‘Free market’ manifesto

As is the custom every year, the Economic Survey for 2013-14 was tabled in Parliament during the Budget session before the presentation of the Union Budget for 2014-15. And, as has increasingly been the case in recent years, the mandarins in the Finance Ministry who prepare the Survey have seen fit to run a 101 Economics tutorial for all the unreformed and misguided critics of “Friedmanomics” out there, and to explain in terms that are enticingly simple why the Indian economy needs to be further liberalised and globalised and, of course, privatised. But, before we get to the Ideological Manifesto part of the Survey, let us take a quick tour of its chapters.

The Survey is an impressive document, covering the Indian economy’s performance during the period under review comprehensively. The first chapter provides a crisp overview of the state of the Indian economy in 2013-14. It argues that, after two years of gross domestic product (GDP) growth at less than 5 per cent, the economy is likely to grow at a higher rate in 2014-15. It bases its optimism on the grounds that the balance of payments situation had improved, inflation rates had begun to moderate, and the fiscal deficit was declining. It adds that there is now expectation of a change for the better (sounding suspiciously like the slogan that the good days will soon be with us) and that a moderate improvement in growth performance of some advanced capitalist economies will help achieve a higher growth rate in the current fiscal year. However, it adds a cautionary note, saying that the recovery may be gradual. The fact is that there are several risks in the current situation, and an overly optimistic assessment of the growth prospects may not be warranted. Additionally, one may note that even the achievement of much higher growth rates in the past have not meant substantial improvement in the conditions of existence of a large segment of our people. The Survey identifies in this overview chapter what it considers as key structural constraints on the growth of the economy. Its identification is in line with its faith in the efficacy of greater liberalisation of the economy.

The first chapter on the state of the economy is followed by a chapter entitled “Issues and Priorities”, which identifies what in the view of the Finance Ministry are key issues and what should be tackled on a priority basis among them. However, though the title talks of issues and priorities, this chapter is essentially an ideological manifesto, setting out the views of the Finance Ministry on how an economy ought to work and how it should essentially be driven by market signals, with the state coming in only where “market failure” occurs.

The third chapter provides an account of the state of public finance in the Indian economy over the recent period and the challenges arising therefrom, primarily from the perspective set out in the previous chapter. The policies of the last two financial years, which have seen significant cuts in government expenditure, are hailed as embodying a “focus on rationalising expenditure” and it is argued that this should continue. The thrust is on reducing expenditures as the main way to reduce the fiscal deficit, the euphemism for which is “fiscal consolidation”. In the words of the Survey, “Steadfast adherence to fiscal consolidation by the Centre and States is key to achieving the desired macroeconomic outcomes.”

The fourth chapter deals with prices and monetary management, and again reiterates the commitment to minimise the fiscal deficit, an article of faith with the neoliberal/pre-Keynesian economists. It is asserted that the National Rural Employment Generation Scheme (NREGS) has caused a wage-price spiral and also led to a shortage of labour in agriculture. But no cognisance is taken of the fact that the average number of days of employment for every rural household registered under the NREGS in a year during the period 2011 to 2014 was less than 45, nor of the fact that wage rates remained well below even legal minimum wages in parts of the country. The overall argument of the chapter is that the best way to combat inflation is to minimise the fiscal deficit, move to “market prices”, further liberalise agriculture by removing restrictions on exports and by effecting changes in a liberalising direction of the rules concerning private trade in agricultural produce.

The fifth chapter deals with financial intermediation, looking at the functioning of financial markets, the state of the banking sector and the rising percentage of non-performing assets, especially of the State Bank of India and the public sector banks as a whole. Again, the stress is on finance-related legislation and policy measures that would further liberalise financial markets.

The sixth and seventh chapters deal with issues relating to the balance of payments and international trade. They bring out the substantial increase in the degree of integration of the Indian economy with the global capitalist economy over the last two decades and more of liberalisation policies. While the account in these chapters does recognise the risks involved in such integration, it is on the whole rather sanguine about the consequences in the medium to long term for the Indian economy of opening up the economy further. In line with its neoliberal philosophy, the account wants closer integration, financial and structural, of the Indian economy with those of advanced capitalist countries.

The eighth chapter deals with agriculture and food management. It claims that, “…over the last decade Indian agriculture has become more robust with record production of foodgrains and oilseeds”. However, it also adds that with the monsoon prospects uncertain this year, there may be a negative impact on agricultural output and therefore on prices of food products. There is a claim that the rate of growth of agriculture between 2007-08 and 2011-12 was 4.1 per cent a year, whereas earlier figures from the government had it somewhat lower at 3.5 per cent. It is true that there has been a recovery in agricultural growth since the very poor period of 1998-2003. The share of horticulture in GDP from agriculture is estimated at a high 30.4 per cent, but there are many data problems here and this figure may be an overestimate. The subsidy on account of implementation of the National Food Security Act in 2014-15 is placed at Rs.1,31,000 crore, which is hardly 1 per cent of India’s GDP. The overall thrust in the discussion on agriculture and food management, as in the other chapters, is towards more “market” and less government. Consider for instance the following passage:

“The continued emphasis on procurement and distribution of rice and wheat is contrary to the ground reality that shows changing preference functions of consumers. A shift to a direct cash transfer system or food stamps would anchor our food policy to the requirements of the people and would additionally reduce the fiscal deficit” (page.159).

Contrary to the implicit argument here, the National Sample Survey data for 2009-10 show that the share of rural households accessing the public distribution system (PDS) has risen across the country, and so has the share of household cereal consumption accounted for by purchases from the PDS.

The ninth chapter of the Survey deals with the performance of the industrial sector. It notes that ”"industry grew by just 1.0 per cent in 2012-13 and slowed further in 2013-14, posting a modest increase of 0.4 per cent” and adds that ”"it will be a daunting task to meet the projected Twelfth Plan targets of 10 per cent for the manufacturing sector and 5.7 per cent for the mining sector in the remaining three years” (page 160). It also points out that growth in the core of the industry sector (consisting of coal, fertilizer, electricity, crude oil, natural gas, refinery products, steel, and cement) declined from 6.5 per cent in 2012-13 to 2.7 per cent in 2013-14. The Survey recognises that “rejuvenating small businesses both in the formal and in the informal sectors is crucial for generating employment opportunities” (page 165). It concludes by expressing the hope that, as the overall economic environment improves, industrial growth will also revive. But it does not spell out the objective basis for its optimism.

Chapter 10 deals with the services sector, which accounts for 57 per cent of India’s GDP. While there has been some slowdown in this sector over the last two years, this sector has been relatively resilient in terms of growth. While hoping for better growth performance from this sector, the Survey notes that there are downside risks in the international political and economic context.

Chapter 11 deals with energy, infrastructure and communications. The Survey notes: “According to the Twelfth Plan projections, during the Plan period, i.e. 2012- 17, an investment of US$ 1 trillion is required in the infrastructure sector in India. About half of this is expected to come from the private sector” (page 210). It further notes that “concerns have been raised over the past few years about stalled infrastructure projects”. It calls for “unconventional development financing products with active support from multilateral development banks as well as international financial institutions for meeting the funding requirements of their infrastructure sector”. The strategic emphasis is on the so-called public-private partnership mode.

The twelfth chapter goes into the issue of sustainable development strategies, a key component of which is dealing with climate change. It recognises that “greater effort at collective action to limit the increase in global average temperature to below 2°C above pre-industrial levels is required” (page 215). It correctly argues that “CBDR (the principle of common but differentiated responsibilities) and equity must continue to be the bedrock of ongoing and future sustainable development financing”. It also highlights the fact that developed countries have shown no eagerness to meet their commitments in respect of sustainable development financing: “Annex II countries provided around US$ 15 billion each year in 2011 and 2012 to developing countries as climate finance, well below the target US$ 100 billion annual goal by 2020 committed by them” (page 226). The Survey concludes its discussion of sustainable development and climate change by warning that, “global cooperation and substantial additional funding are required. If resources of this magnitude are not made available, outcomes in terms of growth, sustainability, and inclusive development are likely to be suboptimal.” Whether India’s negotiating positions in the international fora dealing with these issues will truly reflect the concerns expressed in this chapter remains to be seen.

The thirteenth and final chapter examines the progress in human development in India in recent years. It admits that as per the data from the UNDP publication Human Development Report 2013 , India’s global ranking as measured by its HDI (Human Development Index) figure has worsened, moving from 134 in 2011 to 136 in 2012. While Sri Lanka has moved to the category of countries with high human development, several countries in the medium group such as China, Egypt, Indonesia, South Africa and Vietnam are ahead of India in this regard. The chapter argues that India has stepped up public expenditures on education and health in recent years, but the evidence presented in Table 13.3 on page 232 suggests that between 2008-09 and 2011-12, public expenditure on social services (Education, Health and “Others”) as a proportion of GDP actually fell from 6.8 per cent to 6.4 per cent. It recovered to 7 per cent in the revised estimate for 2012-13, but that reflects primarily a slowdown in the growth rate of the GDP. The Survey acknowledges that massive investments in social infrastructure, skill development, and empowerment of women are needed to reap the benefits of the time-bound demographic dividend. How this will square with the dominant theme of the Survey that the focus has to be on reducing the fiscal deficit by ruthless expenditure reduction is anybody’s guess.

The Economic Survey, while containing rich empirical material, is limited hugely by its unswerving faith in the “optimality” of free markets, without ever bothering to ask if the implicit notion of optimality that frowns on any redistribution of endowments in an egalitarian direction is relevant in a country where 59 dollar billionaires out of a population of more than 120 crore hold wealth amounting to more than a quarter of the country’s GDP. Issues of distribution apart, the achievement of the implicit notion of optimality even in its highly restrictive sense as an outcome of a competitive equilibrium is contingent on a large number of utterly unrealistic assumptions, a fact that the distinguished authors of the Economic Survey are surely aware of. One wonders whether ideology and faith have triumphed over sober reflection and logic.