As Modi Celebrates Eight Years as PM, Three Economic Faultlines That Can't Be Ignored

In the last three years, the Indian economy has been in crisis even if its organized sector has been doing well.

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Three years of Narendra Modi’s second stint as Prime Minister was celebrated by the Bharatiya Janata Party earlier this month. The self-congratulatory campaign, however, was spoiled quickly by a succession of events, all of which point to what has gone wrong during his tenure.

First came the news that the economy is slowing down.

Then came the comments by BJP leaders against Prophet Mohammed, which led to an international uproar and put the government on the back foot. Correctives were applied for damage control.

Soon, thereafter came the revolt by the youth against the announcement of the Agnipath scheme for recruitment into the military.

Finally, the stock market crashed almost into bear territory. It is the sharp rise in the stock market that had enabled the government to claim that the international investors have confidence in the Indian economy’s performance.

Corollary of past policies

Each of these events in June have a link with the policies being pursued over the last three years and earlier. These adverse events could have arisen earlier, but have come at an inopportune moment when the ruling party wanted to showcase its achievements.

First, the ruling party leaders and spokespersons have been making anti-minority statements and comments for long and getting away with them. From there to crossing the ‘lakshman rekha was a short misstep away.

Criticisms from international agencies regarding decline in religious freedoms, press freedom or on the democracy index were water off the duck’s back. Even criticism by the US Secretary of State on two occasions were rebuffed.

The reaction of the West Asian and other Muslim nations had to be taken note of due to the high stakes involved; not that these countries are themselves examples of tolerance or of democracy. India’s dependence on them for energy imports and remittances spurred the government into immediate damage control. Going ahead, this would have a moderating influence on the ruling party since now these countries will monitor more closely and very likely react to adverse communal occurrences in India. So, a key plank of the ruling dispensation is likely to be moderated.

Also read: Without the Diplomatic Outrage, Would the BJP Have Taken Action Against Nupur Sharma?

The other three events mentioned relate to the economy.

Youth unemployment has been growing from before the pandemic. Towards the end of 2021, youth rioted in Uttar Pradesh and Bihar when the results of the Railway recruitment exam for the lower grade posts were announced. For the 35,000 posts announced in 2019, 1.2 crore young had applied. The applicants felt cheated that the results declared were erroneous and very few were called for the next round. They saw their chance slipping away after years of wait and preparation.

Unemployed youth protest

The reaction to the announcement of the Agnipath scheme is more widespread.

There has been no recruitment of soldiers for the last two years. aspirants who have been preparing for the last several years are now told that if they are selected they will get a job for four years after which they will have to look for another job. The retirement benefit will not be a pension but a lump sum to which they will have contributed 50% and which will be wholly inadequate to start any business or for further training for another job.

The government justifies its scheme that a younger and more technically capable force is needed. But, the primary motive seems to be to reduce the budget for pensions, salaries and health expenses.

Is India spending excessively on the military? It is spending about 12% of the Central Budget and 2% of GDP. Is it excessive for a nation aspiring to be a ‘Vishwaguru’ (world leader)? Especially, when there are two active land fronts and challenges in both air and at sea. Yes, we need to try for peace so as to reduce expenditure on the military and invest more in development. But will spending less get us peace now?

Also read: Why the Government’s ‘Plans’ for Demobilised Agniveers Don’t Inspire Trust

The scheme raises many doubts. If the desire is to have a more technically skilled military, will more qualified young join for just four years? If the recruits are to be properly trained in high skills after Class 12, will six months of training be enough? And, if they do get trained properly, should they be let go after four years and their replacement be trained again?

Further, if boots on ground are to be replaced by drones and action at a distance then is age so critical? It is said that countries like Israel and USA also have short tenures. But, unlike India, unemployment there is hardly an issue.

Youngsters block railway tracks in protest against the Centres Agnipath scheme, in Dhanbad, Friday, June 17, 2022. Photo: PTI

According to CMIE, India has a labour force participation rate of around 40%, very low compared to what it is in other big countries like, US and China.

The implication is that large numbers have simply stopped looking for jobs. They are possibly whiling away time or preparing for entrance exams to get into some job. The participation rate for women is even lower. Further, the more educated a person higher the unemployment they face. They appear for exams year after year to get into the army, police, railways, banks, civil services and so on. They are to be found in coaching institutions, near universities and colleges like, outside Allahabad, Delhi, Patna, Universities and JNU and Jamia Milia in North India.

The labour force participation rate is not only low it has declined from 46% in 2016 to the present level. So of the relevant age group of about a billion people, 6% have dropped out – that is 60 million. If other comparable countries have more than 60% in their labour force then we are short by another 14%. That is another 140 million.

If the unemployment rate officially is 4% (of the labour force) then another 16 million are looking for jobs. So, India has to provide decent work to at least 216 million workers. This does not count the workers who don’t have a job commensurate with their degrees. Of course, in many cases the degrees are fake or not worth the paper they are printed on, given the poor standards of education in large number of institutions. This compounds the problem of giving decent work.

The organised sector (government is a part of it) cannot generate this many jobs. Such a large number of jobs can only be created in the labour intensive micro and small sector of the economy. Even agriculture has excess labour. So, the onus is on the government to create the environment in which these sectors can do better.

Unfortunately, the government has done everything to demolish these sectors through demonetisation, GST, digitisation, etc. Its Mudra and skilling schemes are ill-conceived and have not been able to help.

‘Supply side’ cannot deliver

The problem basically emanates from the focus on the ‘supply side’ policies pursued over the last eight years. These policies give concessions to businesses in the hope that they will invest more. But that will happen only if mass demand is robust. That requires employment and incomes to be buoyant which has not been the case and ‘supply side’ policies have failed to deliver. The situation worsened during the ongoing pandemic but course correction was not done. The war in Ukraine is leading to further long term challenges for the Indian economy with the world economy headed to stagflation.

The Indian economy has been in stagflation. The official growth rate does not take into account the declining unorganised sector of the economy, especially the micro and small scale sectors. If they are independently accounted for, the economy would be stagnant and not growing at 8% in 2021-22, as claimed officially. Coupled with WPI growing at above 10% for the last 14 months and CPI growing at above 6% for the last 5 months; the signs of stagflation are clear.

‘Supply side’ policies should not be confused with elimination of supply bottlenecks. They cannot take care of the bottlenecks within the economy and definitely not those emanating from the world economy due to the severe lockdown in China or due to the Ukraine war.

FILE PHOTO: Farmers use a combine to deposit harvested wheat into a tractor trailer, on a field on the outskirts of Indore, in the central state of Madhya Pradesh, India, March 22, 2022. Photo: Reuters.

Within the economy it is the business failures that have created the bottlenecks by disrupting the supply chains. A large number of these failures are in the small and micro sectors and they need to be revived. Helping them would simultaneously reduce supply chain disruptions and generate employment and incomes. That would moderate inflation and boost growth by increasing both demand and supply.

In contrast to what is needed, government’s focus has been to boost the organised sector which is highly capital intensive and increasingly automated. As it displaces the unorganised sector unemployment rises. To solve the problem policy needs an about turn.

The economy showed a spurt (20.1%) in Q1 of 2021-22 due to the low base in Q1 of 2020-21, caused by the lockdown. After that the growth rate of the economy has been declining every quarter – 8.4%, 5.4% and 4.1%. That was the first of the four adverse news listed above. The impact of the continuing Ukraine war and high rates of inflation will cause the economy to further slowdown and this bad news will persist since the government is not changing course.

Can the economy do well if a large number of people are not working or have given up looking for work? These people are from the unorganised sectors of the economy since employment in the organised sector has not declined. So, a shrinkage of the labour force participation implies that the unorganised sector is shrinking.

If this sector is shrinking rapidly, can GDP growth be 8.7% in 2021-22 as claimed officially? As argued repeatedly, if the unorganised sector had been independently estimated, currently the rate of growth of the economy would be close to zero if not negative.

The economy was in a secular decline even prior to the pandemic. In Q4 of 2019-20, the official quarterly growth rate had slowed down to 3.1% from 8%, eight quarters back in 2018-19. Again these rates would have been much less if one could include the decline in the non-agriculture unorganised sector.

All this has serious implications for poverty.

First, per capita incomes are much less than officially claimed. Since the organised sector incomes have increased, the decline in the incomes in the unorganised sectors would be quite sharp.

Second, the government’s welfare schemes for the poor (about Rs. 2.5 lakh crore) that are highlighted by the government as its achievements – giving food, gas and some other essentials – cannot compensate for the loss (about Rs. 10 lakh crore) of their incomes. Government claims to provide free food to 800 million people. The implication is that these people lost incomes and were too poor to be able to adequately feed themselves. In effect poverty increased.

According to the data from e-Shram portal, 94% of the workers said they earned less than Rs 10,000. The PRICE survey also reported that the bottom 60% in the income ladder lost incomes post 2015-16 and they would have slipped below the poverty line or come close to the poverty line.

Also read: Earn Rs 25,000 or Higher? Your Wage Ranks in the Top 10% in India

Third, poverty increased because a large number of people have given up looking for work and have to be supported by those working. Thus, the income of those working spreads thin.

In effect, government’s welfare measures are a necessity to ameliorate the crisis in the lives of the poor. These policies neither signify a success of the government nor reduction in poverty. This situation is that the incorrect policies are increasing poverty and then doing Welfarism so as to prevent a social explosion. Winning elections is another matter – it depends on ground level reach, use of the communal card, etc.

Foreign investors fleeing 

Over the last two years, the stock markets have done well despite the economy doing badly. The government interpreted this to mean that international investors were expressing confidence in the Indian economy. Foreign investments increased due to global factors like, infusion of massive liquidity, interest rates close to zero and attractiveness of Indian technology stocks. Some other sectors also did well (like, pharmaceuticals) during the pandemic and provided opportunity for profitable investments. Indian investors also lacked choices with interest rates going down and invested heavily in the stock markets.

None of this meant that the economy was doing well. After all, even officially the GDP level has just about come up to its level (1.5% higher) in 2019-20. The investments were clearly speculative. The price to earnings (P/E) ratio became high and led to instability. In such a situation, any shock could lead to a fall in the markets. That is what has happened. As the Fed (US Central Bank) squeezed liquidity and raised interest rates, foreign investors withdrew large sums form the Indian markets, causing a sharp fall in the stock markets.

Also read: Fed’s Rate Hike and Domestic Inflationary Pressures Present Double Whammy for Retail Investors

Investment is based on relative returns, where it can get a higher return. Indian stock markets became attractive because of the ‘supply side’ policies favouring big business. It was not due to a generalised confidence in the Indian economy – how could it be? After all it had witnessed the sharpest fall in its growth among all the major economies.

As soon as the relative profitability changed, foreign capital has withdrawn. This belies the government’s claim of foreigners’ confidence in the Indian economy. And that is the last point regarding the government’s copy book getting spoiled.

In brief, in the last three years, the Indian economy has been in crisis even if its organised sector has been doing well. This is not just due to the factors beyond the control of the government like, the pandemic and the Ukraine war but crucially due to the ‘supply side’ policies it has pursued. Even though it has been clear that the unorganised sector has been declining and causing a huge employment problem resulting in shortage of demand and supply chain disruptions. Supply side policies cannot address them. The continuing Ukraine war will aggravate problems. So, government needs to change its policies and at least do what is in its hands.

Arun Kumar is Retired Professor of Economics, JNU, and author of Indian Economy’s Greatest Crisis: Impact of the Coronavirus and the Road Ahead, published by Penguin Random House.