Pc's Economics Confuses All

Biswadeb Chatterjee
The Statesman, August 10

On the eve of the completion of three years of the UPA government at the Centre, finance minister Mr P Chidambaram made a surprising statement in the Rajya Sabha that the present inflation is due to the high growth rate of the economy. He also said that mild inflation during the regime of the NDA government was due to low growth at that time. In this he has not only related inflation to growth rate in a way that growth induces inflation, but has also thrown a policy dilemma before the nation that if it wants a high growth rate, it has to accept a high inflation.

Confusion

The FM has confused people, particularly the students of economics at the school and college levels who are taught the opposite that growth is related to inflation or inflation induces growth. In fact, when the price level goes on rising, the current produce is valued more to cause a high growth rate. So this growth is not real, that is, not in terms of economic expansion or productivity increase, but in terms of monetary expansion. In this sense, our present growth is mostly inflation-induced and so is hollow. Thus, a country with a high price level may achieve a high growth rate even without real progress of the economy. This is nothing but nominal or current price growth rate. Since increased money supply is the prime reason of inflation, the FM has admitted that he has either failed to control money supply or has failed to make its productive use. He has thus cautioned the UPA leaders, albeit indirectly, not to cheer much on the present 9 per cent growth, because, when adjusted to 6 per cent inflation, it becomes only 3 per cent which is the real growth rate. This means that economic expansion and productivity increase of our economy is still sluggish if considered without the inflationary effect. This low constant price growth should be the concern of the government.

By presenting this strange relationship that growth causes inflation, the FM has virtually said that since he is determined to achieve a high growth of the economy, inflation control is beyond his reach. This did not make the Left leaders angry who were terribly vocal to criticise 3 to 3.5 per cent inflation during the NDA regime.

Interestingly, then the economy, with 7 to 7.5 per cent nominal growth, could register a higher real growth. Rather, the Left leaders sat patiently to hear the sermon of the friendly FM that people have to accept inflation as the country embarks on achieving a high growth rate.

Whose growth

Then the question arises for whom this growth is. In other words, who are the beneficiaries of this inflated growth? Inflation hits the poor most; they normally lose real income but cannot find ways to adjust it through rising wage income as is the case with the salaried people of the organised sector. People with a flexible income can also suitably adjust to price rise. The vast 90 per cent of the workers of the unorganised sector are the worst sufferers. Communist parties can cry for them if there is a government not of their choice. Otherwise, they are mute spectators.

The FM has repeatedly said, in the budget speech as well as in several meetings elsewhere, that the inflation is due to supply side constraint as the farm sector has performed lowly as compared to the manufacturing and service sectors. Presently, the farm sector grows by a mere 2 per cent a year, when the respective rates for the other two sectors are 8 per cent and 12 per cent. In fact, price rise of essential farm products like cereals, pulses, edible oil and spices account for 70 per cent of the growing consumer price index which also affect the middle-class people, apart from the poor, who spend most of their income on them. This, on the other hand, shrinks the demand for manufacturing goods as well as the services. So the question is who gains from inflation. Apparently, 10 per cent of the workers in the organised sector, as well as the profiteering class, can have inflation adjusted income and so comprise the creamy layer of society. They can now avail of air journey instead of the time consuming trains, tour abroad on holidays instead of traveling within and send their children to sophisticated schools, if possible abroad, instead of the government-run ones. The present growth is for them. So, despite several pledges by the FM and the Prime Minister, the growth is not inclusive as it fails to percolate to reach the bottom of society. Such socially non-inclusive growth only widens income disparity by persisting poverty.

The FM has thrown in a policy dilemma between inflation and growth rather than the usual dilemma between inflation and unemployment which a country may face during achieving growth. All economic theories have pinpointed that money supply will be inflationary if productivity is not increased. In this situation, more money supply will not be absorbed in output growth and so money wage will increase to curtail employment.

This is not our situation. We have huge unemployed resources, including manpower, but still are facing inflation. The employment scenario is bleak. The continuously falling employment elasticity in the manufacturing sector since the 1970’s coupled with inadequate growth of the small-scale industrial units and mostly non-viable farm activities on small holdings have resulted in a dismal job growth.

So, our real dilemma is between growth and employment. It should be a matter of serious concern that a 9 per cent annual economic growth can yield only 2.48 per cent new employment. But since labour force grows by 2.54 per cent, unemployment rises by 3.06 per cent each year. Despite the huge growth, our unemployment rate exceeds the employment rate in a year. This has accumulated massive unemployment. Taking all types together, open, casual and disguised, it would be 15 crore, apart from underemployment.

Both our farm and manufacturing sectors are performing below expectations while service and construction activities have buoyant progress. But most of the service sector jobs are casual, while construction still falls under the informal sector preventing its workers getting good regular wages. All these have culminated in a jobless growth. Despite all this, demand is increasing in the economy to boost prices and that is the fallacy.

Failed policy

This demand is money-led as our planners are pouring in huge amounts of money each year mainly to meet unproductive needs. Administration, defence, subsidy and debt-servicing account for more than 70 per cent of the annual budgetary allocation of the centre. If budgets of the state governments are considered, unproductive expenditure would account for more than 90 per cent. As per the latest budget estimate, our national government’s total debt requirement has touched Rs 8 lakh crore. If the same for state governments are added, it would be a whopping Rs 30 lakh crore.

In this respect, there is no difference between the Left, Right or Centre. A Left government ruling West Bengal for 30 years at a stretch has landed in a total public borrowing of Rs 1.3 lakh crore. Uttar Pradesh, the biggest state, follows with Rs 1 lakh crore.

The Centre has tried to discipline itself and the states in fiscal matters by introducing the FRBM Act but only to limit necessary revenue expenditures. In fact, the state governments have kept idle Rs 45,000 crore at the RBI due for them as Central grant. This will only jeopardise growth potential. This may be supplemented by private sector investment given the infrastructure facilities which are still in a shambles.

There is no alternative but to put emphasis on agricultural prosperity through increased public investment to realise growth potential without inflation. Although it has a declining contribution in the national economy, it still employs 60 per cent of the population. It will raise both demand and supply of farm products to eliminate shortage and facilitate real growth. Each year it receives increased budgetary allocation, but how much does actually reach the villages and how much is properly utilised is anybody’s guess. The result is diverse growth in the states. The country had a record farm production of 220 million tons in 1998 but never achieved the feat again. Since then it has been hovering around 210 million tons. The government’s policy to import food rather than overhauling it through modernisation is pushing the farmers to further distress - to even committing suicide.

The proposed acquisition of lakhs of acres of farmlands for constructing SEZs will pauperise the farmers further. We have an agricultural minister who is now more interested in cricket administration, not only of India only but also of the global body.

We do not hear anything from him to remove the farmers’ plight or check the continuous rise in food price indices which is affecting all. Like agriculture, our cricket is in a pitiable condition, both under him. This only confirms his inefficiency. Both need immediate recovery, but agriculture should be his first priority as more shortage of farm production will induce more inflation to make real growth only illusory.

(The author is the Reader of Economics, Durgapur Government College)