is a silent discussion on within India's economic policy
establishment. This relates to the way in which the
combination of rising inflation and slowing growth can
be tackled. Till a few months back, when the recovery
from the 2008-09 downturn seemed strong, the focus of
policy was on curbing inflation. But now sustaining
growth is also a concern. The Reserve Bank of India
has lowered its growth projection for fiscal 2012-13
to 6.5 per cent. Yet inflation is still high. Hence,
as the central bank puts it in its first quarter review
of macroeconomic and monetary developments during 2012-13:
''Persistence of inflation, even as growth is slowing,
has emerged as a major challenge for monetary policy.''
Inflation is preventing the central bank from addressing
the growth slowdown by reducing interest rates. In the
policy follow up to the quarterly review, the RBI announced
that it would as of now leave key interest rates unchanged,
and merely reduce marginally the share of deposits that
banks are statutorily required to invest in specified
government bonds. According to the governor of the central
bank: ''The primary focus of monetary policy remains
inflation control in order to secure a sustainable growth
path over the medium-term,'' since ''lowering policy rates
will only aggravate inflationary impulses without necessarily
stimulating growth.'' This declaration would disappoint
a private sector looking for some action to counter
the slowing growth rate.
The question is, can they turn elsewhere for support?
Conventionally, if the monetary policy lever cannot
be used to combat a downturn in growth, the burden falls
on fiscal policy. But this too the RBI argues is not
all too feasible, because the so-called ''fiscal headroom''
required is not available. To simplify, the RBI along
with much of finance capital believes that the government
is already over-borrowed relative to GDP, and therefore
needs to reduce its fiscal deficit. Since an increase
in aggregate expenditures, everything else remaining
constant, would increase the fiscal deficit, that is
not the central bank's desired option. More so because
it believes that more spending implies a larger fiscal
deficit and a larger deficit would necessarily aggravate
inflation. The possibility that the government could
mobilise additional resources through taxation, and
thereby expand expenditures without increasing the fiscal
deficit is clearly being ignored. So, the fiscal policy
option is being ruled out. The government concurs in
theory, though in practice it has let the deficit widen.
How then is growth to be revived? The consensus is that,
rather than spend itself, the government's role should
be to incentivise private investment, which would then
drive growth. There seem to be two positions here. The
RBI feels that the government should spur growth by
expanding investment expenditure, since such expenditure
would incentivise private investment by generating demand
and relaxing bottlenecks. To finance such investments,
it calls upon the government to reduce other expenditures
such as those on subsidies. The subsidies specifically
to be targeted are those on food and petroleum products,
both of which would hurt the poor. But this is a cost
that must be paid, says the RBI, since reducing such
subsidies would keep the deficit under control while
getting growth going. Stated otherwise, while placing
the burden of fuelling growth on the well to do by imposing
taxes that can finance additional expenditures is not
acceptable, reducing subsidies that benefit the poor
is eminently so. What is being discounted is the possibility
that increases in the administered prices of food (distributed
through the PDS) and petroleum products would both directly
and through their cost push effects contribute to inflation.
The second position on how private investors can be
incentivised can be traced to the government, especially
the Prime Minister's office and the Finance Ministry.
It holds that ''big ticket reforms'', such as allowing
foreign direct investment in multi-brand retail or raising
the cap on foreign equity in insurance or privatising
public banks, are needed to unleash ''animal spirits''
and spur investment.
Even if not consciously, this argument advocates feeding
the predatory appetite for profit of big domestic and
foreign private capital. If profits can be inflated,
capital would be willing to make investments, it is
being argued. This is in keeping with policy in the
recent past. Consider the period 2003-2008, when growth
rose sharply, corporate profits spiked, and corporate
savings and investment boomed. The process through which
these occurred is revealing. To start with, since the
early 1990s, when liberalisation opened the doors to
investment and permitted much freer import of technology
and equipment from abroad, productivity in organised
manufacturing has been almost continuously rising. Net
value added (or the excess of output values over input
costs and depreciation) per employed worker (measured
in constant 2004-05 prices to adjust for inflation),
rose from a little over Rs. 1 lakh to more than Rs.
5 lakh. That is, productivity as measured by net product
per worker adjusted for inflation registered a close
to five-fold increase over the 30-year period beginning
1981-82. And more than three-fourths of that increase
came after the early 1990s.
Unfortunately for labour, and fortunately for capital,
the benefit of that productivity increase did not accrue
to workers. The average real wage paid per worker employed
in the organised sector, calculated by adjusting for
inflation as measured by the Consumer Price Index for
Industrial Workers, rose from Rs. 8467 a year in 1981-82
to Rs. 10777 in 1989-90 and then fluctuated around that
level till 2009-10. The net result of this stagnation
in real wages after liberalisation is that the share
of the wage bill in net value added or net product,
which stood at more than 30 per cent through the 1980s,
declined dramatically and fell to 11.6 per cent or close
to a third of its 1980s level by 2009-10.
A corollary of the decline in the share of wages in
net value added was of course a rise in the share of
profits. The years after 2001-02 saw the ratio of profit
to net value added soar, from just 24.2 per cent to
a peak of 61.8 per cent in 2007-08. The driver of this
remarkable boom in profits was a rise in the profit
margin, or the ratio of profits to the value of output.
Increases in profit shares have clearly been the result
of the ability of capital to extract more profit from
every unit of output.
The question naturally arises as to the factors that
explain the sudden and sharp rise in profit margins
and shares in the periods after 2002. The answer is
that in the name of economic reform, the government,
through tax concessions, transfers of various kinds
and sale of land and scarce assets to the private sector
at extremely low prices, engineered this profit inflation.
But to realise those profits the private sector needed
a market to produce for. That market was delivered by
a credit financed boom in private investment and consumption,
which rode on the liquidity infused into the system
by the foreign financial inflows attracted by the concessions
that the reform offered.
There is a major lesson emerging from this narrative.
Neoliberalism is an ambiguous and loosely defined term,
even when restricted to the economic sphere. However,
an essential feature characterising it is the use of
the notion of a minimalist state to legitimise a state-engineered
shift in the distribution of income and wealth in favour
of the owners of capital and their direct or indirect
functionaries and conceal the conversion of segments
of the state apparatus into sites for accumulation.
The limited evidence pertaining to the organised industrial
sector presented above suggests that it was the adoption
of such a strategy that allowed for a process of growth
based on profit-inflation. Sustaining such growth, therefore,
requires sustaining a regime of transfers to private
capital. Under neoliberalism, growth is ensured through
a predatory regime of accumulation.
Those who advocate ''big ticket reforms'' are essentially
arguing that concessions or transfers to the private
sector are required to feed the predatory demands of
capital to spur investment and growth. The idea is to
revive animal spirits with material incentives. Unfortunately,
experience shows that such growth while serving a small
section of private interests will leave much of the
population marginalised and possibly further impoverished.
Moreover, the truth is that in the current conjuncture
this is unlikely to sustain even this kind of growth.
The real problem is slackening demand. Government spending
is being reined in. And the accumulated debt burden
of households and credit exposure of the financial system
appears to be depressing private demand. As a result
the market that is needed to realise profits is shrinking.
More reform would not expand the market.
This seems to be generating a new policy consensus.
One element of that consensus involves spurring demand
for the private sector by diverting expenditure away
from subsidies for the poor to finance investment. That
is the RBI's pitch. Simultaneously, a case is being
made for providing more concessions to cajole the private
sector into exploiting this opportunity. That is the
government's take. This may or may not help sustain
growth. But it definitely would be damaging in many
ways for a majority of Indians. That would be the real
fallout of the obsession to keep growth going without
resorting to taxation or enlarging the government's
budgetary deficit to finance that growth.
This article was originally published in Frontline,
Vol. 29: No. 16 Aug 11 - 24, 2012.