People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 09

March 03, 2013






Change the Economic Policy Trajectory


AS we go to press, as is the normal practice, the union government presented to the parliament the Economic Survey 2012-13 on the eve of the annual budget presentation for 2013-14. 


Nearly 300 pages plus 178 pages of economic data comprise this document, which endorses the Central Statistical Organisation’s estimation of our GDP growth rate of 5 per cent for 2012-13, in contrast with the finance minister and the ministry contesting this figure as being an underestimation of the growth of the Indian economy.  The Survey notes that the growth rate has slowed down from 9.3 per cent in 2009-10 to 6.2 per cent in 2011-12 to 5.0 per cent in 2012-13.  Amongst the factors responsible for the slowing down, it notes that the impact of the boost to demand provided by the stimulus packages following the global economic crisis that began in 2008 has slowed down impacting on GDP growth.  The boost in demand saw consumption growing at an average of 8 per cent annually between 2009-2012.  This, the Survey notes, has resulted in “strong inflation and a powerful monetary response (increase in the rate of borrowing by the RBI) that slowed down the consumption demand”. The Survey notes further that, “starting 2011-12, corporate and infrastructure investment started slowing both as a result of investment bottlenecks as well as the tighter monetary policy”. 


Notwithstanding this, however, the Survey projects a fanciful expectation that the overall economy is “expected to grow in the range of 6.1 to 6.7 per cent in 2013-14”.  In order to achieve this, it prescribes that the investment bottlenecks must be cleared and the monetary policy must be eased to boost the investment rate.  This, in turn, it suggests will lead to higher growth and employment generation.  As we have repeatedly noted in these columns in the past, by merely making available larger investable resources, growth cannot automatically take place.  Growth can take place only when what is produced by such investment is purchased in the market for consumption.  It is precisely this consumption power among the Indian people that has sharply declined, as the Survey notes.  Final consumption in the economy declined from the average of over 8 per cent annually, as noted above, to around 4.4 per cent in 2012-13.  Unless this is increased, no amount of making available funds for investment can result in growth. 


The Survey, however, concentrates on the `investment’ aspect ignoring the `consumption’ aspect which can only spell further misery to the vast mass of our people.  Thus, in order to boost investments by removing “bottlenecks” and easing the monetary policy, incentives for foreign and domestic investments are being proposed.  Noting that there is a strong correlation between the growth rate and investment rate, the Survey appears to come to the conclusion that by increasing the availability of funds for raising the quantum of investment, India can be put back on a high growth trajectory. 


This, as we had noted earlier, is a wrong prescription for furthering neo-liberal reforms based on the correct diagnosis that our economy has slowed down.  Unless demand grows, the growth rate cannot be turbo-started. By merely making available funds or opening up further avenues for foreign investment without increasing domestic demand will only channel these funds into speculative activities rather than productive investments.  This is evident from the recent experience of astronomically high prices of real estate and gold in our country.  The rich are parking their money in such avenues that are called `valuables’, which according to Survey, “include works of art, precious metals and jewellery carved out of such metals and stones”.  At current prices, “investment in the form of valuables registered nearly a 4.5 fold increase between 2007-12…”.   “Even at constant prices, the share of valuables increased from 2.9 to 6.2 per cent of the total investment in the country between 2007-12”. 


Despite such large-scale diversion of funds into unproductive investments, the Survey speaks in terms of structural reforms to encourage investment.  In other words, the effort is to set in motion such a reform package that will give greater access to foreign capital to maximise profits in our country and to domestic capital and the rich which will further widen the hiatus between the two Indias. 


As is universally acknowledged, growth rates alone do not and cannot capture the overall health of the economy or the people. In terms of human development indicators, India has seen a further worsening of the situation.  The UN Human Development Report 2011 is quoted by the Survey which shows that India’s HDI ranking has slipped further to 134 out of 187 countries. In terms of major HDIs, India ranks behind Sri Lanka and Bangladesh.  This is the lowest ranking amongst all BRICS countries.  In terms of health expenditure, similar is the case with public spending on health stagnating at 1.2 per cent of the GDP. Due to privatisation of the health sector, private spending in health has increased to 2.9 per cent of the GDP, more than double that of public spending.  This has led to exorbitant rise in the cost of medicines and health care, estimated to push an additional three crores of our people below the poverty line annually. 


The Survey labours on the need for fiscal consolidation particularly at a time of economic slow down that results in lowering tax revenue. It estimates that in the first nine months of the current fiscal, corporate income tax fell by 4.9 per cent, customs by 18.9 per cent and central excise by 16 per cent.  However, personal income tax grew by 7.6 per cent and service taxes by 5.9 per cent.  This clearly shows that the rich and the India Inc. are paying lower taxes because of the economic slowdown contracting domestic demand while the salaried and the middle classes are showing a greater tax compliance. The Survey also notes that the tax GDP ratio which reached 11.9 per cent in 2007-08 has continuously declined since to 9.6 per cent in 2009-10 and marginally higher at 9.9 per cent in 2011-12.  It is likely to be much lower in 2012-13.  Fiscal consolidation can be achieved through a higher tax GDP ratio by expanding the tax base. The Survey acknowledges this point but it however notes that “open ended commitments such as uncapped subsidies are particularly problematic for fiscal credibility”.  In other words, fiscal consolidation is to be achieved through a drastic reduction in subsidies which, it estimates, to be to the tune of Rs 1,66,824 crores. 


The fiscal deficit for 2012-13 is estimated at Rs 5,13,590 crore.  As we had repeatedly noted in these columns, the total amount of tax foregone by the government, according to the 2012-13 budget papers was nearly Rs 5.28 lakh crores.  Clearly, one can see why such a fiscal deficit has occurred in the first place.  Instead of targeting this source that causes large fiscal deficits, the government continues to target even the meager subsidies for the poor.  This will further impoverish the poor and squeeze domestic demand in our economy.  This, in turn, will further slow down our economy. 


If the Economic Survey is any precursor to the budget and the government’s economic policy trajectory in the future, then it is clear that the merciless economic onslaughts on our people will continue to mount further widening the hiatus between the two Indias. 


The current all India Sangharsh Sandesh Jatha launched by the CPI(M) is aimed at precisely carrying the alternative policy direction that can build a better India and provide better livelihood for the vast mass of our people. 

(February 27, 2013)