India at 67: A mixed and mixed-up story

India at 67: A mixed and mixed-up story

By Paranjoy Guha Thakurta

Independent India’s first Prime Minister envisioned a “mixed economy” for India with the best elements of capitalism and socialism. Looking at key socio-economic indicators today, the verdict is almost unanimous: we took the worst of both worlds.

“One out of three computer software engineers in the world is a person of Indian origin. And so is one out of three persons on the planet who is poor, undernourished and illiterate.”

“It is true that India at present is having neither growth nor equity in adequate measure.”

The most commonly used cliché about India is that this is a country of crazy contrasts. The world’s second most populous nation-state is very rich and very poor; it is extremely educated and extremely ignorant. India’s biggest achievement since it became politically independent 66 years ago at midnight on 15 August 1947, is that it has remained united despite innumerable prognostications to the contrary. The fact that India has remained undivided is significant since this is arguably the world’s most heterogeneous, and at the same time deeply-divided, country – a nation that categorizes its peoples not only along traditional lines of class, race, region, religion and language but also (uniquely superimposed on the other divisions) on the basis of an ancient and oppressive caste system.

One out of three computer software engineers in the world is a person of Indian origin. And so is one out of three persons on the planet who is poor, undernourished and illiterate. Coexisting in the country is a range of political and economic systems including different forms of feudalism, capitalism and socialism. The first Prime Minister of independent India Jawaharlal Nehru wanted India to have a “mixed economy”, one that would include the best elements of both capitalism and socialism. More than six and half decades later, the verdict is almost unanimous: we took the worst of both worlds. Private enterprise (the hallmark of capitalism) was stifled by excessive bureaucratic controls. At the same time, the government could hardly provide quality health-care and elementary education (that socialist societies sought to provide) to the majority of its people.

Even if certain small sections of India’s population have made considerable progress in recent years, the impact of economic development has, by and large, been uneven. The overall nationwide picture of growth indicators conceals sharp and increasing inequalities in income and social development. To claim that the world’s largest democracy has made little progress since the country became politically independent two-thirds of a century ago, would be a travesty. But to argue that the country’s economy has “emerged” from the shadows of under-development would be to gloss over reality. Many who live in politically independent India are far from economically independent. Hunger, malnutrition and unemployment gnaw at the economic freedom of at least a quarter of the 1.2 billion people who inhabit the planet’s second-most populous country. Yes, India and the idea of India have prevailed.

At the time of writing this article in the middle of August 2013, the country’s economy was in pretty bad shape. The danger of the government defaulting on its international financial obligations was not as palpable as it was in June 1991when the present Prime Minister became the country’s Finance Minister in the P.V. Narasimha Rao government. India’s foreign currency reserves have not slumped to the equivalent of a fortnight’s import requirements as it had 22 years ago, but there is a new set of economic crises that seem equally intractable and extremely painful to resolve. The high current account deficit on the external balance of payments has contributed to a fast-falling rupee vis-a-vis the US dollar. On the domestic front, persistently-high food inflation and tardy creation of jobs has led to a widening of the gap between the rich and the poor.

The government’s statistics indicate that 138 million individuals have been “lifted” above the poverty line over a seven-year period between 2004-05 and 2011-12 coinciding with the term of the United Progressive Alliance coalition in office. Academics and officials admit that the yardsticks used to measure poverty are inadequate and contentious. Those who support the government’s claim that the proportion of Indians living below the poverty line has come down dramatically from 37.2 per cent in 2004-05 to 29.8 per cent in 2009-10 and further to 21.9 per cent in 2011-12 — based on a daily per head consumption of Rs 33.40 in urban areas and Rs 27.20 in rural areas — argue that these figures are not fudged.

They claim that the “internationally accepted” definition of a poverty line is US$1.25 per person per day on the basis of “purchasing power parity” that better reflects standards of living than exchange rates. Thus, if one uses the current exchange rate of Rs 60 to one dollar, the internationally accepted poverty line would be Rs 75 per person per day. If one deflates the figure using purchasing power parity norms, the poverty line would be in the region of Rs 30 (or 50 cents) per person per day. The same set of data put out by the National Sample Survey Organization (NSSO) can, however, be interpreted differently in a way that hardly shows up the government’s performance in good light.

The survey on consumption expenditure shows that overall spending by the richest 10 per cent of Indians living in urban areas went up by nearly two-thirds (63 per cent) between 2000 and 2012 while expenditure by the bottom five per cent rose by just a third (33 per cent), the corresponding figures for rural areas being roughly 60 per cent and 30 per cent respectively. The same set of data disclose that the gap in spending by the richest and poorest in urban India went up from twelve times to fifteen times in this period, while the gap in rural areas increased from around seven times to nine times between 2000 and 2012.  It is not as if the rich are getting richer while the poor are getting poorer. The undisputed fact about contemporary India is that the gap between the rich and the poor has widened significantly and continues to do so.

The NSSO figures state that while the per person spending on milk and milk products went up by 58 per cent for the poorest 30 per cent in rural areas and 111 per cent in urban areas, the corresponding figures for the richest five per cent jumped by more than three times (331 per cent) in rural areas and over four times (422 per cent ) in urban areas over this 12-year period. The same story gets repeated across other commodity groups (such as fresh fruits and vegetables, eggs, fish, poultry and meat) as well as expenditure on education and medicines. 

 At one level, the debate on the direction of economic policies — epitomized by the acrimonious war of words between economists Amartya Sen and Jagdish Bhagwati — has acquired a new urgency with everybody pitching in with her or his comments on the relative importance or unimportance of growth versus welfare (or redistribution) schemes. While this debate is undoubtedly important, it is also true that India at present is having neither growth nor equity in adequate measure. The growth rate of gross domestic product has slumped. Employment opportunities are being created very slowly despite the government’s claims of having sharply brought down the incidence of poverty over the last nine years. Welfare schemes — including the Mahatma Gandhi National Rural Employment Guarantee scheme — are being implemented with varying degrees of efficiency and effectiveness in different parts of the country. More welfare schemes are to be initiated soon, including the legislation on food security. But all these efforts are being negated, if not neutralized, because of the government’s inability to control food inflation.

Since the country imports 80 per cent of its total requirements of crude oil and because the government has chosen to gradually equate domestic energy prices (especially diesel, the most widely-used petroleum product) with world prices, what is essentially taking place is that we as a country are importing inflation. The government is unable to narrow the trade deficit which is the principal reason why the current account deficit on the external balance of payments has careened out of control. Many of our exports are highly import intensive (for example, polished diamonds, gems and jewellery) while the markets for other labour-intensive exports (including textiles, garments, leather, handicrafts and processed foods) have shrunk on account of recessionary conditions in the West. With imports inelastic and exports sluggish, it is hardly surprising that the government has no alternative but to depend on volatile flows of foreign capital to bridge the gap between inflows and outflows of foreign currencies.

This is hardly a good situation to be in. The government belatedly decided to curb imports of gold and luxury products. But the problems will not disappear overnight. The reason why people have been investing in (legal and illegal) gold is simply because the yellow metal is perceived as the best hedge against inflation. In other words, the demand for gold from Indians will not be curtailed until the root cause — that is, inflation — is first addressed.

The government has gone on an overdrive hiking the limits and caps on foreign direct investment in various sectors. But this is not going to result in a flood of FDI flowing into the country given the economic conditions currently prevailing. As the experience of attracting FDI in multi-brand retail should make amply clear, there is indeed many a slip between the cup and the lip. The key issue the government has not been able to tackle is to convince India’s own entrepreneurs that they should invest in their own country before seeking greener pastures overseas.

Prime Minister Dr Manmohan Singh says economic reforms cannot take place unless there is political consensus. The question, therefore, arises as to what are the reasons why the UPA government failed to build the necessary political consensus. Finance Minister P. Chidambaram is openly angry with some of the judges of the Supreme Court, the Comptroller and Auditor General of India and even, the Governor of the Reserve Bank of India, because they have refused to toe the government’s line. On the contrary, they have been often critical of the policies, programmes and actions of the ruling dispensation. By being critical of institutions that are responsible for strengthening democracy, the government has not been able to create consensus in a highly-fractious polity such as ours. 

In the last fifteen general elections in India, there have been peaceful regime changes on no less than seven occasions. We seem to be on the cusp of another round of changes, brought about largely by the arrogance and stupidity of those in positions of power and authority.


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