The Hindu : Economic policy under IMF rule

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Monday, Apr 01, 2002

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Economic policy under IMF rule

By Kannan Srinivasan

The Economic Survey admits that the main problem the Indian economy faces is one of inadequate demand... The revenue raising measures in the budget will only further depress demand.

FOR THE last five years, the Economic Surveys have presented a jumble of reasons for the deepening recession. Now the latest Survey admits for the first time that the main problem the Indian economy faces is one of inadequate demand. Yet what it will not admit is that this problem has essentially to do with the increasing poverty of the Indian people. Poverty dictates that there continues to be too slender a consumption base for growth.

Under IMF rule, marginal increases in budgetary expenditure in any year are irrelevant. What is important is the long-term trend. As Aspects of India's Economy (30-31, Research Unit for Political Economy) has pointed out, Plan capital expenditure as a percentage of GDP has declined from 2.77 per cent in 1990-91 to 1.52 per cent in 2000-01. No doubt this year's Budget shows a modest increase in Plan capital expenditure. But this is negligible considering the long drought of investment during the last decade, and the depth of the current recession. And Ministry heads show that the Government's claim of a boost to social sector spending and infrastructure is false. Rural employment has hardly been hiked from Rs. 4,225 crores to Rs. 4,596 crores. The allocations for coal, steel, heavy industry have all been slashed. A part of this long-term collapse has been a sharp drop in agricultural investment. Public investment in agriculture, which had been in decline since the 1980s, has declined further from Rs. 4,467 crores in 1993-94 to Rs. 4,007 crores in 2000-01 (at 1993-94 prices). The index of agricultural production for all commodities was 175.7 in 1996-97, and it is 175.9 in 2001-02. The Economic Survey makes the claim that "Growth in foodgrains production has been consistently above population growth..." Its authors must have assumed that no one would check. But foodgrains production increase is only 10.24 per cent over this decade, while population increase is 17.52 per cent.

Employment growth has slowed down from 2.43 per cent during the period 1987-88 to 1993-94 to 1 per cent in the period 1993-94 to 1999-2000. The Survey claims this is partly because of the slowdown in population growth. But employment growth has declined much more sharply than the growth of population. There is really no connection between the two. The Survey tries to prettify the unprecedented fact that agricultural employment has declined in absolute terms during 1993-94 to 1999-2000, claiming that employment has shifted out of agriculture. But shifted where? There has been no corresponding increase in industrial jobs. As the Survey itself admits, ''Non-farm employment growth has, however, not compensated adequately for the lack of growth in agriculture.'' Government-organised employment has collapsed. In 1995-96, for instance, 1,242 million mandays were provided. By 2000-01, this had gone down to 486 million mandays. But in the first ten months of 2001-02, this had dropped to 190 million mandays. In other words, the Government's provision of employment declined to a fifth of what it had been just five years earlier.

The per capita net availability — which is more or less the consumption — of foodgrains a day has declined from 510.1 grams in 1991 to 417 grams in 2001. This is a catastrophe, and a clear indicator of widespread hunger, induced by poverty. The Government claims that consumers have shifted to other foods as a result of higher incomes. As a consequence, says the Government, the production of foodgrains is too high, and Indian farmers should shift to the production of non-foodgrains. And the Economic Survey strains to give the impression that people are spending a smaller share of their income on food out of choice. Food has no doubt shrunk to a smaller share in the consumption basket. But textiles, for instance, have not increased their share. Fuel, transport and medical care have increased their share, and under compulsion. In fact, increased income would be reflected in increased foodgrains consumption since in rural India the lowest 70 per cent consume less foodgrains per capita than the top 30 per cent.

Ominously, the Budget 2002-03 is silent on what to do with Rs. 60,000 crore-odd worth of foodgrains stocks. These stocks have risen only because the Government switched to pricing ration shop foodgrains out of the reach of consumers. Today these large stocks have provided the Government the argument for winding up procurement entirely. But there are two ways the Government could reduce the stock of foodgrains. First, it could sell off the public distribution system grain very cheaply, at prices the poor can afford. Second, it could dramatically increase food-for-work. But the consequences of the first would be that people would expect the PDS to continue. And of the second, that people would expect food- for-work to continue. Moreover, rural wage rates would rise. The Government is determined to avoid all these consequences. So it is unable to take any rational step on foodgrains policy. As a result, it now plans to dismantle procurement and the PDS, and encourage commercial crops. The consequence will be even more widespread hunger. The Economic Survey claims that poverty has fallen dramatically: from 36 per cent in 1993-94 to 26 per cent in 1999-2000. But this merely underlines the rapidly vanishing credibility of poverty data. All other data indicate that people are getting poorer. When employment growth is slower than the growth of population; when agricultural employment growth is negative; when agricultural growth has been flat for the last five years; when foodgrains consumption has been falling; when organised sector employment growth has turned negative: is it conceivable that poverty is falling rapidly?

There are numerous telling signs of the secession of elite demand from the rest of the Indian economy. Consumer durables — largely luxury commodities — grew at 12.7 per cent a year during 1994-5 to 2000-01, while consumer non-durables — largely wage goods — grew at just 6.1 per cent during the same period. Indians now spend as much on foreign travel as India earns on tourism receipts, despite this being such a poor country. Thus, there is considerable leakage of this narrow base of elite demand out of the country. In just the five years from 1996-97 to 2001-02, there was a dramatic increase in imports of electronics goods and in expenditure by Indians on foreign travel. Electronics goods imports increased from $1.42 billion to $3.51 billion and Indian spending on foreign travel went up from $858 million to $2.87 billion. Had this elite demand under just these two heads been repressed at 1996-97 levels — we do not even add another category under capital goods, the imports of automobiles and components for automobiles — about $16.8 billion or more than Rs. 80,000 crores at current exchange rates would not have been diverted away from domestic demand in just these five years.

The revenue raising measures in this budget will only further depress demand. And excise duties have once again been raised, while customs duties have been simultaneously lowered sharply. The purpose of this can only be to accelerate the rapid de-industrialisation of the Indian economy.

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