BEYOND ARITHMETIC - The Indian economy has reached a topsy-turvy situation

Ashok Mitra
The Telegraph, 23 July

Arithmetic can be enlightening. Sometimes it can be so enlightening as to brighten the daylights out of us. Take the case of a country close to one-fifth of whose people are enjoying a rate of income growth anywhere between 30 and 40 per cent per annum. At the other end, the rest of the population experiences a niggardly rate of growth of income of around 1 to 2 per cent. Arithmetic, however, is arithmetic; despite the abysmally poor circumstances of the nation’s preponderant majority, aggregate national income will still be growing at a rate which is plus-minus 10 per cent. The absurdity of the situation would not disturb either the statisticians or the nation’s rulers in case they are sufficiently unfeeling. There would be international headlines on the country’s attaining such a high rate of growth, perhaps the highest in the world.

The instance discussed above is not altogether hypothetical or imaginary. Something similar to it is taking place in the Indian economy right at this moment. Thanks to the explosion of activities in technology-related service industries, as well as in other such services as banking, insurance, tourism and entertainments, combined with a high tide of growth over an entire range of luxury consumer industries, a narrow section of the population is benefiting from an income growth at a rate consistently around 30 per cent per annum, or even more. While all this is taking place, the farm sector, providing livelihood to nearly two-thirds of the country’s working force, is facing one crisis after another. Agricultural commodities have been hit hard by both depressed world prices and a low rate of growth; in a number of states, suicide among the farming community is ominously high. What is equally disconcerting, given the exceedingly capital-intensive nature of the fast-growing services and luxury goods-producing industries, opportunities of new employment in these activities are also getting increasingly narrowed.

The Indian economic system has thus reached a topsy-turvy situation: agriculture is down in the dumps, unemployment is rife everywhere, but for those whose obsession is to concentrate on national income-growth statistics, such developments are of little consequence: why worry, it is boom time in the services and luxury goods sectors, and overall growth of national income is unimpaired. As if to assuage the collective conscience — in case there is such a thing — the authorities have announced an additional allotment of Rs 25,000 crore for alleviating conditions in the farm sector; this allocation, it is hoped, will raise the rate of growth of agricultural output to 4 per cent per annum. Even if that hope is belied, the powers-that-be are unlikely to lose much sleep: are we not about to catch up with China as far as GDP growth is concerned?

Some other questions will crowd in though. Is such an economic arrangement, characterized by an inordinately high rate of growth, confined to a narrow section, while the rest of the nation is accursed with near-stagnation, sustainable over the long, or even intermediate, run? Will not it come a cropper because of what Marxists call “the realization problem”, or Keynesians describe as “the crisis of under-consumption”? If the output of goods and services piling up in a segregated corner of the economy is not fully matched by demand for such goods and services, would not the process of growth break down? Put in another way, were the enormously high income appropriated by a relatively insignificant minority of the nation not equalled by the total amount they spend in the form of consumption and investment, would not the system get disequilibrated? How come such a denouement has not already overtaken the Indian economy?

True, it is a near-miracle. But miracles do take place now and then. The top deciles of the Indian population — the creamy layer — have, for the present, succeeded to spend the income they are earning, and dispose of the supply of goods and services they are producing. It is as if the economy has been divided into two distinct compartments; the vastly richer compartment is carrying on on its own without bothering about the state of affairs in the other compartment. The fabulous earnings of those engaged in the IT-related services and similar other activities are, in part, getting spent on luxury consumer goods and services, which are either produced at home or imported from overseas; the residual part of their income is being ploughed back into investments in the same kind of activities they are associated with.

The export boom in the IT-related industries is, for example, being matched by a corresponding boom in the import of petroleum products mostly for the use of automobiles choking the streets of the big cities. Luxury consumption is being complemented by rising investment in the fast-expanding, capital-intensive industries and services financed by the ploughback of rising profits. Ploughbacks of this nature are necessary because of the heavy demand for the outputs of these sectors in the form of outsourcing from firms in the Western countries and Japan. Whatever goods and services are produced in this compartment of the economy is being used up without much hitch, thanks to the high levels of consumption, investment and exports.

Describing such material reality in verbal terms can pose a challenge. Some economists will describe the on-going phenomenon as an instance of exclusive growth, since roughly four-fifths of the national population are excluded from its benefits. On the other hand, there may well be a tribe of linguists and grammarians who will be inclined to consider this as an illustration of inclusive growth. To sustain the process of growth, exports to and imports from other countries are, of course, necessary. That caveat apart, growth in this department is completely self-propelled, the wretched hundreds of millions belonging to the lower deciles are not at all called for to sustain the development process. This can be a cause for satisfaction for the nation’s affluent: they can develop and prosper without any dependence on the poorer classes, they are self-sufficient, they have established the point that one part of the economy can, on its own, continue to flourish. Barring some exports and imports, theirs is, in that sense, a closed, ‘inclusive’ system.

So far, someone may say, so good. Problems however can crop up. The applecart could overturn if exports suddenly fall off on account of decisions taken in foreign countries resulting in a dramatic shrinkage in outsourcing. At least one-fifth of the American senators are already up in arms against outsourcing which, they believe, is depriving proficient American technologists of job opportunities, which would otherwise have come their way. Difficulties could also arise if the rate of obsolescence of equipment in the capital-intensive services and industries slows down perceptibly. An equally disturbing development is conceivable in case those constituting the nation’s top deciles start feeling disenchanted with the mountains of durable and non-durable luxury consumer goods they have got in the habit of accumulating, and consequently stop visiting the market, or visit less frequently and with lesser intensity.

The final question concerning the sustainability of this two-compartment economic arrangement has to do with the character of the polity. Is it, in political terms, a feasible proposition that, for years on end, one-fifth or thereabouts of the nation will continue to enjoy, undisturbed, an annual rate of growth equal to, or exceeding, 30 per cent while the overwhelming majority have a shoestring existence? Even if all other considerations are left out, what is the guarantee that the nation’s fortunate few will not be victims of that deadly sin human beings are prone to, envy?

Who knows, we may then have to prepare ourselves for another kind of denouement. Envy often instigates that other deadly sin, avarice. The combination of the two could exert a strong exogenous influence on the beautiful model of record-setting rates of GDP growth; social forces, furiously at work, will make nonsense of arithmetic.