The Indian economy and the cobra effect | Pakistan Today

The Indian economy and the cobra effect

  • Modi’s economic management ignores the ordinary citizen

By Pitamber Kaushik

As the Indian rupee hit a new low, exports fell 9.7%, and growth rates slid to a six-year nadir in the first quarter, there was widespread criticism of government economic policies, mismanagement and myopia. Independent global organisations were compelled to lower ratings, while economists consistently appreciative of Modi, also turned sceptical. GDP growth fell to a humble 5 per cent in the first quarter. Growth in eight core industries dropped to 2.1 per cent, the worst in four years, from 7.3 per cent a year ago. Speculations of an imminent recession led to unrest. Severe manufacturing sector slowdown was largely responsible as the fourth consecutive quarter of decline materialised.

As the Prime Minister repeated his ambition of a “5 trillion economy”, noted economist and BJP MP Subramanian Swamy said the dream was best forgotten, as that would need growth of 18-19 per cent. Former Prime Minister Manmohan Singh termed the slowdown “very worrying”. Holding the government accountable for ‘monumental blunders’, he contended that demonetisation, followed by faulty GST implementation, triggered the slowdown. He proposed a six-point plan to counter the slowdown and contended that long-term planning would be best to tackle the impediment. However, the flurry of criticism from all sides didn’t bridle the indiscriminate juggernaut of economic ambition, but rather seemed to divert it on a more dangerous course. The opposition merely deflected the government’s blind zeal, leading it to drastic measures derailing the situation further. It only prompted it to act compelled by its own underdeveloped economic diligence.

Apparently agitated by the criticism, the government still disregarded that six-point plan, which asked to revive agriculture, simplify the unified goods and services taxes, creating capital, boosting exports, reviving job-centric sectors and building infrastructure. It labelled him a puppet and instead continued slashing corporate taxes, and merging banks. That was purportedly intended to reinvigorate the economy, believing the tax rate deterred market stimulation. However, many contend otherwise. Economist Jayati Ghosh accused the government of mismanagement, by not acknowledging that the slowdown is affecting demand and living standards. The government refuses to acknowledge that citizens do not have money to spend and that the lower stratum is struggling even for a fair livelihood. The BJP regime is superfluously promoting ease of business, investment and banking environment, instead of recognising that it is demand, and the inability of people to buy and take credit, that is crippled. The government has been consistently neglectful of the working class and is blatantly sidelining income equality, putting its faith in the obsolete trickle-down paradigm.

A historic parable: Because of the number of wild cobras in Delhi, the imperial British government announced a programme of a reward for dead cobras. There was initial success. Soon, locals began breeding cobras, slaying them, and presenting for the reward. The administration repealed the programme, and cobra breeders released their stock into the wild, increasing the number of wild cobras. A similar occurrence transpired in colonial Vietnam, where the French authorities paying a reward per rat killed. To claim the bounty, one needed to present the rat’s tail. Soon, locals started severing rat tails and setting the rats free back into the sewers, so they would keep breeding and maintain the population. This proliferation ruined the entire exercise. Similarly, the regime has taken measures deepening capitalism and worsening the crisis for the worst-hit.

The government’s attempt to forge a business-conducive and banking-fostering semblance is not only misdirected but also misplaced. Instead of advocating a bottom-up approach, the government is dealing in the abstract. Criticism from the comparatively less capitalist opposition has only resulted in the government misinterpreting the issue. However, it is actually the intimate correlation between the formal and the informal sector in India, the latter of which has suffered massively for the past three years that has brought the calamity. Things like the rural employment guarantee need to be revived, to cure the malady, as a public purchasing power increment initiates a chain reaction. This pulse in purchasing ability provokes multiplier effects, and automatically causes a rise in grassroots production. The government needs look no further than the biscuit industry crisis.

The Finance Minister declared that the total revenue loss due to the cuts would be about $20.5 billion, which has caused concerns regarding the government’s ability to meet its fiscal deficit target for 2019-20, particularly with revenue collections already attenuated. Rating firm S&P Global deemed the rate cut a “credit negative development”. The BJP stayed in denial, tweeting that despite all concerns, India was still the fastest growing economy, even at a time archrival China well overtook it. The government also availed an unprecedented surplus transfer of Rs. 1.76 trillion from the RBI to bail itself out. The unemployment rate reached a 45-year high and the tax collections from the previous fiscal caused an estimated revenue shortfall of Rs 1.67 trillion. None of these steps address the problem of falling demand, and blatantly ignore unequal wealth distribution. The problem of widening economic rift and financial impairment of the lower strata is not acknowledged, let alone redressed.

Overt reliance on growth rate per se, disregarding wealth disparity and distribution undermines democracy and hampers a welfare economy. The effects of the new corporate tax cuts will take time to manifest and will worsen matters now for government funds. The criticism by the opposition, most of which is left of the BJP, has backfired, colliding with the latter’s rigid political ego, and unrelenting confidence. In effect, criticism of lessening growth, seemed to be taken by the government as a challenge, and led it to patch the figure rather than cure the causes. Thanks to the superficial opposition criticism, the BJP regime will direct all its efforts at artificially bolstering the numeral, rather than perceiving it as an indicator of an economic crisis. The crisis runs more than skin deep and manifests in several botched-up parameters, from export rates to unemployment, with GDP growth only one symptom, albeit the most conspicuous. Thanks to ill-prepared attacks by opponents, the government is more reckless. Blinded by the provocation, the government will aggressively act to increase the number and not work on causes. Because the statistic is a convenient rule of thumb for the layman, the government will work to make it a spectacle– an electoral superlative catering to voters without time or analytical acumen to spare on the intricacies of economics. Projecting the figure as a singular representative of progress, the government will likely successfully manage to divert attention from income equality, social justice and welfare.

Thumping steps as corporate tax cuts also distract attention from underlying flaws. Emphasising disproportionately on the declining GDP growth rate, the opposition has proven that its superficiality, opportunism, quick-baiting habit and lack of analytical depth match that of the government, rendering it inadvertently complicit. The Indian economy has become a ping-pong ball trapped in ignominy. With attention spans becoming irrelevant, and oblivion of the rational, analytical method, the political accountability of governments is not established, particularly in economic policymaking. The transient six per cent increment in the stock exchange, coupled with increased investments and preference for India site-location by mega-MNCs as Samsung are initial successes expected to bolster the government’s already bloated complacence and conviction in its top-down style of legislation.

The Cobra Effect is an attempted solution aggravating the problem. It shows incorrect stimulation in economy and politics. As with the colonial pest purges, relying on symptoms and superficial indicators, they only present a partial picture which lead to administrators dwelling in prolonged delusion. The same symptomatic targeting is evident in the Finance Ministry’s new steps. Rather than targeting root causes, these insta-hacks always do more harm than good. Using sheer scale not only tends to distract from the crisis at hand, but creates an illusion of government willpower. If the government is criticised, provoking the government to take GDP growth rate as an end in itself, it shall pursue it to curtail criticism by simply towards repairing the number, and not the economy, directly. These measures, not in the least limited to manipulating output data or changing statistical methods, shall only serve to mislead public opinion. Former Chief Economic Advisor Arvind Subramanian had attracted considerable international attention for exposing India’s GDP overestimation methodology. If his hypothesis was correct, India’s data collection method is inherently flawed, and the GDP growth rate might be well below five per cent.

The recently enforced tax-concessions are speculated to have a negative effect on the level of activity in the economy, which in turn is bound to adversely affect employment and output, something the government is blatantly ignorant of. Prabhat Patnaik, an emeritus economics professor, propounded that as the reduction won’t be financed by a large fiscal deficit, it would eke out its resource supply from the common people, further depriving them of their income and purchasing power. In effect, this would enact an income-shift from the working people to the corporates, which would reduce consumption demand, as former have a higher propensity to consume. He argues that since corporate investment depends on the anticipated expansion in market size, which remains unaffected by rise in post-tax profits, the recently-granted concession will not generate further investment. Thus, the aggregate demand would decline, and in turn feed a lower investment in the next quarter, dragging down the economy.

It is not only India, which is suffering from the income divide, but the worldwide economic recession is a result of the exploitative neo-liberal nexus having its way. Unfortunately, criticism directed at dated macro-parameters is ignorant of more modern, refined and inclusive vital statistics that do not alienate welfare and individual development.

It has often been theorised and practically corroborated, that reforms only work bottom-up, not top-down. Moreover, neglect of the manufacturing sector as well as the informal sector and nonrecognition of its intimate flow to the formal sector, has crippled production. Declining production, especially that of fundamental everyday items affects informal labour employed in these industries. Elementary secondary goods often employ low-income or rural labour and thus their crippling generates mass-unemployment. The government has failed to acknowledge the significance of migratory rural labour.

The ego of the government and its penchant for showy action, prevents it from prudential strategies. Consistency of action, optimisation, and foresight are alien to the BJP’s characteristic chest-thumping, shock-value-reliant policymaking. Here’s a government which wishes to reflect its political will by making split-second, bolt-from-the-blue decisions. Instead of gradual, multi fronted economic reforms, and phasing things and out, the Modi government comes across as pompous, control-freaks who disregard continuity, usurp ongoing life, and disrupt entire systems. Everything from the Demonetisation to the GST, to the scrapping of Article 370 reflects this. Discarding stable, existing systems, with absolutely no regard for continuity has become the most salient trait of the incumbent regime.

Criticism didn’t retard this crisis, and provoked a kneejerk reaction that targeted the symptoms, not the underlying causes. The political ego and denialism of the government, coupled with blame mongering, caused insidious damage. It is perhaps in the psyche of an excessively publicity-conscious PM to make decisions based on publicisability rather than utility. Reformist steps, such as those quietly undertaken by Dr Manmohan Singh, become irrelevant.

The lesson is that critics must never play the same games as their subjects. It is not prudent to counter authoritarianism, corporatism and crony capitalism, by citing macro-indicators. The trade-off is often a bellicose reaction. Dissent must never trade veracity for sensationalism. In the Indian context, it is prudent to stay vigilant if the winds of criticism douse or rouse the unbridled fervour and misplaced confidence of the government. So far, every brick pelted at the upper echelons of the government has only been consolidated into its impenetrable wall. The more bricks pelted at the top, the higher the authoritarian edifice grows. It is thus crucial that the opposition, if genuinely concerned about the state of democracy and the citizens, pluck the fuel from the fire, and not fan it further.