India’s Ponzi-styled economic reforms run out of steam

Author: Ranjit Goswami, IMT Nagpur

Noam Chomsky once said that ‘reform is a change that you’re supposed to like. So as soon as you hear the word reform, you kind of reach for your wallet and see who’s lifting it’.

An Indian homeless family seen under a flyover in the eastern Indian city of Calcutta. Now that India has a sizeable middle class, the situation for poor Indians has worsened since the 1990s. (Photo: AAP)

This statement is all the more true given that economic reform does not mean the same thing across the world. Not all countries choose to take the IMF-driven, Washington Consensus path of economic reform. China’s ‘socialism with Chinese characteristics’ is the clearest example of this.

India’s particular brand of economic reforms can be analogised to a Ponzi scheme. Every year, state-owned enterprises and public assets are privatised in the name of asset reallocation, at throwaway prices. On top of that, every year tax-breaks or subsidies amounting to nearly US$100 billion are handed out to private industries in the name of reform or liberalisation. A small part is then recycled to the citizens in the name of social welfare. This structure is not sustainable, and is bound to fail as the Ponzi schemes in India have been failing.

Regardless of the label one adopts for the reforms, their broad aim is to improve the economic efficiency of the nation. A minority, made up of influential industry lobbyists and journalists in India, have long been sold on the reforms because they have apparently resulted in higher rates of GDP growth in India compared to earlier periods. But this line of reasoning fails to address four key points.

First, correlation does not mean causation. India began to witness higher rates of GDP growth not from 1991 onwards (when the first big economic reforms reportedly began) but during the 1980s. Many commentators have repeatedly pointed out that the high growth rate of near double digits, during parts of the last decade, was more due to global factors, like unparalleled global liquidity, rather than domestic factors; and therefore is not sustainable.

Second, India’s economic growth does not appear to have resulted in employment growth in the formal sector. India has an officially reported unemployment rate of less than 4 per cent, compared to more than 7 per cent for the United States and 4 per cent for China. But in India, 92–96 per cent of employment is made up of employment in poorly paid and low productivity oriented informal sectors. During 1994–2000, organised sector employment grew at 0.53 per cent whereas overall employment grew at 0.98 per cent, both at a much lower level than the increase in the labour force. Recent data from 2004–2005 to 2009–10 period show nearly zero employment elasticity, at 0.01. Most nations chase growth as a means of generating employment, whereas in India, growth has been an end in itself.

Third, in spite of economic growth, there is some evidence that Indians are on an average living on a lower food intake than before, when measured according to calories. Now that India has a sizeable middle class, the situation for poor Indians has surely worsened since the 1990s. The data perhaps reflect a situation where increased per capita consumption at one socio-economic level is resulting in scarcity at the lower level, and thereby reducing the overall national average.

Finally, India’s export competitiveness has fallen. Ad hoc measures, such as cheap resource transfers, liberalisation, export sops, and the creation of Special Economic Zones (themselves a euphemism for land grabs), along with India’s inherent advantages like cheap labour, all have collectively failed to help India gain export competitiveness in a sustainable manner. Exports, as a percentage of imports, have now fallen below the pre-reform days, after showing some early unsustainable momentum up to 2002–3. India’s current account deficit is now worse than that of the US, in terms of per cent of GDP, with the obvious difference being that the US has a strong global currency whereas India has a weak one. Now, India’s current account deficit is worse than its pre-economic reform days, and this, after two decades of reform, cannot be completely blamed on the post-2008 global economic adjustments.

India needs growth. That is not in question. Unfortunately whenever anyone critiques the growth characteristics of India, true believers of the reforms (who Amartya Sen calls ‘growth-maniacs’) demand to hear an alternative. There are and were alternatives, but the present Ponzi reformists have simply been emboldened with too much unsustainable growth too soon. The easy money power, created in the last decade by the global liquidity binge, and the low inflation-environment generated by the Chinese expansion of productivity, have also helped to keep the pro Ponzi-style Indian reform propaganda alive.

India’s constitution, adopted back in 1949, declared India to be a sovereign, secular, democratic and socialist republic. But India’s economic reforms have been divorced from that socialistic mind frame, barring populist measures for election purposes. Howard Zinn, the best-known people’s historian, often stated that socialism should not be viewed as a bad word. India, as a country where 68.8 per cent of people survive on less than $2 a day according to per capita income, cannot ignore economic reform with a socialistic touch. And this can only come when India creates more supply-side capacity, by minimising revenue losses, and by cutting unsustainable subsidies year after year, to both the rich and the poor.

Ranjit Goswami is Dean at the Institute of Management Technology (IMT), Nagpur.

9 Comments

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  • Anil Kshatriya

    In their book “Poor Economics”, Prof. Abhijit Banerjee and Esther Duflo of MIT have made some remarkably similar observations (http://pooreconomics.com/research/studies?page=7).

    This article also reiterates the relevance of “Phillips Curve” in present context. There is a need to balance the inverse relationship between unemployment and growth/inflation.

    Observations from yesterdays ET interview of Prof. Jagdish N Bhagwati, Columbia economist, suggest that when used with short-termist vision, Pro-poor economics has done more harm to poor than to rich (http://articles.economictimes.indiatimes.com/2013-06-03/news/39714742_1_indian-economy-hundred-days-debate).

  • Dr. Jayaraman

    The author needs to get his facts right. The original Indian constitution did not contain the terms Socialist or Secular. Those were inserted much later, by Indira Ghandi.

    • Yes, Dr. Jayaraman is right. Original Constitution didn’t envisage ‘socialist & secular’ India; it was brought in the 42nd Amendment during the Emergency in 1976. I acknowledge I did not know it. We believe in factual accuracy, to be a precondition for any article, and therefore thank Dr. Jayaraman for pointing it out.

  • Sanjay

    What a pack of rubbish. Socialist? Socialism has been proven to be nonsense that doesn’t work. Economics is practised through relationships, and relationships cannot be forced, imposed or dictated – whether by the state or anyone else. If I have a wife or girlfriend, our relationship is our personal matter, and it’s not your concern to be meddling in it. Likewise, if I have an economic relationship with someone, that’s between us, and it’s none of your business. The fact that leftists see fit to poke their nose in everyone else’s affairs like busybodies is why there are so many refugees fleeing the 3rd world. And as we know, refugees are people who vote with their feet. This shows the overwhelming verdict against socialism, which seeks to deprive everyone of choice, and invariably becomes the preserve of elites.

    • Some of us tend to think socialism in same line with terrorism or so…without probably exactly understanding what socialism means, or its context. It surely does not mean same thing to everybody, particularly after USSR (Marxism, many say, is most misunderstood). The reason for referring Howard Zinn was his idea of Socialism, this is what he said:

      ‘Let’s talk about socialism. I think it’s very important to bring back the idea of socialism into the national discussion to where it was at the turn of the [last] century before the Soviet Union gave it a bad name. Socialism had a good name in this country. Socialism had Eugene Debs. It had Clarence Darrow. It had Mother Jones. It had Emma Goldman. It had several million people reading socialist newspapers around the country. Socialism basically said, hey, let’s have a kinder, gentler society. Let’s share things. Let’s have an economic system that produces things not because they’re profitable for some corporation, but produces things that people need. People should not be retreating from the word socialism because you have to go beyond capitalism.’ (From Wikipedia).

      Management Guru Peter Drucker was also amazed at the income inequality as he felt that the highest paid corporate executive shouldn’t be getting probably more than 25 times the average salary of the company. One may look at various Wall St. excesses over last few years. So, socialism, like anything else, should be taken in its context. Moreover, if one reads the last couple of lines in the article, it talks about reducing subsidy, to the rich and also to the poor where not helping over the years; and thereby creating capacity.

      Specifically, in Indian context, one can read couple of articles to understand what socialism probably is, and ‘what socialism Indian Government practices': (1) Stop subsidizing the rich http://www.thehindu.com/opinion/op-ed/stop-subsidising-the-rich/article4354518.ece and (2)The feeding frenzy of the kleptocracy http://www.thehindu.com/opinion/op-ed/stop-subsidising-the-rich/article4354518.ece . NYT articles of Cohan (2010) on ‘You’re welcome Wall Street’ and recent article on Turney Duff may help one again understand context globally. Point is: Let’s question, socialism is not a bad word, neither capitalism nor reform is. The context is the king.

      • msj

        Socialism, as a concept is good, but implementation is what is brings the pain.

        Simple analogy of sharing the pie equally doesn’t bother about baking the pie….

        My understanding of socialism that was/being practiced is this much.

        Govt. (which mostly doesn’t earn, but only spends) takes over welfare of people.
        Some unknown judge/officer decides what scheme/fly-over needs to get built.

        Hence, we have Govt. run flying schools functioning fully-staffed & lots of Govt. schools getting closed, due to lack of staff & children

  • S. Suchindranath Aiyer

    India’s Stalinist “Social and Capital re engineering” Governance, Constitution and Laws were never changed. Without reforming this Neta-Babu Quota-Corruption Raj i.e. a Sociometric Kleptocracy, you cannot reform any facet of India. Such as “economics”.

  • hari nair

    The idea of india is based on the concept of welfare state.The word “welfare state” gain significance because we are still a poor country, most indians needs support from the government to sustain.so i think subsidies for the poor is not an economic crime but political sops are. The first step we need to take to elevate the indian poor to the mainstream is to make them independent of political sops, MNREGS is alone responsible for the decline of rural farming sector and supply side constrains. there are many in the underdeveloped india who still believes in socialist idea because it very well connected with the concept of welfare state, for them growth without inclusion and high GDP rate with skyrocketing inflation are the indicators of a new capitalist india.

  • Mandar

    Socialism, is this the only alternative for Capitalism? Capitalism becomes inhuman as it centralizes resources to handful of people. Any ‘progress’ in that case becomes progression of money from the hmass to a minority. However, socialism, if it means state owned industry, is not going to help either. How many successful economies do we see that operate on socialism? USSR is gone, China is diverting, West Bangal is in bad shape. Still there are socialists around who are not broken.
    We should ponder on ideas that give rise to fair distribution of money, by promoting smaller businesses.