An Economy of Concern

Arshad Shaikh checks the state of our economy in the wake of the third wave of the Covid-19 pandemic. India’s growth rates are being touted as one of the fastest in the world but what about employment and inflation. The role of the government in such phases of the business cycle is critical and needs careful study.

Newspapers all over the country flashed the news that India’s economy will surpass that of Japan by 2030 and become Asia’s second-largest economy. The projection by London-based market analyst and critical information provider – IHS Markit also stated that our GDP would cross Germany, France and the UK by 2030 and become the third-largest economy in the world. India’s economy is expected to grow from the current $2.7 trillion to $8.4 trillion by that time. IHS Markit believes that India’s large and growing middle class will fuel our economic growth by doubling current consumption expenditure from $1.5 trillion to $3.0 trillion by 2030. Adding to the euphoria was the news that India is well on course to regain the title of the world’s fastest-growing economy.

The National Statistical Office (NSO) data estimated that our GDP is expected to grow at 9.2% in FY22. This figure is bound to be revised as the last quarter of the current fiscal is yet to roll out and is beset with Omicron-related constraints.

This long-term projection about the size of our economy and GDP growth rates makes for happy reading and gives a boost to our patriotic fervour; however, it is important to check if these numbers imply anything to our well-being and economic prosperity. Typically, if we want to examine the health of any economy, we usually look at the economic growth, employment levels and inflation or price stability. However, there are other equally important indices as defined through the Human Development Index (HDI) such as the life expectancy index, education index and Gross National Income (GNI) per capita. India’s current ranking in HDI is 131 out of 189 countries.

Growth and Income Inequality

The above table shows the percentage GDP growth of India over the years. One can see the effect of demonetisation (end of 2016) and the Covid pandemic (2020 and 2021). Mainstream economics literature and the dominant practice of governments and policymakers (following the capitalist model) suggest that economic growth is the direct result of capital accumulation. Therefore, when we want economic growth, we imply that the stock of capital that we have this year should be more than what we have last year.

Capital accumulation is directly linked to our savings also known as the sacrifice made on current consumption. Savings translate into investment and lead to more production and a subsequent increase in the stock of capital. This simple equation that is common to most economic growth models does not take into account the distribution of capital. The approach merely confines itself to the growth in total capital assuming that it will lead to the growth of all.

Experience and empirical data show that this quest for economic wellbeing through GDP growth has led to growing inequality with the top 1% taking 38% of all additional wealth accumulated since the mid-1990s, whereas the bottom 50% capturing just 2% of it. In India, the average income of the working population is around Rs 2 lakhs (Rs 17,000/- per month) with the bottom 50% earning only around Rs 50,000 (Rs 4,500 per month). In contrast, the top 10% hold 57% of the income and the top 1% hold 22% of the national income. So despite the spectacular projected GDP growth numbers and the future size of our economy, it is doubtful if it will do anything to help the poor and marginalised in any meaningful way.

THE THREAT OF INFLATION

Economist John Kenneth Galbraith said, “Nothing so weakens a government as inflation.” Margaret Thatcher described inflation as “the parent of unemployment and the unseen robber of those who have saved.”

India has been grappling with inflation for the past three years. Fuel prices are at an all-time high. The wholesale price index is red-hot at 15% and usually feeds into retail inflation that is currently 5.59%, a six-month high.

The latest Financial Stability Report by the RBI states, “The global economic recovery has been losing momentum in the second half of 2021 in the face of resurfacing COVID-19 infections, the new variant Omicron, supply disruptions and bottlenecks, elevated inflationary levels and shifts in monetary policy stances and actions across advanced economies and emerging market economies.”

As pointed out by MK Venu (The Wire – How The Rise Of Global Inflation Will Play Out In Indian Politics, Jan 11, 2022), the US debt to GDP ratio has gone up from 45% in the 1980s to well over 100%. The Fed balance sheet was $4.7 trillion before the pandemic and now stands at over $8 trillion. It is estimated that 40% of dollars in circulation was created in the last two years. So Americans who had forgotten the meaning of inflation are now experiencing inflation levels that are at 40-year highs. Naturally, the effect of these cheap dollars is spilling over to Latin America, Asia and Central Asia with inflation rates spiralling out of control.

Venu correctly predicts, “Historically, once every 10 to 12 years, inflation does become a monster and tends to devour the ruling regime. It creeps up without the establishment even realizing it. The prolonged farmers’ agitation was about farmers seeking higher output price but the real hit came because of inflation in input costs of diesel, fertilizer, pesticide etc.”

THE HARSH REALITY

The harsh reality of life is that no economy in the world can operate in isolation and continue to flourish on its own in the long term. It is an interconnected and interdependent global economy that is steered by the interest-based global financial system. This develops two asymmetries. One is the dichotomy between the financial economy and the real economy. The other imbalance that is created is the extreme inequality in the wealth distribution, which is the root of all social and financial turmoil. Both asymmetries feed each other. It is a vicious cycle.

The financial system is based on lending by charging interest. This is the biggest financial crime that can be committed by any entity and yet it has been normalised to the extent that the world is not ready to accept that we can have an interest-free economy that supplies credit by way of equity financing and venture capital.

Secondly, the equity markets run on the back of speculative financial instruments that are fuelling the persistent rise in the prices of commodities. Governments have become captive to crony capitalists and industries that promote war and conflict. Defence budgetary allocations are rising continually and no cuts can be envisaged therein for diverting the much-needed funds for poverty alleviation programmes and towards the social sectors like health and education.

The famous American economist Arthur Laffer said: “And you can’t have a prosperous economy when the government is way overspending, raising tax rates, printing too much money, over-regulating and restricting free trade. It just can’t be done”.

Hope we take this advice seriously. We all know big does not mean best.