Themes > Current Issues
03.03.2001
Economic Survey
2000-01:
Bizarre Logic
C.P.
Chandrasekhar
The Economic Survey, the annual pre-budget,
state-of-the-economy report issued by the Finance Ministry is meant
to be an exercise in stocktaking that provides the background for initiatives
to be launched in the Budget. But in recent times, as the neo-liberal
agenda and the obsession with the fiscal deficit it entails has constrained
the maneuverability of the government, the budgetary exercise has had
little to do with the actual state of the economy.
To start with, additional revenues are virtually impossible to mobilize within the neoliberal policy framework. Additional direct taxes cannot be mobilized as that would adversely affect private initiative, customs duties have to be reduced as part of trade liberalization, and excise duties have to be cut in the hope they would generate additional demand for industrial goods from the upper-‘middle’ class. As a result, tax revenues as a percentage of GDP fell from 10.1 per cent in 1990-91 to 8.2 percent in 1998-99, and though provisional figures for 1999-2000 point to a marginal recovery, the evidence of decline is clear.
With the tax base shrinking, and revenue expenditures burdened with irreversible outlays on interest payments, capital and social expenditures have to be cut to keep the fiscal deficit in control. Within the neo-liberal framework there is only one alternative available in this context to sustain capital and social expenditures: that of divesting equity in profitable public sector undertakings to garner resources that can be frittered away to keep the government’s expenditure figures rising. Despite the irrational, short-run nature of any such initiative, the government has been desperate to adopt such as policy, targeting sums of up to Rs. 10,000 crore as “revenues” from privatization. Unfortunately, the logic of the market is such that any such desperate effort to divest equity to garner resources could succeed only if public assets are undervalued massively, as has been sought to be done in many recent instances of regular and strategic disinvestments of large public undertakings to bargain-hunting domestic and foreign capitalists. Since, there are limits to which this can be pushed ahead within a democratic framework, the privatization effort has, fortunately, been a complete failure.
This essentially means that the State can no more serve as the stimulus to growth. Nor has the much promised boom in private investment led by exports materialized despite ten years of liberalization of trade and foreign investment rules. As a result fiscal paralysis results in an underlying tendency in the system for growth to slacken. It is not surprising therefore the fundamental message delivered by the statistics incorporated in the Survey is that of an overall slowdown in growth and a slump in the commodity producing sectors, viz., agriculture and industry. GDP growth has fallen from 6.6 per cent in 1998-99 to 6.4 percent in 1999-2000 to an estimated 6 per cent in 2000-01. In three of the last four years, the index of agricultural production has registered a decline varying between 0.7 per cent and 6.1 per cent, making the 7.7 per cent growth in the good monsoon year 1998-99 inadequate to ensure a positive trend growth rate. And industrial production growth during those years has fluctuated between 4.1 and 6.7 per cent, which is well below the 8 per cent average growth rate registered during the 1980s.
It is not just growth that has been the casualty. Movements in social indicators and the incidence of poverty reflect clearly that progress on the human development and poverty alleviation fronts have substantially slowed and in certain instances have even been reversed in recent years. The Survey skirts this issue in many areas, but in others such as the poverty reduction front it resorts to an obvious sleight of hand. Evidence of consumer expenditure surveys from the NSS have revealed that till 1998 the incidence of poverty has at most stagnated or perhaps even increased during the 1990s, as compared with the significant reductions recorded in the 1970s and 1980s. To counter this, the Economic Survey cites the completely non-comparable estimates yielded by the contaminated 30-day recall figures in the 1999-2000 consumer expenditure survey by the National Sample Survey Organization, to suggest that poverty may have declined significantly during the 1990s. Realizing that this judgment is unacceptable given the change in methodology in the 1999-2000, 55th Round NSS Survey, the Survey itself notes that the 1999-2000 poverty figures are not “strictly comparable” with earlier estimates. This half-hearted honesty has however a deeper motive. It helps divert attention from the available figures, which suggest that progress on the poverty alleviation front during the so-called reform years has been disastrous. But clearly, those who seek to divert attention from a set of facts, are obviously cognizant of those facts.
Faced with these circumstances, the message which should have been derived from the survey’s figures is that there is need to reconsider the tax and spending strategy underlying the neoliberal reform policy, and a new beginning that reverses such reform should be made in this budget itself. But clearly the dominance over policy-making under the NDA government of interests, especially international financial interests, which back neo-liberal reform is so overwhelming that this option cannot be countenanced.
In the event the principal concern of the Economic Survey is not to derive the implications of recent trends in economic performance for budgetary policy but to make the document another attempt to defend reform. Much time is spent on making a comparison of growth during the pre-reform (1980-81 to 1991-92) and post-reform (1992-93 to 2000-01) years. There are three points to be made about this comparison. First, the figures suggest that though GDP growth “improved” from 5.4 per cent in the first to 6.4 per cent in the second, almost all of this is the result of a sharp increase in the rate of growth of services. The rate of growth of services GDP rose from 6.4 to 8.2 per cent between these two periods whereas in the case of agricultural and industrial GDP, the comparable growth rates during the two periods were 3.9 and 3.3 per cent and 6.3 and 6.5 per cent respectively. That is, if at all the Survey’s delimitation of the post-reform years is acceptable, there is no evidence of a revival of growth in the commodity producing sectors after reform.
Second, the sharp rise in services GDP is by no means largely a reflection of new dynamism in sections of the services sector such as financial services and software & IT-enabled services. Rather, it appears to be in significant part due to increases in public sector incomes ensured through the much-delayed implementation of the Pay Commission’s recommendations. Not surprisingly, after the three years (1997-98 to 2000-01) during which these recommendations have been implemented in staggered fashion at the central and state levels, there are signs of the rate of growth of services GDP decelerating.
Finally, the choice of what the Survey terms pre- and post-reform years is driven by the need to dress up the post-reform figures. The year 1991-92 is included in the pre-reform years, though the reform was launched in July 1991 and the IMF-stabilization induced compression in growth occurred in 1991-92. GDP growth in that year stood at 0.9 per cent, industrial growth at – 4.5 per cent and agricultural growth at – 2.0 per cent. A case could have been made to drop 1991-92 altogether from the growth comparison. But to have chosen to make an extremely poor year the terminal year of the pre-reform growth calculation is to resort once more to the many ways in which statistics are being doctored by the government to defend the reform. Unfortunately for the mandarins at the Finance Ministry, even this has not proved too helpful.
This strenuous effort to defend the reform is not without purpose. It is aimed at shoring up a bizarre three-step argument incorporated in the survey. The argument goes as a follows. First, it is argued that post-reform growth has been better than pre-reform growth. Second, it is shown that more recently growth has been slackening. Third, it is argued this calls for an acceleration of reform in the form of accelerated trade liberalization including agricultural trade liberalization, massive privatization, removal of small-scale industry protection, drastic revision of labour laws, and a host of other similar initiatives. The Economic Advisory Council in its recently released report had launched this campaign for an acceleration of neoliberal reform, despite the strong evidence that it has been a failure. The Survey only carries further that campaign to enrich segments of domestic and international capital at the expense of the country’s poor agriculturalists, workers and small producers.
The implication is clear. This budget would fail to take up a major opportunity offered by current economic circumstances to redress the further depredation of the poor unleashed during the years of neoliberal reform. That opportunity stems from two sources. First, the accumulation of huge stocks of foodgrains, estimated at close to 45 million tonnes, with the government. Second, the comfortable foreign exchange reserves position of the central bank, with its foreign currency assets alone amounting to $41 billion. When foodstocks are aplenty and foreign reserves comfortable, the maneuverability of the government is substantial. It can undertake expenditures without the perennial fear that plagued it in the past that such expenditures, by raising employment, incomes and the demand for food, could create a food shortage that triggers an inflationary spiral. And even if the economy, in the wake of such expenditure, runs into temporary supply bottlenecks in particular sectors (such as say, sugar, edible oils or onions), the available foreign exchange reserves can be used to resort to imports to ease supply and dampen price increases. The danger that expenditure increases on the part of the government would trigger inflation hardly exists.
This ability to increase expenditure without triggering inflation constitutes an opportunity because it arises in a context where demand in the economy is sluggish and poverty remains high. And there is little disagreement on the fact that the sluggishness in industrial growth is a result of slackening demand growth in the system.
Since a decade of reform has not triggered the promised export boom, which would have served as an external stimulus to growth, domestic demand generation is a must for a revival of growth. There is no other instrument that is likely to be more successful in stimulating increases in demand then higher government expenditure. And such demand increases are unlikely to spur inflation, given the comfortable food stock and foreign exchange reserves position referred to earlier.
What is more, the availability of food stocks with the government can be used to ensure that a part of state expenditure could raise employment substantially, by being allocated to food-for-work programmes that build much-needed rural infrastructure. Higher employment in such programmes has and will impact positively on poverty, the incidence of which the available comparable estimates show, has remained stubbornly unresponsive to growth during the 1990s.
But given the interests the current government serves this opportunity would be left unexploited. Change after all is not driven by economic logic. It requires the creation of a political environment that can advocate and implement reform of the kind that serves the interest of the majority of Indians.
To start with, additional revenues are virtually impossible to mobilize within the neoliberal policy framework. Additional direct taxes cannot be mobilized as that would adversely affect private initiative, customs duties have to be reduced as part of trade liberalization, and excise duties have to be cut in the hope they would generate additional demand for industrial goods from the upper-‘middle’ class. As a result, tax revenues as a percentage of GDP fell from 10.1 per cent in 1990-91 to 8.2 percent in 1998-99, and though provisional figures for 1999-2000 point to a marginal recovery, the evidence of decline is clear.
With the tax base shrinking, and revenue expenditures burdened with irreversible outlays on interest payments, capital and social expenditures have to be cut to keep the fiscal deficit in control. Within the neo-liberal framework there is only one alternative available in this context to sustain capital and social expenditures: that of divesting equity in profitable public sector undertakings to garner resources that can be frittered away to keep the government’s expenditure figures rising. Despite the irrational, short-run nature of any such initiative, the government has been desperate to adopt such as policy, targeting sums of up to Rs. 10,000 crore as “revenues” from privatization. Unfortunately, the logic of the market is such that any such desperate effort to divest equity to garner resources could succeed only if public assets are undervalued massively, as has been sought to be done in many recent instances of regular and strategic disinvestments of large public undertakings to bargain-hunting domestic and foreign capitalists. Since, there are limits to which this can be pushed ahead within a democratic framework, the privatization effort has, fortunately, been a complete failure.
This essentially means that the State can no more serve as the stimulus to growth. Nor has the much promised boom in private investment led by exports materialized despite ten years of liberalization of trade and foreign investment rules. As a result fiscal paralysis results in an underlying tendency in the system for growth to slacken. It is not surprising therefore the fundamental message delivered by the statistics incorporated in the Survey is that of an overall slowdown in growth and a slump in the commodity producing sectors, viz., agriculture and industry. GDP growth has fallen from 6.6 per cent in 1998-99 to 6.4 percent in 1999-2000 to an estimated 6 per cent in 2000-01. In three of the last four years, the index of agricultural production has registered a decline varying between 0.7 per cent and 6.1 per cent, making the 7.7 per cent growth in the good monsoon year 1998-99 inadequate to ensure a positive trend growth rate. And industrial production growth during those years has fluctuated between 4.1 and 6.7 per cent, which is well below the 8 per cent average growth rate registered during the 1980s.
It is not just growth that has been the casualty. Movements in social indicators and the incidence of poverty reflect clearly that progress on the human development and poverty alleviation fronts have substantially slowed and in certain instances have even been reversed in recent years. The Survey skirts this issue in many areas, but in others such as the poverty reduction front it resorts to an obvious sleight of hand. Evidence of consumer expenditure surveys from the NSS have revealed that till 1998 the incidence of poverty has at most stagnated or perhaps even increased during the 1990s, as compared with the significant reductions recorded in the 1970s and 1980s. To counter this, the Economic Survey cites the completely non-comparable estimates yielded by the contaminated 30-day recall figures in the 1999-2000 consumer expenditure survey by the National Sample Survey Organization, to suggest that poverty may have declined significantly during the 1990s. Realizing that this judgment is unacceptable given the change in methodology in the 1999-2000, 55th Round NSS Survey, the Survey itself notes that the 1999-2000 poverty figures are not “strictly comparable” with earlier estimates. This half-hearted honesty has however a deeper motive. It helps divert attention from the available figures, which suggest that progress on the poverty alleviation front during the so-called reform years has been disastrous. But clearly, those who seek to divert attention from a set of facts, are obviously cognizant of those facts.
Faced with these circumstances, the message which should have been derived from the survey’s figures is that there is need to reconsider the tax and spending strategy underlying the neoliberal reform policy, and a new beginning that reverses such reform should be made in this budget itself. But clearly the dominance over policy-making under the NDA government of interests, especially international financial interests, which back neo-liberal reform is so overwhelming that this option cannot be countenanced.
In the event the principal concern of the Economic Survey is not to derive the implications of recent trends in economic performance for budgetary policy but to make the document another attempt to defend reform. Much time is spent on making a comparison of growth during the pre-reform (1980-81 to 1991-92) and post-reform (1992-93 to 2000-01) years. There are three points to be made about this comparison. First, the figures suggest that though GDP growth “improved” from 5.4 per cent in the first to 6.4 per cent in the second, almost all of this is the result of a sharp increase in the rate of growth of services. The rate of growth of services GDP rose from 6.4 to 8.2 per cent between these two periods whereas in the case of agricultural and industrial GDP, the comparable growth rates during the two periods were 3.9 and 3.3 per cent and 6.3 and 6.5 per cent respectively. That is, if at all the Survey’s delimitation of the post-reform years is acceptable, there is no evidence of a revival of growth in the commodity producing sectors after reform.
Second, the sharp rise in services GDP is by no means largely a reflection of new dynamism in sections of the services sector such as financial services and software & IT-enabled services. Rather, it appears to be in significant part due to increases in public sector incomes ensured through the much-delayed implementation of the Pay Commission’s recommendations. Not surprisingly, after the three years (1997-98 to 2000-01) during which these recommendations have been implemented in staggered fashion at the central and state levels, there are signs of the rate of growth of services GDP decelerating.
Finally, the choice of what the Survey terms pre- and post-reform years is driven by the need to dress up the post-reform figures. The year 1991-92 is included in the pre-reform years, though the reform was launched in July 1991 and the IMF-stabilization induced compression in growth occurred in 1991-92. GDP growth in that year stood at 0.9 per cent, industrial growth at – 4.5 per cent and agricultural growth at – 2.0 per cent. A case could have been made to drop 1991-92 altogether from the growth comparison. But to have chosen to make an extremely poor year the terminal year of the pre-reform growth calculation is to resort once more to the many ways in which statistics are being doctored by the government to defend the reform. Unfortunately for the mandarins at the Finance Ministry, even this has not proved too helpful.
This strenuous effort to defend the reform is not without purpose. It is aimed at shoring up a bizarre three-step argument incorporated in the survey. The argument goes as a follows. First, it is argued that post-reform growth has been better than pre-reform growth. Second, it is shown that more recently growth has been slackening. Third, it is argued this calls for an acceleration of reform in the form of accelerated trade liberalization including agricultural trade liberalization, massive privatization, removal of small-scale industry protection, drastic revision of labour laws, and a host of other similar initiatives. The Economic Advisory Council in its recently released report had launched this campaign for an acceleration of neoliberal reform, despite the strong evidence that it has been a failure. The Survey only carries further that campaign to enrich segments of domestic and international capital at the expense of the country’s poor agriculturalists, workers and small producers.
The implication is clear. This budget would fail to take up a major opportunity offered by current economic circumstances to redress the further depredation of the poor unleashed during the years of neoliberal reform. That opportunity stems from two sources. First, the accumulation of huge stocks of foodgrains, estimated at close to 45 million tonnes, with the government. Second, the comfortable foreign exchange reserves position of the central bank, with its foreign currency assets alone amounting to $41 billion. When foodstocks are aplenty and foreign reserves comfortable, the maneuverability of the government is substantial. It can undertake expenditures without the perennial fear that plagued it in the past that such expenditures, by raising employment, incomes and the demand for food, could create a food shortage that triggers an inflationary spiral. And even if the economy, in the wake of such expenditure, runs into temporary supply bottlenecks in particular sectors (such as say, sugar, edible oils or onions), the available foreign exchange reserves can be used to resort to imports to ease supply and dampen price increases. The danger that expenditure increases on the part of the government would trigger inflation hardly exists.
This ability to increase expenditure without triggering inflation constitutes an opportunity because it arises in a context where demand in the economy is sluggish and poverty remains high. And there is little disagreement on the fact that the sluggishness in industrial growth is a result of slackening demand growth in the system.
Since a decade of reform has not triggered the promised export boom, which would have served as an external stimulus to growth, domestic demand generation is a must for a revival of growth. There is no other instrument that is likely to be more successful in stimulating increases in demand then higher government expenditure. And such demand increases are unlikely to spur inflation, given the comfortable food stock and foreign exchange reserves position referred to earlier.
What is more, the availability of food stocks with the government can be used to ensure that a part of state expenditure could raise employment substantially, by being allocated to food-for-work programmes that build much-needed rural infrastructure. Higher employment in such programmes has and will impact positively on poverty, the incidence of which the available comparable estimates show, has remained stubbornly unresponsive to growth during the 1990s.
But given the interests the current government serves this opportunity would be left unexploited. Change after all is not driven by economic logic. It requires the creation of a political environment that can advocate and implement reform of the kind that serves the interest of the majority of Indians.
© MACROSCAN 2001