PROFESSOR ARUN KUMAR, a noted economist who is also Malcolm Adiseshiah Chair Professor at Institute of Social Sciences and former head of Centre for Economic Studies and Planning, JNU, is an authority on black economy and has authored The Black Economy in India and Indian Economy since Independence. His area of specialisation includes Public Finance, Growth Economics, Macroeconomics and Development Economics. He studied at Delhi University, Jawaharlal Nehru University (JNU) and Princeton University, USA, and taught economics at JNU for three decades till 2015. In an interview with MOHAMMAD NAUSHAD KHAN, he said the economy has been stagnant since demonetisation and is now in recession and the key is to raise demand in the economy especially from the unorganized sector in rural areas and that should be the policy to boost our economy.
What is your assessment of the current economic situation in India?
The basic problem is that the unorganised sector in India has been hit hard by demonetisation and GST so that it has been in decline. Even though the unorganised sector is exempted from GST, they don’t get input credit and they cannot give input credit so that their price is higher and demand has shifted from them to the organised sector. This is borne out by the statement of Chairman of the pressure cooker industry who said that demand has shifted from the unorganised sector to the organised sector because the former is not able to cope with GST. The third shock to the economy was the NBFC crisis (bad debt crisis). NBFCs are an important source of credit for a part of the unorganised sector. These three big shocks have hurt the unorganised sector which employs 94 per cent of the work force. These people lost employment and their incomes went down. That impacted demand for food so that the prices of agricultural produce went down and incomes of farmers declined. Since farmers are almost 50% of the workforce, that further impacted demand. While low food prices meant a low rate of inflation, it was at the expense of the farmers.
Why does the official data not reflect what you are saying?
Initially, the organised sector benefited from a shift in demand but as the unorganised sector continued to decline, demand shortage hit the organised sector also. Our annual GDP is calculated with data from the organised sector since the unorganised sector data comes once every five years. In between these years it is assumed that the two sectors are growing at the same rate which is incorrect due to the shocks to the economy. Worse, quarterly GDP is calculated largely from data of the corporate sectors. So when the government says that the growth rate is 5 per cent or 6 per cent, it is only representing the organised sector.
Five quarters back the rate of growth was 8%. If from this one subtracts the decline in the growth rate of the unorganised sector, the rate of growth in 2017 and 2018 would have turned out to be around 1 per cent. Now that the rate of growth is down to 5 per cent, the rate of growth would have gone down to minus one per cent or so. So, Indian economy was stagnating earlier but now it is in recession. The situation is very drastic.
How will the current situation impact the budgetary position of the government?
This has impacted government’s tax revenue which has fallen short of the targets. Both, GST collection and direct tax collection have been impacted. So we had a shortfall of Rs.1.6 lakh crore last year. But the government did not use this to predict revenue growth for the current year and therefore it is likely that the revenue shortfall may be even bigger. The government wanted to maintain the fiscal deficit at 3.4 per cent last year and now is targeting 3.3 per cent this year. But if revenue is short, the only way to maintain the fiscal deficit is by cutting expenditure. The government cut back expenditure last year which worsened the recessionary situation. This year also as revenue shortfall occurs and maybe larger than that last year, more cutback will be required. The States will also lose revenue and their deficit will also increase. Further, many tax concessions have been given to the organised sector to boost it but, this will mean less revenue collections (government has given a figure of Rs.1.45 lakh crore) so that the fiscal deficit will rise.
Would a higher fiscal deficit not lead to increased demand in the economy?
This increased fiscal deficit which should have created more demand will not do so because it has been given as concession to the corporate sector. That will certainly boost their incomes, but they are wealthy and consume little of their incomes. Would they invest more, another source of demand? Unlikely, since capacity utilisation is low. If they invest more, currently their profitability will come down further. Unfortunately, the measures that the government has taken in the last two months hardly benefit the unorganised sector even though that is where the problem of demand began.
If the government was willing to allow the fiscal deficit to rise by one or two percentage of GDP then what would have been its best use? Clearly, it would have been far better to have given the money to the unorganised sectors and/or invest in rural infrastructure to generate employment. More transfer to the farmers, higher allocation to MGNREGS, investment in education and health and rural water supply, roads and minor irrigation would have raised demands immediately.
Will the concessions announced lead to more foreign investment?
Unless demand increases, investment rate will not increase above the present level of around 30%. Another argument is given that Foreign Direct Investment may increase. But foreign investment is only about 5 per cent of the total investment. And even if this increases by 20%, it will hardly solve the problem. But, even foreign investment will come when there is demand. Big investment like Walmart buying Flipkart is an acquisition and will not create new employment. Therefore, foreign investment is unlikely to boost demand in India.
What should be done to solve the problem?
In brief, the solution to the current recession lies in reviving the unorganised sector by investing more in rural infrastructure, social infrastructure. The other thing that the government can do, if it doesn’t want the fiscal deficit to rise, is to raise additional tax resources by reviving wealth tax, estate duty and gift tax. In India the wealth disparity is very high as per Oxfam report that nine people had more wealth than 700 million people. And one per cent Indians have more than 50 per cent of the wealth. So, a wealth tax of half a per cent on the top 5% of the wealthy can raise 1 per cent of the GDP and this can be used to enhance expenditures. This way the fiscal deficit will not increase but expenditures would lead to increase in demand. So, the key is to raise demand in the economy especially from the unorganised sector in rural areas and that should be the policy.