It has been a long time since I blogged on my personal blog here. From today, I would like to write on various issues on this blog along with other cyber forums where my writings are uploaded.
Hope to get comments and feedback.
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:
(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
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:
(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.