Hard Times

If the government does not do something quickly enough, the slowdown evident through the falling growth rate will become so severe that it might trigger a cycle of social pain and mass unrest

Sanjay Kapoor Delhi

On February 20, 2013, Bharat woke up to an angry bandh. All the public sector banks were closed. Most of the factories in industrial estates were shuttered. Largely peaceful and organised, those who dared to resist the bandh were met with sporadic violence. Workers’ fury was most visible in Noida and the Okhla industrial estate near Delhi, where they burnt offices, cars and fought with the police. Their demands included abolition of contract labour, wage index to be linked with price rise, and social and economic rights for the vast unorganised labour sector which constitutes over 90 per cent of the working class in India. 

The trade union movement in the country, that had been listless all these years, has been re-charged by people’s anger against the policies of the UPA government that is slowing down growth with a sudden spike in unemployment. Billionaire corporates are singularly being pampered, they are getting richer, and the poor are being hit where it hurts most; this is a universal view shared across the fragmented and unequal Indian landscape.

The levity visible in the economy in the last few years of UPA rule when growth was around 8-9 per cent was replaced, when the need was to raise it to 9 per cent or more to absorb the youth bulge. Why did the growth rate turn gloomy while uncertainty lay in store for the economy and the country? Why has the growth rate stuttered to a 5 per cent low?

So why is the economy that was doing a robust 8 per cent after recovering from the 2008 slowdown now threatened with a growth rate of 4 per cent in the next quarter of 2013? The blame should squarely go to RBI Governor Subbarao, who, single-handedly, squeezed life out of the economy

Some perceptive economists believe that growth does not fall from the high of 9 to 5 per cent in a space of three years unless there is a war or a major calamity. In India’s case, there was a combination of events that brought the economy to its heels. 

The Economic Survey released before the annual budget of 2012 states that the economy, that had recovered from the slowdown of 2008-09 due to monetary stimulus, has begun to stumble due to tighter monetary policy in 2011-2012. Within the government there is clear recognition that such a policy initiated by the Reserve Bank of India (RBI) to control inflation was the reason for the slowdown. The Economic Survey also lists a weak monsoon and the slowdown in Eurozone and uncertainties around fiscal policies in the US.

These are not the only reasons for the wreck that the economy has become. Large-scale corruption, organised loot by crony capitalists due to inadequate regulatory mechanism, the poor quality of governance, have all contributed in their own way in hurting the aspirations of a large mass of people who expected the advantage of the headwinds that were blowing in favour of the country. The net result is that the India that was pumped up to take on neighbour China in this unequal race is falling far behind.

So why is the economy that was doing a robust 8 per cent after recovering from the 2008 slowdown now threatened with a growth rate of 4 per cent in the next quarter of 2013? The blame should squarely go to the RBI and Governor Duvvuri Subbarao, who, single-handedly, squeezed life out of the economy.

Subbarao, who has been giving precedence to controlling inflation over growth, has forgotten the RBI’s larger mandate of maintaining stable prices with growth and financial sector stability. He has narrowed his play to pursuing a monetarist policy based on correcting the excesses of fiscal demand. His over-enthusiasm has been strange; the prices may not have really spun out of control over the last few months and there was a strong and compelling case for the RBI to cut down the rate of interest and increase the bank credit.

Since controlling inflation is shown as the holy grail by the RBI, some politicians have urged it to ease off and let businesses breathe. A senior communist leader patted the RBI governor for controlling inflation, but when asked about the impact it was having on growth, he blamed the government for the slowdown. The demand on the RBI to ease off interest rates has come from Finance Minister P Chidambaram, but the matter did not meet the necessary traction.

Although the last budget of Pranab Mukherji was flawed in many ways, the biggest harm was caused by the RBI’s monetarist policy. In those days there were suggestions that Mukherji’s budgetary initiatives were deliberately hurt by his opponents in the government, who were working closely with the RBI governor. Was there any merit in this conspiracy theory?

 Thousands of people have lost jobs, businesses have shuttered down and the pain seems unending. What is galling for ordinary people is that the fortunes of the super rich have grown multi-fold. Reports abound how the rich have become richer 

The RBI had raised the policy (repo) rate 13 times from 4.75 in 2010 to 8.50 per cent in October 2011. It also increased the cash reserve ratio. All these steps were taken to limit the credit supply in the market. According to an article in the Economic and Political Weekly (February 23, 2013), the growth rate, consequent to these steps, fell rapidly from 8.4 per cent during 2009-10 and 2010-11 to 6.7 per cent and is now going southward to less than 5 per cent.

 The RBI’s periodical reports were cognizant of the slowdown. Its figures showed how the industrial sector that was rocking at 10-12 per cent growth was brought to its knees at about zero per cent. The RBI did not really calculate the impact on employment and how many people had lost their jobs consequent to their tinkering with their policy rates. Every survey over the last two years told the RBI how business and consumer confidence was low, but it chose to attribute this to the global macro-economic and trade environment and hoped that the current account deficit caused by the increase of oil, coal and gold imports would be balanced by a spike in exports.

It chose to ignore the logical link between the fall in exports to depressed industrial growth.

Expectedly, this was followed by a drastic fall in employment. This led to a fall in savings and investment. All these issues are well known, but Subbarao has been recalcitrant in backing off. “The RBI governor is no longer in control of the government. He is more answerable to other central bankers like the Bank of England and the Federal Reserve,” claimed an eminent economist. As Noam Chomsky, in one of his writings, had suggested, a sovereign government should be allowed to control its monetary policy.

The crisis triggered by the monetary squeeze initiated by the RBI is similar to what is being experienced. There, too, technicians in the form of central bankers are leaning on politicians to change the way the economy has to be run. The conditions imposed by the International Monetary Fund (IMF) that invaded the DNA of these bankers and some finance ministry functionaries, undermined the independence of the economy. The politicians who did not flaunt these attributes and mindset were forced out of power

What really de-legitimises the existence of such politicians is the rating agencies that keep a close watch on the economy and how it is behaving. They have other considerations that have not really been understood.

The Eurozone experience of stringent austerity measures has shown the capacity to ravage societies. Greece, Portugal, Spain and other European nations that seem to have survived the slowdown of 2008 due to increased monetary stimulus are suffering deeply after the European Central Bank with IMF in tow began to reduce the credit supply in their respective economies. Thousands of people have lost their jobs, businesses have shuttered down and the pain seems unending. What is particularly galling for ordinary people is that the fortunes of the extremely rich have grown multi-fold. Reports abound how the rich have become richer.

Bankers, too, who were blamed for much of the excesses responsible for the collapse of these capitalist societies, continue to enjoy big bonuses. In a reluctant admission, IMF economists have regretted suggesting policies that have caused deep and widespread suffering in the societies where they
were implemented.

 The conditions imposed by IMF that invaded the DNA of these bankers and some finance ministry functionaries, undermined the independence of the economy. Politicians who did not flaunt these attributes were forced out of power

In the US, the government did not practice austerity measures, but in turn resorted to injecting stimulus in the society to revive the economy. Now, global economic revival is predicated on the rise of the US economy, which is slowly, but surely happening.

India is different from Europe. Hence, it was important that the government did not really lose control of the instruments that are needed to sustain the economy. Pandering to bankers and credit rating agencies may serve the interests of the corporate houses, but, surely, it is bad politics as many western societies have realised over the last few years.

Not a single government got re-elected after the slowdown of 2010 in Europe. Such a fate could visit the UPA government too. “The RBI governor’s monetary policies could pave the way for the BJP to return to power in the 2014 elections,” claimed an official located in the financial establishment.

The UPA government, to its credit, has tenaciously hung on to some of the ‘populist’ programmes like the rural employment guarantee scheme and cash transfer. It may also bring the food security bill in the coming months to reach out to the rural poor who have seen their livelihoods disappear and incomes plummet due to the structural changes that have taken place in the society. However, there is a big gap between what the government promises in the annual budget and what gets delivered to beneficiaries. In the last fiscal, the finance minister, realising that the deficit was ballooning mercilessly, cut the expenditure of many social sector ministries like tribal affairs and panchayati raj. The external affairs ministry’s outreach to other countries was also severely curbed.

The fear is that in 2013-14, if certain assumptions built in the annual budget do not happen, there might be another big crisis. These are improvement of external environment, attainment of PSU disinvestment targets (which depend on the stability in stock market) and increased flow in foreign direct investment (FDI) in different sectors of the economy. FDI in multi-brand retail would be tested during this period. Even the Supreme Court will be getting an answer to its recent query about how much FDI has come into the retail sector after the announcement of this policy.

There is little guarantee that the challenge of the slowdown can be met by the annual budget announced by P Chidambaram till the time the basic reasons that pushed Indian society into gloom and despair are analysed. Business will flounder till consumption gets re-ignited and the purchasing power of the middle class returns. As of now, the middle class is trying to hang on to their jobs and figure out a way to meet their strained budget. Their problems get compounded when they find the youth in their family losing jobs due to the meltdown in telecom, aviation and IT sector. Thousands of qualified young men, who took loans from banks, suddenly find themselves jobless. Many of those who participated during the gangrape agitation in Delhi were jobless youth who were angry with the government for botching up
their future.

Indeed, if the government does not do something quickly enough, the slowdown revealed through falling growth rate will become so severe that it might trigger a vicious cycle of social pain and mass unrest.