Economy on Downturn

by R.Mohan

Till recently, the protagonists of new liberalism were saying that Indian economy is the fastest growing one among world economies and we have surpassed our not so friendly neighbour China, whose economy had entered a slowdown phase. Our economy since 1991, has thrown away the formal garb of socialistic pattern and has been on the high road of Liberalisation,Globalisation and Privatisation (LPG) . Except for a cyclical downturn during second half of the 1990s, our economy has grown at 6-9 percent in real terms. When global recession struck in 2008, the UPA 2 government, with an experienced Finance Minister, Pranab Mukherjee,( presently our President), took a bold decision to increase spending ,notwithstanding legislation on deficit targeting, to ward off a disastrous slowdown.

In 2014, when the NDA took over, it got an economy which was on a reasonable growth rate of more than 6-7 percent. Here, we cannot gloss over the fact that since the early 2000s, our agrarian sector has been in crisis and income inequality has been on the rise. The share of profits of enterprises has increased sharply vis-a-vis the wage share. This is a direct reflection of increasing misery of a large number of wage labourers amidst a high growth rate in production of goods and services in the economy.( This aspect has been clearly brought out in a study. By Ishan Anand and Anjana Thampi, two research scholars in JNU, in an article titled Recent Trends in Wealth Inequality in India, published in Economic and Political Weekly, December 10, 2016). Obviously, this has not got the deserved attention in the mainstream economic discourse, where there have been loud cries for faster reforms and more labour market flexibility.

It is in this political economic context that the campaign against corruption and black money caught the imagination of the aspirational middle classes, when clouds of mega corruption scandals were gathering in the run up to 2014 elections. Mid way through the tenure, the present government was rather compelled to do something. It had to be at least partly in action and not in rhetoric only. It is this compelling partisan need to keep the caravan moving, which is behind this ill advised sudden demonetisation. A more thought out decision would have been wiser, but what was needed was a dramatic facade and rattle of rhetoric that a Big Bang action is being taken. Emotional discourses following this clearly show that the impact has been palpably politically costly.

To summarise  1. The demonetisation of 86 percent of currency in circulation threw normal economic and banking activity out of gear. 2. Productive time of the poor was spent in queues for a few notes. 3. For the first time in our recorded history, people had money but no cash. In short, there was official currency rationing. The legality and constitutionality of these are subject matter before the Apex Court. 4. Our reasonably growing, yet fragile economy, largely dependent upon consumption expenditure, is bound to contract resulting in loss of jobs in the informal sector, which caters to the employment needs of 92 percent of the workforce. 5. Elementary monetary economics, tells us that when money circulation and its velocity are curtailed, output would shrink and economic growth would fall. 6. State governments which depend mainly on consumption taxes are going to face more serious fiscal crisis than the Centre, which would affect social sector spending in the second round. 7. The fact that the system was ill prepared to handle this is evident from the huge 2000 rupee notes being hoarded by currency black. In short, the policy induced note shortage has hamstrung a reasonably growing economy forcing it to contract, with no visible impact on black money stored in foreign and domestic assets other than cash,

To touch the tip of the iceberg, the attempt has been made to dredge out the entire sea water. How history would record this exercise is anybodys guess. In the immediate run, we are going to have an economic slowdown, which has been created by this policy and the second round contraction is likely to linger on for more time than predicted by experts. Kerala, having a remittance induced consumption driven economic growth, is in for a slower phase of growth and less future revenue receipts. With expenditure burden fixed and committed, the State government has an unenviable task ahead.