People's Democracy

The Growth Slump

Prabhat Patnaik

THE Ministry of Statistics and Programme Implementation released the GDP figures for the fourth quarter of 2012-13, and hence for the financial year as a whole, on May 31. And it shows a GDP growth rate of only 5 per cent for 2012-13 over 2011-12. These GDP figures have 2004-05 as the base, which means that the overall growth rate is calculated as a weighted average of sectoral growth rates, taking the weights of the different sectors as they were in 2004-05. Since the service sector has been the fastest growing sector in the economy of late, its weight too has been rising. If we take an earlier base year, for which the weights of the material production sectors were higher, then the GDP growth rate will be even smaller.

WHY GDP ESTIMATES

MUST EXCLUDE SERVICES

Indeed, the material production sectors alone are often considered to be a better indicator of the economy’s output growth than the conventional GDP estimates which include services as well. This is so for at least four reasons:

First, a very substantial part of service sector “output” estimation is statistically extremely ill-founded; indeed it is no more than guess work.

Secondly, even conceptually it is difficult to separate “transfer payment” made by one person to another, which is not included in GDP estimates, from, “payment for services.” Typically, “payment for services” is supposed to involve compensation for some “satisfaction” given by the payee to the one who pays; the giver of this “satisfaction” becomes a “service provider” by virtue of this act of giving “satisfaction.” But if giving alms to a beggar provides “satisfaction” to the alms-giver, then the beggar becomes a “service provider” by this definition, in which case the alms given should be counted not as transfer payment, but rather as part of GDP. Since it is impossible to distinguish between “transfer payment” and “payment for services,” many economists are in favour of excluding services altogether from GDP estimates.

Thirdly, there is no independent means of estimating service sector output other than what is paid for the service. Thus the output of the service sector called “public administration” goes up if the salaries of government employees are increased because of the Pay Commission; hence the GDP goes up even without any additional effort having been made by anyone.

Fourthly, and even more significantly, service sector output goes up when the degree of exploitation of the working people in the economy goes up, so that increased exploitation appears perversely as increased GDP. Suppose, for instance, that in a purely peasant economy, the output of agriculture remains unchanged at 100; the original surplus handed to landlords was 50 which they used for maintaining 50 musclemen. The GDP as estimated conventionally would be 150, of which 100 would be in agriculture and 50 in services (the musclemen). Now, if the surplus extracted from the peasants goes up to 60 and 60 musclemen are employed with it, then the GDP would go up from 150 to 160. An increase in the exploitation of producers appears ironically as an increase in production!

For these reasons, the Soviet Union and other socialist countries earlier included only material production sector output in their GDP estimates. If we adopt a similar procedure in India, then the so-called growth acceleration during the last decade or so itself becomes questionable, since the material production sectors hardly participated in it. What is more, on that definition, the economy’s growth has not only slowed down; it is virtually negligible at present in per capita terms as the Table alongside shows.

Table 1: Quarterly Growth Rates of GDP by Sector of Origin

Source: Ministry of Statistics and Programme Implementation (May 31, 2013)

POVERTY INCREASES

ALONG WITH GROWTH

The abysmal rate of manufacturing growth is particularly noteworthy here. In fact, since the industrial recession of the mid-sixties which constituted a crisis of the dirigiste regime and a turning point for the Indian economy, the country has never experienced two successive years with such abysmal industrial growth. This acute recession gets somewhat camouflaged by the service sector, but it is no less in its intensity than what was experienced in the mid-sixties, with one important difference: the mid-sixties recession was related to a sharp absolute drop in agricultural, especially foodgrain, output; the current recession is occurring even in the absence of any such drop.

A point needs to be clarified here. The Left has been arguing that even during the years the economy was experiencing high GDP growth rates, absolute poverty, as measured by the calorie norms specified by none other than the Planning Commission itself, has been increasing. From this fact an inference may be drawn that if high growth was associated with growing poverty then low growth should be associated with falling poverty; but this is completely erroneous.

The reason that absolute poverty increased even in the period of high growth is because this growth was accompanied by a process of primitive accumulation of capital that distressed and dispossessed vast masses of peasants, fishermen, agricultural labourers, craftsmen, artisans and others, without at the same time creating much proper employment (other than “informal employment,” “casual employment,” “part-time employment” etc, which are but a camouflage for the reserve army of labour). The slowdown in growth will lower the growth rate of employment even further; indeed the industrial recession will cause retrenchment of workers. But it will not stop or slow down the process of primitive accumulation of capital one little bit. Hence the growth in absolute poverty will only intensify because of the current growth slowdown.

Putting it differently, the reason why absolute poverty has been increasing even in a period of high growth has to do with the specific trajectory of growth, viz. the neo-liberal trajectory. Along this trajectory, absolute poverty increases even when growth is high (since a substantial increase in the pace of primitive accumulation of capital is an immanent feature of this entire trajectory); and it increases even faster when the pace of growth slows down because the pace of proper employment generation, already inadequate in the period of high growth, becomes even more so. It follows that the working people who had already been victims of the growth process earlier when the growth rate was high, will become even greater victims now when the growth rate slows down.

GOVT’S RESPONSE:

CREATION OF BUBBLES

The response of the government to the growth slump is instructive. Within the neo-liberal trajectory, where any substantial and leading role for public investment is eschewed, growth depends essentially upon what Keynes had called the “animal spirits” of the entrepreneurs which determine how much investment they make. But a very important characteristic of the capitalist market is its incapacity to distinguish between “speculators” and “entrepreneurs;” and indeed in the era of finance capital this distinction itself disappears since even the so-called “entrepreneurs” indulge in “speculation” as a matter of course. The intervention by the government therefore, which in any case is confined to stoking the “animal spirits” of the “entrepreneurs,” necessarily also takes the form of encouraging speculation; and this occurs typically through the creation of euphoric expectations in the form of “bubbles.” Thus, almost the only weapon used by the government for stimulating the economy within a neo-liberal set-up is the creation of asset-market bubbles.

This is precisely what Alan Greenspan, the chairman of the Federal Reserve Board in the US, had done when the “dotcom bubble” that had stimulated a boom in the 1990s had collapsed; Greenspan had used monetary policy to promote a “housing bubble” whose collapse in 2008 ushered in the current crisis. Everybody blames Greenspan for being irresponsible and promoting the housing bubble; but the fault lay not with Greenspan for stimulating a bubble but with the system whose inherent characteristic was such that it could escape a recession only through the stimulus of a bubble. The Manmohan Singh government is trying precisely to stimulate a new bubble.

Its very effort, however, is laying bare the cause of India’s high growth earlier, which had to do with the US “housing bubble”-led boom in the world economy on the one hand, and a domestic asset price bubble on the other (especially a stock market bubble that saw the Sensex zooming at one stage to reach 20,000 in record time). Both these bubbles have now collapsed, and with it the Indian high-growth story; but the Manmohan Singh government is still trying its best to recreate the past. Opening up new areas to foreign finance capital, opening up the domestic multi-brand retail to companies like the Walmart, trying to reach an “amicable settlement” on Vodafone’s tax evasion (which is a euphemism for letting Vodafone get away with it) so that foreign investors draw favourable conclusions about India’s “hospitality,” all these are meant to attract finance into the economy so that it can generate a new asset-price “bubble” (apart from financing the burgeoning current account deficit on the balance of payments).

The Manmohan Singh government, however, is making little headway. Indeed it can only make little headway, since the crisis in world capitalism leaves little scope for entertaining euphoric expectations about the Indian economy (given especially its acute current account deficit). Besides, the current recession in India is also accompanied by significant inflation; hence a monetary policy attempting to stimulate an asset price bubble through a lower interest rate runs the risk of aggravating the inflationary situation. This fear --- that the effect of low interest rates will be felt in the commodity markets rather than in the asset markets --- has made the RBI more cautious in pursuing low rates; it explains the current difference in policy stance between the RBI on the one hand and the Montek-Chidambaram crowd on the other.

Instead of counteracting the recession through an expansionary fiscal policy, neo-liberalism demands fiscal conservatism (the old pre-Keynesian policy of “sound finance” that is usually referred to these days as “fiscal consolidation”), on the assumption that it would start a new “bubble.” While this assumption will not get realised (it is not getting realised anywhere in the world), the austerity enforced by such a fiscal stance will only aggravate the recession. If the present neo-liberal regime continues then the crisis will only intensify; and the working people will have to suffer because of the caprices of finance capital.