Leaps of faith

IT used to be said of the Bourbons of France that they learnt nothing and forgot nothing. It may seem a little unfair to make an analogy between the distinguished economists who crafted the Economic Survey 2008-09 of the Union Ministry of Finance and the Bourbons. However, the fact that the global economic and financial crisis has not even made them pause before advocating a rapid return to neoliberal fiscal orthodoxy, especially in a context where the Indian economy has been wracked by a severe downturn, makes one wonder at the tenacity of their faith. The Survey is very well written. It provides an excellent, even if in some respects selective, summary of the state of the Indian economy.

A large number of issues are addressed. The performance of agriculture and food management, industry, energy, infrastructure, communications, financial markets and intermediation, and so on are reviewed. The issues of prices and monetary management, public finance and fiscal developments, the external sector and of human development, poverty and public programmes are all discussed in detail.

While substantive chapters focussing on these topics provide a great deal of useful information on many specific aspects of the economy, the part of the Survey that has drawn the most media attention is the second chapter. Titled Challenges, Policy Response and Medium-term Prospects, it advocates big bang privatisation and a rapid return to unfettered neoliberal reforms, including comprehensive financial liberalisation and a range of measures to woo foreign investment. For the lay reader, the first chapter, which provides an overview of the state of the economy at the end of the financial year 2008-09, is perhaps the most useful part of the Survey. The Survey notes that the annual rate of growth of gross domestic product (GDP) of the Indian economy, measured at current market prices, came down from 9.1 per cent in 2007-08 to 6.1 per cent in 2008-09, while the corresponding decline in terms of GDP measured at factor prices and constant (1999-2000) prices was from 9 per cent to 6.7 per cent.

Agricultural growth decelerated from 4.8 per cent in 2007-08 to 1.8 per cent in 2008-09, while manufacturing output suffered a sharp decline from 8.25 to 2.4 per cent. In fact, except for mining and quarrying, which registered a marginal increase in the growth rate from 3.3 per cent to 3.6 per cent and community, social and personal services, which registered a growth rate of 13.1 per cent in 2008-09, nearly double its 2007-08 growth rate of 6.8 per cent, all other sectors witnessed a decline in the growth rate.

The apparently impressive performance of the community, social and personal services was, in part, the result of the implementation of the Sixth Pay Commission recommendations in respect of the salaries of Central government employees and the consequent rise in the valuation of the output of government services. This measure, timed with the elections to the Lok Sabha in view, also turned out to be a useful, although perhaps unintended, stimulus to the economy in the face of the decline in demand arising from the impact of the global recession.

The sector of Financing, insurance, real estate and business services, a high growth performer in the past several years, suffered a decline in growth rate from 11.7 per cent in 2007-08 to 7.8 per cent in 2008-09. What is worth noting is that the decline in the growth rate in three key sectors, namely manufacturing; construction; and financial, insurance, real estate and business services, began in 2007-08 itself, after peaking in 2006-07. This suggests that impulses spurring a downturn in growth rates were already present in the economy before the impact of the global recession began to be felt. In fact, this is true also for trade, hotels and restaurants; and transport, storage and communication sectors, which had grown at the rate of 10.4 per cent and 16.3 per cent respectively in 2006-07 before declining to 10.1 per cent and 15. 5 per cent respectively in 2007-08, and further declined to a combined growth rate of 9 per cent in 2008-09.

Over the years, since the ushering in of neoliberal reforms in India in 1991, the economy has been getting increasingly integrated with the developed capitalist economies. The sum of Indias merchandise exports and imports as a share of GDP was 14 per cent in 1991. It grew to 23.7 per cent by 2003-04 and further to 38.9 per cent in 2008-09. Taking trade in goods and services together, the share of imports and exports in GDP was at 47 per cent in 2007-08, reflecting a high degree of integration in terms of trade.

Perhaps even more important is the substantial rise in inflows and outflows of finance capital. Gross capital flows into India rose to 9 per cent of GDP from a much lower figure of 1.9 per cent in 2000-01. All these indicate a greater degree of not only integration with the developed capitalist economies but also vulnerability to adverse developments originating in those economies.

The year 2008-09 provided dramatic evidence of this increased vulnerability. The onset of the sub-prime crisis in the United States in mid/late 2007, followed by the collapse of some of the Wall Street financial giants in 2008 and several others across North America and Europe, has had a severe impact on most developing economies, including India both in terms of capital flows and in terms of merchandise trade. The Survey tries to whitewash and lend respectability to early claims of the Indian economy being decoupled from the world economy and, therefore, of being insulated from the crisis, but concedes that this argument soon proved unfounded as the global crisis intensified and spread to the emerging economies through capital and current account of the balance of payments.

This is, however, soon followed by the claim that despite setbacks the BoP situation of the country continues to remain resilient. Considering that the rate of growth of exports fell sharply in 2008-09 compared with 2007-08 and that export growth has been negative for several months now, this seems a somewhat complacent view.

The Survey goes on to describe the various fiscal and monetary measures taken by the government to deal with the impact of the global economic crisis on the Indian economy, and expresses a great deal of satisfaction with them, as would befit a government department document.

With reference to the movement of prices and the problem of inflation, the Survey notes that while headline inflation as measured by the Wholesale Price Index (WPI) was only 0.8 per cent at the end of March 2009, the WPI Food index showed a year-on-year inflation of 6.8 per cent at the same point of time. Also, there has been significant variation in inflation rates as between the WPI and the Consumer Price Indices. Thus, while the average WPI inflation rate for 2008-09 was 8.4 per cent (2007-08: 4.7 per cent), the CPI for rural labour was 10.2 per cent and that for industrial workers was 9.1 per cent. Quite clearly, the bulk of Indias working people have had to contend with both increasing unemployment and rising prices during 2008-09, notwithstanding official claims of having managed the crisis successfully.

In its summary of the state of the economy, the Survey makes the obligatory reference to the new mantra of inclusive growth. Listing some of the schemes such as the National Rural Employment Guarantee Scheme (NREGS) and the National Rural Health Mission (NRHM) in this regard, it provides detailed numbers that suggest that while these schemes did have an impact, their political impact may have been far more significant than their economic impact.

Arguing that the Indian economy has withstood the adverse global economic situation, it makes the assertion that the [Indian] banks are financially sound and well capitalised and that agriculture and rural demand are strong and agriculture production prospects are normal.

The optimism on agriculture and rural demand may be somewhat misplaced, and not just because the monsoon seems to be playing truant. It would also not be altogether wrong to suggest that the strength of the Indian banking system owes a great deal to progressive forces in this country that fought both for the nationalised banks remaining with the government and for strict regulations as well as limits to foreign banks presence in the Indian banking system.

It may also not be entirely uncharitable to suggest, in this regard, that such resilience as has been demonstrated by the Indian financial system is despite and not because of neoliberal reforms.

The Survey makes sweeping recommendations in favour of rapid and comprehensive financial liberalisation and a quick return to the path of fiscal rectitude. These include:

Disinvestment of public sector assets to realise at least Rs.25,000 crore revenue for government every year;

A new edition of the Fiscal Responsibility and Budget Management Act with a new target of zero fiscal deficit on a cyclically adjusted basis;

Decontrol of petrol, diesel, sugar, fertilizer and drug prices;

Privatisation of the coal sector; Amendment of the Atomic Energy Act to allow private players in nuclear power;

Lifting of ban on futures trading; and

Passing of the Banking Regulations Act and enhancing of the FDI limits in banks to enable foreign banks to enhance their presence in India.

The most obvious feature of these and other neoliberal recommendations of the Survey is that none of them follows logically from the description of the state of the economy and the analysis of developments in the economy in the past year. They are, quite simply, leaps of faith. They seem to be rooted in the firm belief of the authors of the Survey that even while neoliberal economics may be discredited globally in the wake of the financial and economic crisis, with developed country governments running up huge fiscal deficits and nationalising financial institutions, it remains theoretically sound and deserving of immediate and comprehensive application in India.

The fact that only some (such as the abolition of Commodity Transaction Tax and the surcharge on income tax) have found a place in the Budget for 2009-10 should not lead one to conclude that the view of the government is basically different from that of the Survey. As has been made clear by the Prime Minister and the Finance Minister post-Budget, the government is committed to large-scale disinvestment at an appropriate time.

The same is true in respect of the other suggestions made in the Survey. Clearly, all talk of inclusive growth notwithstanding, the new UPA government, without the restraining hand of the Left, is determined to pursue neoliberal reforms with zeal. As a tailpiece, we may add that the issue of massive unemployment does not figure prominently in the Survey.