The world economy is in coma. We must readjust our policies according to changing contours of the world economy. Till recently, the MNCs in the developed countries were making new innovations like the Windows software and HP Laptops. They were selling these pioneering products to the developed countries at high prices, making huge profits and paying high salaries to their workers. Their workers were buying goods produced in China. This led to a two-way flow between the developed and developing economies. The MNCs were investing their profits in India and China to produce goods that were imported back into the developed countries for the consumption of their own people. There was a flow of investment from the developed to the developing countries and a flow of goods from the developing to the developed countries.
The situation has changed dramatically in the last 20 years. The last commercially relevant innovation by the developed countries was the internet in the mid-nineties. The developed countries today have few pioneering technologies that they can sell at high prices. As a result, they do not have the incomes to pay high salaries to their workers. No wonder President Obama persuaded the Labour Unions at General Motors to accept a reduced pay package. As a result, workers of the developed countries do not have the incomes to buy ever increasing amounts of goods from India; neither do MNCs have the profits to make ever increasing amounts of investments in India.
The way to revive the Indian economy in this situation is to generate domestic demand. But the large-industry-cum-big-business approach being followed by our government is doing exactly the opposite. The government wants to attract big ticket investments using automatic machines in order to produce goods in large quantities. The number of workers employed for producing the same amount of goods is shrinking everyday. Pioneering factories are now entirely worked by robots. Only a few workers are required—only to manage the robots. The cost of production of these automated factories is less. Small and medium enterprises cannot compete with them. These small industries generate most employment. These are getting smothered by big industries. A large number of small bread manufacturing industries that used to run previously have now been mostly uprooted. As a result, the workers do not have income to buy goods from the market. Agricultural prices too are being kept low by the government to control inflation. As a result, the farmers also do not have income to buy goods. Few lakhs of skilled software and other professionals are making money but the larger population does not have the money to buy goods. As a result the market is flat.
The government hopes to revive the economy by implementing deeper economic reforms. But these will only make things worse. First reform is that of the Goods and Service Tax (GST) which will equalise the tax rates on goods consumed by the rich and the poor. Presently, say, the table fan is taxed at 8 percent and the air conditioner at 16 percent. The tax rates will be equalised under the GST regime. Say, both are taxed at 12 percent. The burden of tax on the poor will rise while that on the rich will decline. Say the burden of tax on the poor increases by Rs 100 and that on the rich reduces by Rs 100. The poor spend 90 percent of their income for consumption and save 10 percent. An increase in tax of Rs 100 on them will lead to a reduction of consumption by them by Rs 90. On the other hand, the rich spend only 10 percent of their income for consumption and save 90 percent. A reduction in tax of Rs 100 on them will lead to an increase of consumption by them by mere Rs 10. The total demand in the economy will decline by Rs 80.
There is a need to first put in place measures to rehabilitate the displaced ones in order to increase the total demand in the economy. The government is like the doctor who prescribes the much needed protein supplements for the patient but does not care whether that poor fellow gets a full meal or not.
The second reform being proposed is to implement the land acquisition act. Once again, the poor land sellers will get less money for the land they sell. Their consumption will go down steeply. The rich buyers of land will pay less money for the land. They will have more disposable income left in their hands but this will lead to only a small increase in their consumption. On the whole, there will be less demand in the market.
The showcase projects of the government are not helping either. Shipping Minister Nitin Gadkari is bent upon converting the Ganga into a waterway for the plying of large cargo ships. That will kill the livelihoods of the fishermen and boatmen and lead to erosion on the banks of the Ganga and displace poor people leading to loss of demand from them. The government wants to run bullet trains between Delhi and Agra. That will take away the jobs of taxi drivers. The government wants to make smart cities. A fleet of computer managed trucks will pick garbage, for example. That will take away the jobs of the sweepers presently appointed by the Municipality. The government wants to dig up the forests by using large excavators in order to produce coal. The list goes on and on. I am not opposing the adoption of advanced technologies like these. But there is a need to first put in place measures to rehabilitate those who are displaced so that the total demand in the economy increases. The government is like the doctor who prescribes the much needed protein supplements for the patient but does not care whether that poor fellow gets a full meal or not.
The government must take the following steps to revive demand. One, impose taxes on large factories using automatic machines; and reduce taxes on small factories employing large numbers of labour. Two, subject all FDI proposals to an employment audit. Make sure that the number of jobs created by new investment is more than the numbers of jobs eaten away. For example, a modern textile mill may create 5,000 jobs but take away the jobs of lakhs of weavers. Three, simplify labour laws for small industries. Four, improve infrastructure in small towns where small industries are concentrated. Let the fiscal deficit increase, if necessary, for making this infrastructure. Five, increase the prices of agricultural produce so that demand in the rural areas increases. Six, rework the rules of the WTO to provide protection to labour intensive industries. These measures will generate demand in the domestic economy, Alas! None of these are on the radar of the mandarins managing the Finance Ministry.
Author was formerly Professor of Economics at IIM Bengaluru