does not increase due to the contraction of  domestic demand, and, hence, domestic market.

The critics of liberalisation, like us, have been repeatedly pointing out that unless domestic demand is expanded rapidly, the strengthening of domestic manufacturing and India’s industrial society, thus, cannot take place. This, in turn, requires a massive dosage of public investment which, while building the required social and economic infrastructure, provides jobs to people  which, in turn, gets translated into greater domestic demand for goods which, in turn, provides the impetus for a growth in domestic manufacturing.

Instead of adopting such a course, the process of liberalisation continues to focus on what the economists call the “capital constraint”.  In reality, however, the real bottleneck in Indian economy is the “demand constraint”.  Unless this is addressed in earnest, the potential of the Indian economy to develop with a robust health will not take place. 

Thirdly, the real health of any economy can be gauged from the levels of domestic capital formation that takes place.  This is so for the simple fact that capital formation sustains both the fundamentals of the economy and its future potential for growth.  During the course of these reforms, the ratio of capital formation to GDP, at factor cost, which stood at 26.3 in 1991 declined to 22.6 in 2001-02.  While provisional figures for 2003-04 indicate  that it is inching towards the levels where  it stood in 1990-91. In other words, all through these years of liberalisation, even at the merciful best, we can only conclude that the gross capital formation in the Indian economy has stagnated. But the continuous decline during the course of one whole decade has, actually, weakened the economic fundamentals.  If the recent upturn is a reflection of a rethink on this score, then it is welcome. But only time will tell if this is a sustainable trend.

These three parameters put together throw up serious challenges before the Indian economy and consequent welfare of its people. What is required is consistent sustainable growth accompanied by a significantly higher index of distributive justice.  As long as the agrarian distress continues to haunt vast tracts of our country characterised by starvation deaths and distress suicides, the critics of liberalisation will continue to point out the gross inadequacies of the economic policies in redressing people’s misery.

In the final analysis, it must be, once again, underlined that one feature of the 2004 people’s mandate was the overwhelming assertion by the Indian people that the focus of the economic policies must be people’s welfare and not only the growth of corporate profit.  It is such a shift that the people expect from the UPA government. It is such a shift that the Common Minimum Programme seeks to embark upon. Concentration on implementing these aspects of the Common Minimum Programme would serve this government better.