Tuesday, March 10, 2009
Adhering to Neo-Liberalism: FRBM Act and Declining Fiscal Deficit
Neo-liberalism entails an economic philosophy where the state rescinds its role of catering to the interests of the people under its jurisdiction and transforms itself into an instrument of promoting the interests of global finance capital. This essentially at the policy level takes the form of an expenditure cut on the part of the state under the diktats of finance capital. In our country this expenditure cut has been given a legal status under the Fiscal Responsibility and Budget Management (FRBM) Act, which limits the fiscal deficit (difference between Government’s expenditure and taxes) to only 3% of GDP. This Act was passed by the NDA Government but the UPA Government too with its basic thrust in favour of neo-liberalism embraced it. As a result, during the UPA regime, the fiscal deficit continued to decline from 4.5% in 2003-04 to 2.7% in 2007-08. In 2008-09 as a result of the financial crisis and revenue deficit of the Government increasing, the fiscal deficit has shot up to 6% of GDP, which however is estimated to continue its declining trend from next year, with a commitment that the FRBM targets will be adhered to in the near future. (Budget Speech of Finance Minister, 2009-10).
Declining Development Expenditure
This declining fiscal deficit essentially means a decline in the expenditure of the Government. Now, within this expenditure of the Government, there are fixed expenditures like salaries and wages to the Government employees, (which has increased recently due to the 6th pay commission), interest payments and administrative costs of the Government. So if the Government decides to decrease its expenditure then this essentially means, given the fixed part of its expenses, a decline in the Government’s development expenditure. Therefore, it is not surprising that the expenditure of the UPA Government as a proportion of GDP, has actually declined from 7.09% in 2003-04 to 6.17% in 2006-07 and then marginally increased to 6.76% in 2007-08. (Handbook of Statistics on the Indian Economy, RBI) In other words, as a result of the basic adherence of the UPA Government to the policies of neo-liberalism, it has actually decreased the expenditure on development, as a proportion to GDP, which is most important for the aam admi. This declining expenditure on development has taken a huge toll, particularly, on education and health in India.
Expenditure on Education and Health: A Far Cry from NCMP
Increasing Public spending on education to at least 6% of GDP was a key commitment made in the NCMP. Far from increasing the public spending on education, there has actually been a decline in the expenditure GDP ratio from 3.94 to 3.24% of GDP between 2000-01 and 2006-07 (taking into account expenditure by all government departments on education). Within this, the share of the central Government has marginally increased from 0.48% to 0.75% of GDP. This abysmal level of expenditure on education in India is even less than countries like Tunisia, Jamaica, Maldives and even less than the Occupied Territories of Palestine. (Source: Human Development Report 2007-08). This is a terrible and shameful state of affairs in the country, which the UPA has done very little to overcome. It is shameful that the UPA Government has actually reduced the allocation for the Sarva Shiksha Abhiyaan (SSA) since 2007-08. In 2007-08, the total allocation for this scheme was Rs 12020.2 crore, which has decreased to Rs 11933 crore in the interim budget of 2009-10. This fact alone speaks volume about the UPA Government’s commitment towards universalizing education in the country.
In the face of this refusal by the Government to increase expenditure on education, what has happened is that private players have come in a big way in the education sector both in Primary as well as Higher education. The share of private unaided higher education institutions increased from 42.6% in 2001 to 63.21% in 2006. (Source: XI Five Year Plan, Vol. 2). The UPA Government has declined from enacting any legislation to control the fees and admissions in the private education sector. Therefore, what has essentially happened is that far from spending 6% of GDP in education, the UPA Government has decreased the expenditure and catered to the interests of private education providers, who are anything but the aam admi.
The aam admi in India is basically unhealthy because of the complete apathy on the part of the Government to increase allocation in the health sector. According to the National Family Health Survey (NFHS)-3,
46% of children below 3 years of age were under weight
Percentage of anemic children between 6-35 months increased to 79.2% in 2005-06, from 74.2 in 1996-97. Percentage of anemic married women increased to 56.2% in 2005-06, from 51.8 in 1996-97. Percentage of pregnant women who were anemic increased to 57.9% in 2005-06, from 49.7% in 1996-97. In other words, there has been a drastic increase in anemic persons in the population.
This reflects a decrease in the nutritional intakes of the population. In 2004-05, the average calorie intake in rural and urban areas was 2047 and 2020 Kcal respectively, which decreased from 2153 and 2071 Kcal respectively.
In the face of such glaring deficiencies in the health of the population, it was imperative that the Government increase its expenditure on health significantly to at least 2-3% of GDP, as promised in the NCMP. However, it is seen that the expenditure on health in the country was only 1.02% of GDP with the centre contributing only 0.34% of GDP. Such low level of public expenditure on GDP is amongst the lowest in the world. As a result of this abysmal level of public expenditure on education, the number of functioning Primary Health Care centres in the country decreased from 22842 in 2001 to 22370 in 2007. Percentage of vacant doctor posts in the Primary Health Centre has also increased from 13.36% in 2001 to 18.04% in 2007. (Source: How the UPA Spend Our Money, CBGA). In other words, under the UPA Government the aam admi could find less number of primary health care centres in his/her vicinity and even when s/he could find one, the probability of not finding a doctor in the health centre actually increased.
One of the main reasons for the defeat of the NDA Government in 2004 was the acute agrarian crisis in the country. In the NCMP, the UPA Government promised to improve the agrarian situation in the country. The reality after five years is however far from what the UPA Government promised.
Large number of farmers continued to commit suicides even after the UPA came to power. In the year 2006, 17060 farmers committed suicide which was slightly lower than 17131 farmers who committed suicide in 2005. In 2007, as many as 16632 farmers committed suicide. (Source: http://www.counterpunch.org/sainath02122009.html). The farmers committing suicide in such large numbers only show that the extent of agrarian crisis did not subside with the UPA coming to power.
In order to address this issue of growing agrarian distress and farmers’ suicide, the Government in the budget of 2008-09 announced debt waiver scheme for the farmers. While the debt waiver came too late, it had its own problems also. Firstly, there was no scheme announced to waive the loans of the farmers taken from private money lenders which constitute bulk of the loans of the farmers. Secondly, the uniform cut-off of two hectares discriminated against dry land, as against wetland, farmers since the plot sizes of dry land farmers are comparatively larger; indeed this uniform cut-off may even leave out large segments of the peasantry in crisis-hit regions like Vidarbha.
At the same time, there are other serious issues pertaining to agriculture in terms of a falling per capita availability of food grains. It is noteworthy that the per capita availability of food grains continued to decline under the UPA Government from 168.9 Kg per capita per annum in 2004 to 160.4 Kg per capita per annum in 2007. This is basically a reflection of growing problem of food security in the country which has been compounded by the reluctance of the UPA to universalize the Public Distribution System. Moreover, the total allocation on food security decreased from 1.16% of GDP in 2004-05 to 1.12% in 2008-09. (Source: How the UPA Spend Our Money, CBGA). All this points to the fact that under the UPA, it has become difficult for the population to access food in the country. This is indeed a travesty of the UPA commitment towards improving the conditions of the aam admi.
After many years, the country reeled under double digit inflation rate under the UPA Government. This inflation was a result of the denial of the UPA to come out of the neo-liberal paradigm and strengthen the Public Distribution System and ban futures trading in essential commodities. Moreover, the UPA’s stubborn refusal to cut the excise duties on petroleum products also increased the price of petrol and diesel in the country. The sky rocketing price rise has subsided now, only with the advent of recessionary trends in the Indian economy as a result of the global economic crisis.
Denial Mode on Economic Crisis
Ever since the economic crisis hit the world and India, the UPA Government has been on a denial mode. Firstly, they claimed that India was insulated from the crisis, which was completely false as the data of the Indian economy showed the imminent slow down and job losses in the economy. Even then, the basic policy thrust of the UPA continued to be neo-liberal and market oriented when the entire world, particularly the advanced capitalist countries, were falling back upon public investment and Keynesian measures to reverse the global recessionary trend. This is most evident in the fact that the UPA Government announced its decision of increasing the FDI ceiling in the insurance sector when the entire world was in a financial crisis, which spread precisely because of such policies aimed at opening up the financial sector.
Secondly, the response of the UPA Government to deal with the crisis is grossly inadequate. The basic thrust of the UPA has been in terms of announcing tax cuts and interest rate cuts in the economy aimed at luring the people to spend more thereby increasing demand. However, in times of recession when the confidence on the economy is low, such tax and interest rate cuts does not increase demand, simply because the public hold on to their cash balances and do not spend more in anticipation of an uncertain and bleak future. What was needed was direct investment and demand injection on the part of the Government. In this regard the UPA only announced a direct fiscal stimulus which was only 0.5% of India’s GDP, which was a paltry sum compared to the enormity of the crisis. As a result of the UPA’s reluctance to deal with the crisis, lakhs of people have lost their jobs and many had to suffer pay cuts. In other words, the ideological commitment of the UPA towards neo-liberalism continues while the aam admi suffers.
The policies of the UPA Government led by the Congress party are clearly enmeshed within the overall contours of anti-people neo-liberalism benefiting the rich at the cost of the aam admi. It is time to defeat the forces of neo-liberalism and rally behind an alternative set of pro-people policies which can be provided only by an alternative political formation led by the Left. The need of the hour is to defeat the communal BJP led NDA as well as the UPA and fight for a secular, democratic and pro-people political alternative to the BJP and the Congress.
Tuesday, January 27, 2009
In all these analyses there is an effort on the part of the elite media to deny the existence of the poor. Basking in the glory of ‘Shining India’ and record number of billionaires in the country, the Indian elite simply want to wish away the existence of the poor. The fact of the matter however is a bit different. The trajectory of economic reforms in India has been such that the increase in the number of billionaires in the country has been at the cost of pushing to the margin even larger number of people. Even official statistics admit that the pace of reducing poverty has greatly come down in India in the post-reform period. On the other hand, it has been pointed out by noted economist Prof. Utsa Patnaik that the official poverty figures are wrong and poverty in India has actually increased drastically in the post reform period. Since the film is based on Mumbai, the following quote from Prof. Utsa Patnaik’s article will not be inappropriate;
“Urban Maharashtra is the most expensive place for the poor where they have fared worst. There is a massive rise from 52.5 percent to 85 percent in the population unable to access through their spending, even 2100 calories per day, the official urban nutrition norm. Over half the urban population has gone below the lowest nutritional level, 1800 calories compared to just over a quarter a decade earlier. In-migration from rural areas and other states does not explain the scale of the worsening which is mainly on account of the people already there.”
It is ironic that no Bollywood film, in the recent past, of any fame has even tried to capture this growing misery of the people of Mumbai and it takes a Meera Nair or a Danny Boyle to do so. Ever since the reforms we have seen that the focus of Bollywood movies sharply shifted towards a celebration of NRI lives and lives of the super-rich creating a fantasy world devoid of the ugliness of poverty, slums or malnourished children. In this respect, it is welcome that Slumdog has moved out of this strait jacket and focused on the underbelly of Mumbai.
The scenes of the film depicting the miseries of the slum children, particularly that of Jamal the protagonist and his brother, with some fine camera work and editing is indeed worthy of praise. The depiction of the children doing all kinds of work starting from begging to selling different commodities to stealing to working as guide in the Taj Mahal and the entry of Jamal’s elder brother into the world of organized crime have been superbly filmed. Particularly, the shot where Jamal was trying to steal a roti from the window of a running train while he was hanging from the roof with a rope held by his brother was superbly done. All this indeed is the reality of urban India where our everyday existence bears testimony to all that was shown in the film.
These slices of reality in the film are squeezed between the fantasy run of Jamal who won Rs 10 million in ‘Who Will be a Millionaire?’ or ‘Kaun Banega Crorepati?’. This dream run of Jamal is so out of the ordinary for a slum-dweller that he is hounded and tortured by the police under the prejudice that he has cheated in the show. In response, Jamal says that how each and every answer that he gave was a result of his experiences with life as a poor slum dwelling child in Mumbai. For example when asked what does Ram carry in his right hand, Jamal remembers the Mumbai riots and a figure of Ram, when the Muslim locality was attacked by Hindutva brigade and gives the correct answer that Ram carries a bow and arrow in his right hand. In this sense every answer that he gives is a result of a remarkable set of coincidences whereby each one of them is linked to some or the other experience of his miserable life. In this entire drama that is played out in the sets of ‘Who Wants to be a Millionaire?’, we also get a glimpse of the malice of the rich to the poor, in the character of Anil Kapoor, the anchor of the show. His continuous jabs at Jamal for being a Chaywallah and prompting him the wrong answer of a question only exposes the hatred of the rich for the poor. In the end however, the underdog wins the game stunning all and to the cheers of the poor while at the same time winning back his lady love. Slumdog in its essence then is a well made rag to riches movie, with some superb camera work, editing, script, acting and direction.
The problem of the film however lies elsewhere. Firstly, it is true that Slumdog was never intended to be a documentary film on Mumbai’s poverty, it is not proper to judge the film as to how well poverty has been depicted. Rather the point is that the poverty in the film is shown from a distance. With adoption of the narrative style of flashback, the viewer in some sense is put as a distant observer from the crushing poverty of Jamal, both in time as well as space. The poverty of Jamal is a memory and hence is at a distance, moreover this memory is unfolded not in the slums but in the police station or the sets of ‘Who wants to be a millionaire?’ when Jamal is on the threshold of money and fame through his participation in the TV show.
The importance of this TV show should not be missed. ‘Kaun Banega Crorepati?’ has been an iconic TV show in post-liberalization India. In this show anybody can become a millionaire provided s/he answers a set of questions from general knowledge. Huge amount of money and instant fame awaits the winner of the show. Essentially speaking this show is a cultural product of post-liberalization India. It portrays the ambition of the common man to be a millionaire in the shortest possible way. The show was a huge success in India not only because it was hosted by the legendary Amitabh Bachan but because people identified with those who were contesting and their desire to win the promised money. In the film, this TV show turns out to be the path to salvation for Jamal, or anybody like Jamal who have witnessed crushing poverty.
Jamal is also aptly aided by one of the most important economic symbol of contemporary India, the call centre of the booming BPO industry. Jamal who used to work in the call centre as a chaywallah managed to learn some English and also remembers the names of streets in London, courtesy his association with the call centre.
This is the fantasy that is created in the film, namely that anybody in India with the help of luck and basic intelligence can do well and live a better life. The real problem of the film does not lie with the depiction of poverty or the underbelly of India. The problem lies in the basic fact that the film ignores the questions of the exploitative power structures inherent in Indian society which are directly responsible for the mass poverty that we witness today. Rather the film endorses the symbols of neo-liberalism as an emancipatory tool for the poor. The conflict between Shining India and Suffering India is reduced to null and void where the Suffering India clings on to Shining India for its upliftment. In this sense then, the triumph of Jamal in the film is not only a triumph of the Slumdog but also is posited as a moral triumph of Shining India, where the deep fissures between rich and poor and the coercion of capitalism is sought to be kept under the carpet.
The movie then in its essence while remaining unquestioning to the existent structures of power, which are the causes of massive poverty, portrays poverty in its many faced ‘ugliness’. The absence of any attack or question on the basic structures of society and economy endears it to the liberals in the West where it turns out to be a massive hit and favourite. In India however, the elites are agitated simply because the movie portrays the existent underbelly of every glittery city in the country, which they have tried so hard to forget in their collective amnesia of the poor.
Thursday, December 25, 2008
The Mid Year review of the Indian economy was placed in Parliament on
· The overall outlook for the economy is that of cautioned optimism.
· The report forecasts a 7-8% growth rate of
· The fiscal deficit target of 2.5% of
· Inflation rate will ease even further
· It is projected that exports will be adversely affected.
(Source: Review calls for more rate cuts, reforms: Inflation To Continue Fall, Growth To Ease, The Economic Times,
This report comes in the background of the global financial crisis which has also adversely affected the growth prospects of the Indian economy. In this context, we have already seen that the Government has announced a stimulus package, which is aimed at strengthening the economy. It is in this context that the conclusions of the report and its recommendations have to be judged.
As far as the issue of growth is concerned, the report is somewhat optimistic because of five main factors in the Indian economy. Firstly, it is said in the report that the share of services in
Based on the above analysis of the functioning of the Indian economy, the following policy prescriptions have been deduced:
- Since, the threat of inflation has subsided, based on a tight monetary policy, the need of the hour is to pursue an expansionary monetary policy. It is argued that the RBI should announce further cut in the different interest rates. The basic logic behind this is that with the loosening of the monetary policy, money supply or liquidity will increase in the economy on the basis of which, demand will increase.
- It has been mooted in the report as well as several other policy documents of the Government, that infrastructure is a very important element in the overall growth strategy. Therefore, it has been argued that all policy and institutional impediments to private sector investment in infrastructure sector should be removed.
- A logical part of the previous strategy is the Government’s advocacy for accelerating all the pending policy reforms. This is supposed to induce the animal spirits of the investors which will sustain the growth process in the economy.
(Source: The Economic Times,
Let us now look into each aspect of the abovementioned points. Before going into the policy issues, let us first highlight the problems that are plaguing the Indian economy. As a result of the global financial crisis, the Indian stock market has been extremely adversely affected with
The second important aspect of the crisis in
Firstly, it is clear from the above that there has been a general problem of demand in the Indian economy, with services also facing a problem of demand. For example, the IT sector, which is the fastest growing sector within the services sector has taken a hit because of the global financial crisis. It is also wrong to visualize the services sector as a homogeneous block, which it is not. While IT is a part of services sector so are housemaids. In case of economic slowdowns it might so happen that people unable to find meaningful jobs crowd in lower end services. This will show itself as a bulging service sector but the well being of the people will hardly increase. So, the argument that since
Secondly, the entire question of monetary policy has been exaggerated in the policy circles in
As far as the question of infrastructure is concerned, two points need to be noted. Firstly, it is nobody’s case to argue against infrastructure building in
The suggestion for even more liberalization of the Indian economy is completely untimely and misplaced. A majority of the problems of the Indian economy today is not in spite of but because of globalization. This is evident from the fact that the problems in the global economy have been imported into the Indian economy as a result of the policies of globalization and liberalization. Even after this, the fact that
The Government’s biggest lacuna in this report as well as its other responses to the crisis is the fact there has been no concern for the unorganized workers and other marginalized sections of the population who are facing the brunt of this crisis. There is very little or no effort on the part of the Government to put purchasing power in the hands of the poor through higher Government spending. The biggest impediment to this is the FRBM Act. In the absence of Government spending as well as higher purchasing power of the poor, the role of the engine of economic growth and sustaining demand automatically goes to the rich and the corporate sector. Thus if the Government is not concerned enough about the rich and their well being and still wants to ensure higher growth, then it is bound to rely more and more on the rich and the corporate sector. As a result the policies of the Government are aimed at wooing the corporate sector to invest or the rich to consume more. The interest cuts on homes, car loans, the demand for removing all constraints on private sector investment in infrastructure are aimed at precisely this. While this may or may not improve the growth in the country, the poor are clearly left out of its benefits. This is because even the employment generated on the basis of the demand pattern of the rich is low and the infrastructure projects in
Wednesday, December 17, 2008
Monday, December 8, 2008
Double digit inflation returned to
From the chart it is seen that the overall inflation rate in
From the above graph it is clear that all major commodities like primary articles, manufactured products, fuel, power, light and lubricants, registered significant increase in the inflation rate. These three sets of commodities more or less comprise the overall price index. Thus, the movement of these three sets of commodities explains the overall inflation rate in the economy. From the graph it is clear that the commodity group fuel, power, light and lubricants witnessed the highest inflation rates touching 19% in the week ending
This weight of this group of commodities is 14.23 in the overall index. Thus, such large inflation in this group is bound to affect the overall inflation rate in the economy. Moreover, fuel being a key input in almost all the commodities, any hike in the price of fuel consequently leads to a cascading effect on the prices of all other commodities. Now, the question is what explains the huge rise in the inflation rate in this group of commodities. Firstly, this increase is largely because of the increase in fuel, particularly oil prices in the global market. This increase in the oil prices in the global market was largely on the basis of speculation. There was no discernible decrease in the supply of oil or a sudden increase in demand. Still, the oil prices increased based on speculation. (See ‘Is the Present Crisis Ricardian?’, Prabhat Patnaik, http://pd.cpim.org/2008/0615_pd/06152008_9.htm). Indian economy being a part of this globalized world had no option but to allow for an increase in prices. This however was compounded by the fact that the excise duties and custom duties on crude oil in
As far as manufactured products are concerned, it is seen from the above graph that this set of commodities also witnessed double digit inflation, which later on decreased. Manufactured products’ weight in the overall index is 63.75. Thus the overall inflation rate is decisively influenced by the inflation rate of the manufactured products. The inflation rate in the manufactured products has been largely driven by the increase in raw material prices as well as increased demand for steel and other metals in the international market driven by the construction boom in
The most worrying aspect is the inflation rate of the primary commodities. It is seen from the above graph that like every other commodity groups, the primary commodities too have witnessed double digit inflation. Food is the most important component of this group of commodities. Now, food being the most important item in the consumption basket of the poor, such high food inflation adversely affects the poor to a great extent. It must be conceded at one level that this high inflation in food prices was also an international phenomenon, where many factors contributed to the increase in the food prices. The most important of these reasons being the shifting of land from food production to the production of bio-fuels, drought like conditions in
Government’s main response to the question of inflation has been to try and manage it through monetary measures. This is reflected in the fact that the RBI increased all key rates (like Cash Reserve ratio, repo rate etc) in the economy which was followed by the banks raising the interest rates for home loans and other loans. This was done with the basic assumption that with an increase in the interest rate, the demand in the economy will decrease and this will lead to a reduction in the inflation rate. On the face of it, this remedy seems to have worked, given the decrease in the inflation rate as has been discussed above.
However, there are some problems with the overall policy of the Government, which are enumerated below. Firstly, conceptually speaking inflation can hurt the poor only in a situation where all prices other than the wages rise, which is a reflection of excess demand for the commodities. In the case of
It is however the case that the prices of other commodities excluding food have decreased significantly as compared to the double digit inflation figures. It cannot be ascertained how much of this decrease in the inflation rate is directly because of the policy announcements of the Government and how much is because of international factors. Since the month of September, an unprecedented financial crisis having the potential of turning into another Great Depression has hit the world economy. As a result of this crisis, there are recessionary trends in all advanced countries including
Now, with the financial crisis hitting the Indian economy and the possibility of a global slow down, the policy direction is again focused on ensuring that the growth rate does not fall too much. In order to ensure that the Indian economy is not hit by a recession, the Government has come out with a stimulus plan, the salient features of which are the following:
- The Government has proposed to increase the Planned expenditure by Rs 20,000 crores.
- To ensure additional spending to boost demand, the Government has reduced the Cenvat tax by 4%.
- Interest rate on export credit has been reduced. Additional funds of Rs.1100 crore will be provided to ensure full refund of Terminal Excise duty/CST. An additional allocation for export incentive schemes of Rs.350 crore will be made. Government back-up guarantee will be made available to ECGC to the extent of Rs.350 crore to enable it to provide guarantees for exports to difficult markets/products.
- Public Sector banks will announce a package for the housing sector loans while the RBI will put in place a refinance facility worth Rs 4000 crores for National Housing Bank. There are also plans to finance the textile sector.
- The Government has decided to boost infrastructure through Public-Private Partnership. The Government has also decided to raise Rs 10,000 crores from tax free bonds.
(Source: Government Announces Measures for stimulating the Economy, http://pib.nic.in/release/release.asp?relid=45377)
The above mentioned measures are aimed at boosting domestic demand through direct government expenditure, excise duty cuts and infrastructure projects. At the same time, the package also entails to boost the export sector in
Firstly, the fiscal stimulus of Rs 20,000 crores is too small and it is also not clear as to under what heads will this money be spent. Secondly, there is no announcement on the part of the Government to protect the interests of the workers directly, while they are the ones who are facing the brunt of the crisis with massive lay-offs as a result of the global crisis. Thirdly, the finances of the state governments are completely ignored in the package, a point which has been made by the Finance Minister of Kerala. (Central Package Ignores States, Says Minister, The Hindu,
There is however a more fundamental point regarding the entire approach of the Government. We were told during the days of high inflation that it is a result of overheating of the economy. Hence interest rates were increased to reduce demand. This however did not result in a decrease in the food prices, while overall inflation came down aided by international factors. Again, with the global financial crisis, the Government decided to cut the interest rates to boost demand. This also did not have the requisite impact because the crisis was a crisis of confidence with the banks refusing to give loans. So, even with an interest rate cut the problem could not be resolved. This over reliance of the Government on the monetary instruments to resolve every problem of the economy stems from the basic position that the Government should maintain fiscal prudence. However, as has been discussed earlier, what is needed to tackle the problems of the Indian economy is to increase the purchasing power of the poor and by increasing Government expenditure particularly in the rural areas. In order to do so, the Government has to come out of the overall hegemony of international finance capital and neo-liberalism reflected in the FRBM Act and the policy of fiscal prudence. Given the neo-liberal commitment of the Government it is improbable that it will tread on this path. The answer therefore lies in the struggle for an alternative set of policies challenging the hegemony of finance capital.
Friday, November 14, 2008
On November 3, the Prime Minister of
Job loss in the Indian Economy
Already, we have seen that the performance of the Indian corporate sector has been adversely affected. The results of the second quarter for this fiscal year show that the aggregate profit growth for the corporate sector as a whole has come down. The main reasons for such decline in profits being rise in interest costs and raw material prices. In the wake of such decline in profits, the Indian corporate sector had to cut down on costs. In this regard, retrenchment of workers was thought to be an effective way of cutting costs. The move by Jet Airways to retrench 800 workers was done primarily on the basis of the above thinking on the part of the Jet management. However, due to much public outcry and political pressure, the Jet management had to withdraw its decision. This was however only the beginning of the story. Almost all the sectors of the economy have resorted to job cuts or a cut back in the production in order to cope with the economic crisis. We give some of the major decisions of job cuts or production cuts on the part of the Indian corporate sector in the wake of the financial crisis.
’s leading truck maker, Tata Motors, announced the shutdown of its Pune unit for six days in November, which will follow a three-day closure of its India plant. Jamshedpur
- Ashok Leyland, the second largest producer of trucks, drove in tandem, slashing its weekly working days to three.
- JSW Steel opted for a 20-per cent cut in output this month.
- Another steel maker Essar also has decided to reduce capacity utilization.
- Tata Steel’s
subsidiary, Corus, has also affected a similar cut in capacity utilization. It has also decided to axe 400 jobs. UK
- DBS has decided to cut 900 jobs
- Cement manufacturers have reduced capacity utilization to about 85% because of a sharp fall in demand from the realty sector, which consumes about 55% of the total production of 200 million tonnes.
(The above data is taken from: More Companies Opt to Trim Man Hours, Cut Production, Business Line,
- Nearly 150 trained pilots and hundreds of trained airhostesses have been rendered jobless as the economic turbulence is forcing airline companies to ground a significant part of their staff. (150 Airhostesses, Pilots Get Grounded, The Economic Times,
8 November 2008).
- Even in the Finance or the IT sector, the threat of job loss is looming large. For example, Fidelity National Information Services (FIS) has given pink-slips to over 100 employees at its Chennai operations, which constitutes more than 10% of its staff in the metro. (Over 100 FIS staff get pink-slips, The Economic Times,
8 November 2008).
- L&T Infotech, the wholly-owned subsidiary of the country’s largest engineering company Larsen &Toubro (L&T), is trimming down its staff by asking some employees to resign. It is estimated that the number of forced resignations till now is around 100. (L&T IT Arm Starts Trimming, The Economic Times,
8 November 2008).
- At the same time, the international banks’ offices in
are significantly down sizing their work force. Goldman Sachs slashed its workforce by close to a dozen in its Mumbai office. Credit Suisse, another recent entrant in India , has also slashed some jobs in the country. (These Are Mean Cruel Times, Indian Arms of I-Banks in Lay-off Mode, The Economic Times, India 8 November 2008).
- The most severe job cut however has been witnessed in the textile sector. It is estimated that over the last six months there have been 7 lakh job losses in the textile sector. The textile sector is particularly important because it provides employment to more than 3.5 crore workers. It is also projected that this number can increase to 12 lakhs in the next three months. (Textile Cuts 7 lakh Jobs in Six Months, The Economic Times,
8 November 2008).
Why Such Job loss?
The question that naturally arises is what accounts for such across the board and massive lay-offs in the Indian economy? There are several reasons for this. Firstly, as has been already mentioned, job cuts is a way of reducing costs to the companies, which they are resorting to in the wake of rising interest and raw material costs. However, the malaise goes deeper than this. This is evident from the fact that not only has there been a job cut, but many companies have been forced to suspend or reduce production in the recent times. This points to the fact that the companies are trying to reduce their capacities. Such reduction in capacity utilization is symptomatic of the fact that there is not enough demand in the economy. For example, for the auto manufacturers like TATA Motors or Ashok Leyland, there is just not enough buyers to buy their products. In this context, to carry on production will only result in accumulation of inventories, which these companies do not want- hence the decision to suspend production in their plants. As far as the steel sector is concerned, the biggest demand from steel in
The case of the textile sector is particularly worrying. This is because this sector employs a very large number of people. Moreover, the people who are particularly losing their jobs in the textile sector are those workers who are daily wage earners. The question is why such severe job cuts are being witnessed in the textile sector. One of the major sources of demand for the textile sector is the external demand. In other words, there is a strong export demand for the Indian textile sector. In 2006-07, the textile exports comprised of 12.9% of the total exports from
Lessons for the Prime Minister
The economist Prime Minster needs to learn proper lessons from this. His argument to industry not to retrench workers is nothing short of a hogwash. This is because, as the Finance Minister and now the Prime Minister of the country, Dr. Singh has presided over a systematic entrenchment of the Indian economy into the logic of the market. Today, the organized sector employment growth rate has reached minimal level, with the employment in the Public sector turning negative. (Economic Survey, 2007-08). On top of this, there is the new mantra of labour market flexibility supposedly to increase the efficiency of the Indian industries. These are nothing but euphemism for doing away with whatever little social security that the workers have in this country. Now, when the workers have been subjected to the tyranny of globalization, Dr. Singh is now paying lip service to them, on the eve of the elections.
This impasse has been created by the votaries of neo-liberal reforms in the country. Over the last few years, the Government has self-imposed strict limits to fiscal expenditure as a result of following the policies of globalization, the FRBM Act being one example. Instead of ensuring proper expenditure on the part of the Government aimed at uplifting the conditions of the poor what has been done is providing sops to the corporate sector, in the form of tax exemptions. This has allowed the corporate sector to rise to dominance in the Indian economy. At the same time, the demand for the products, primarily high end, of the corporate sector has been provided by the debt financed consumption of the middle class and the rich. Now, with the financial crisis, the banks are becoming less forthcoming in providing such easy debts to the middle classes. That is why there has been consistent demand on the part of the press as well as other stakeholders to reduce the interest rates on housing and other loans, in order to again stimulate the debt financed consumption. In fact, the Finance Minister compelled the Public Sector Banks to reduce their rates. This route of stimulating demand is however problematic because of the following reason. What is essentially done through this lowering of interest rate is to neglect putting more purchasing power to the majority of the people and lure the middle class to consume, thereby keep the demand in the economy afloat. What is missed is the fact that such soft loans in return may give rise to sub-prime loans in the Indian economy, which can cause serious problems for the banks. Already it has been seen that the largest credit card issuer, ICICI Bank has shown flat profits and significantly enhanced loan loss provisions. The second largest credit card issuer, the State Bank of
Who Pays the Price?
In this context one of the most important issue is the asymmetry in the impact of the boom and the bust. When
Now, the signs of the impending slow down in the Indian economy are global in origin. It is the speculators in the Wall Street who have manufactured this global crisis riding on greed and free market ideology. And who suffers the consequences of this in
One might actually argue that the riches are also losing out. It is reported that the collective wealth of
As far as the middle classes are concerned, yes there have been losses for this section of the population. The option of high consumption on the basis of soft loans has also dried out to a significant extent. This however might be transitory since the banks are already easing out different rates. A section of the white collared people has also lost their jobs. What is noteworthy however is the response of the media as well as the establishment to this problem of the middle class. Only 1900 people were sacked by Jet Airways, which was indeed a terrible thing, and the entire media cried foul over it. Today 7 lakhs poor people have lost their jobs in the textile sector only. The media is silent on their plight. Thus, it is seen that it is the working people of the country who are mostly paying the price in the aftermath of the financial crisis and its impact on
What Can be Done?
What can be done is however very simple. The Indian economy is riddled with large scale poverty and misery particularly in the rural areas. What is needed is Government expenditure in a big way in the economy, putting purchasing power in the hands of the people whose increased consumption can then be a very important source of demand in the economy. This can be done by providing employment to the masses, which will also help in eradicating poverty to a significant degree in
Tuesday, November 11, 2008
The recent growth scenario of
Now, the question is what has led to this massive increase in the investment-
In this context of a private corporate sector driven growth in the Indian economy, it is obvious that the performance of the private corporate sector is of crucial importance to maintain the high growth trajectory in
In a study conducted by the Economic Times it has been found that India Inc.’s profit growth has witnessed a sharp slow down in the second quarter of the current financial year. It is found that out of 1,450 listed firms (excluding banks and oil & gas majors), aggregate net profit growth has come down to 5.7%, which was 25.8% in Q2 of 2007-08 and 9.9% during the first quarter of 2008-09. 20% of the companies in the sample have reported net loss as against 14% during the second quarter of 2007-08. (Source: India Inc.’s Profit Drive Takes a Beating, The Economic Times,
In another separate study undertaken by the Business Line it has been found that 116 companies out of a sample of 814 companies have seen a decline in the ‘value added’ (measured as the sum of ‘net sales’, ‘other incomes’ and net addition to inventory minus the value of raw material and stores consumption) during June and September 2008 quarters compared to their immediate previous quarters. (Source: It is Recession for One in Seven of NSE Listed Companies, Business Line,
The question that immediately arises out of this is what accounts for the decline in the profit for these companies. We know that profit is the difference between total revenue and total cost. Therefore, a decline in profit must mean a decline in the total revenue of the firm or an increase in the cost of the firm. As regards revenue, it has been found that at the aggregate level, growth rate of net sales of the companies in the sample was 28.3% during the latest quarter as against 17.7% for the same period last year. (Source: The Economic Times,
Thus, the decline in profit has to be accounted for by an increase in cost. The biggest component of the increased cost has been the increase in the interest rate. It is estimated that interest costs rose by 72% in the last quarter as against 26% during the same period last year. Added to this, there has been an increase in raw material prices for manufacturing industries, which has also pulled down profits. (Source: The Economic Times,
The question is what accounts for the increase in the interest rates as well as raw material prices for the industries. There are several reasons for this. Firstly, the rise in the interest rate is due to two basic factors. (a) In order to tame the rising inflation in
Secondly, the hikes in the raw material prices are mainly due to the hikes in the prices of oil, agricultural products, particularly food grains and steel at a global level. Most importantly, oil is a commodity which is almost universally used by all industries. Therefore, a hike in the price of oil is bound to increase the raw material prices in a big manner. (It is however the case that the prices of oil in the international market has decreased. But this has not been translated into a decrease in the domestic price of oil because of the high tax burden that the Government continues to impose on the people.) However, it must be remembered that this hike in the raw material prices that we are talking about is really not an Indian phenomenon but largely due to global economic problems. But with policies of globalization indiscriminately followed in
Now, with the rise in the prices of raw material and higher interest rates, resulting in higher costs, the prices of end products of the companies also increased. This is mainly responsible for the increase in the revenue of the firms. “For instance, the country’s largest automaker, Maruti Suzuki, reported a 6% rise in net sales during the quarter even as it witnessed a 2.5% decline in the number of cars sold during the period. Consumer goods firm Hindustan Unilever, which recorded a 22% growth in the Fast Moving Consumer Goods business, attributed almost two-thirds of it to price increases.” (Source: The Economic Times,
In addition to this, the latest figures for Index of Industrial Production (IIP) show that the rates of growth of the manufacturing IIP indicate that growth in August 2008 for industry as a whole and manufacturing in particular were 1.3% and 1.1% respectively. This number was 10.86% and 10.75% respectively in the corresponding month of the previous year. This indicates that there has been a slow down in the manufacturing and industrial output growth rates in
This slow down in the growth rate of industrial production is particularly important because of the following. In order for the industrial sector or the economy to grow, there must exist sustained demand in the economy. In
However, in the absence of adequate domestic demand in the economy, the industrial sector might still continue to grow if there is adequate external demand for
The question that naturally arises is how to overcome the problem of slow down in the Indian economy. It has been already seen that both the debt financed consumption as well as the external sector currently is not being able to boost the demand in the economy. This demand boost can however be provided by the Government if it takes upon itself the task of injecting demand into the economy through higher Government expenditure. In the absence of private sector stimulus to growth, the only way out is for the Government to boost demand. However, our policy makers are so entrenched in the ideology of sound finance and neo-liberalism that they are incapable of thinking about this route of advance for the Indian economy.
It is the result of the policies of the Government that the corporate sector rose to the stature of the dominant investor in the economy. This investment while generated high growth could not increase the purchasing power of the majority of the people. With the private sector in a crisis of its own, in the absence of Government boosting demand, the conditions of the people will further worsen. It is time to go back to John Maynard Keyenes and argue like him for state intervention to boost demand.