CENTRE for POLICY ANALYSIS

CENTRE for POLICY ANALYSIS

“Social progress can be measured by the social position of the female sex” - Karl Marx

ARTICLE


The India Economy and The Cobra Effect


As the Indian rupee hit a hitherto annual low, exports fell 9.7%, and growth rates slid to a six-year nadir in the first quarter of the financial year, rebuke was widely directed towards the incumbent regime's economic policies, mismanagement and myopia. India's economic crisis attracted concern from the usual fans and critics. The usual agencies were compelled to reassess India's ratings while economists consistently appreciative of Modi's free-market advocacy and assorted policies soured about the Indian economy's state. GDP growth rate fell to a humble 5% in the first quarter of 2019, and cumulative growth in the first quarter was notably diminutive. Growth in eight core industries dropped to 2.1%, the worst in 4 years, from 7.3% a year ago, while the automobile sector hit an 18-year trough. In August, the eight core industries contracted 0.5%. This six-year low came soon after the re-elected government had galloped into power.

Former prime minister and economist Manmohan Singh termed the slowdown "very worrying". Holding the government accountable for "monumental blunders" he contended that demonetisation, which he had characterised at the time as "organised loot and legalised plunder" followed by faulty implementation of the Goods and Services Tax had triggered the slowdown. However, the flurry of criticism, outcry and suggestion from all sides has only seemed to divert the government onto a more dangerous course. It seems opposition has merely deflected the government's blind zeal and conviction, leading it to take misdirected and drastic measures that will derail the situation.

It disregarded Singh's 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 went ahead to slash corporate taxes and swiftly enact bank mergers. These major steps, hurried and ill-timed, are purportedly intended to reinvigorate the economy by reviving competitive investment. This requires us to believe that the higher-than-Asian-average tax rate in India was an important factor behind long-flagging private and public investment. The sudden manoeuvre, the government said, would foster competition and incentivise investment.  

However, many contend otherwise. Economist Jayati Ghosh wrote that India was in the midst of a crisis which in any other country would have been taken as a national emergency. She accused the government of mismanagement, by not acknowledging that the slowdown was affecting demand and living standards, and of deploying supply-side reparations to deal with a demand problem, whereby people do not have employment or income, leading to poor purchasing power. Still the government refuses to acknowledge it that people do not have money to spend and that the lower stratum is struggling even to eke out a fair livelihood. The BJP regime is superfluously directing all its tall endeavours into promoting ease of business, investment and banking environment, instead of recognising that it is demand, and the inability of people to buy or take credit, that is crippled.  

A historic parable is of particular pertinence here. Out of concern for the number of wild cobras in Delhi, the imperial British government had announced a reward program – for dead cobras presented to them. The program enjoyed initial success. Soon after, locals began breeding cobras, slaying them, and proceeding to present them before the government to reap hefty rewards. Realising their blunder the administration repealed the reward program, provoking the cobra breeders to release their stock into the wild, which increased the existing number of wild cobras. A similar occurrence transpired in colonial Vietnam, where the French colonial authorities launched a bounty program, paying rewards per rat killed. In order to claim the bounty, one needed to present the rat's tail. Soon it boiled down to locals severing rats' tails and setting them free back into the sewers, so they would keep breeding and maintain the population. A symptomatic criticism of the incumbent regime along the same lines, has been responded to by measures that have deepened capitalism and worsened the crisis.  

Instead of advocating a bottom-up approach, or at least embracing the social, concrete and individual aspects of the economy, the government is dealing in the abstract. It is actually the intimate correlation between the formal and the informal sector in India, the latter of whom have suffered massively for the past three years, that has brought in the calamity. Programs such as the rural employment guarantee, which has been at 0.2% of GDP for a long time, a sharp deterioration since its value of 0.6% in 2010, need to be revived, in order to cure the malady once and for all, as public purchasing power increments initiate a chain reaction which perpetuates all through the supply-demand continuum. This pulse in purchasing ability provokes multiplier effects, and automatically causes a rise in grassroots production, particularly of essentials. This ripple, in turn, leads to producers employing more labour. To understand this the government needs to look no further than the unprecedented and unanticipated crisis faced by the biscuit industry, particularly India's popular Parle-G, considered one of the most economical food products in the country.  

The Finance Minister declared that the total revenue lost due to the corporate tax cuts would be about $20.5 billion, which has attracted considerable concern regarding the government's ability to meet its fiscal deficit target for 2019-20, particularly when tax collections are already attenuated. S&P Global issued a statement deeming India's step to slash corporate tax rates a "credit negative development" as it would further widen its fiscal deficit rift. The government has also availed an unprecedented surplus transfer of Rs 1.76 trillion from the RBI to bail itself out of the crisis.  The unemployment rate was finally revealed to have reached a 45-year high, and tax collections from the previous fiscal year put an estimated shortfall of Rs 1.67 lakh crore from the revenue expected by the government. None of these steps address the problem of falling demand, and blatantly ignore the causes of unequal wealth distribution. The problem of widening economic rift and financial impairment of the poorer strata fails to merit acknowledgement let alone redressal.  

There has only been shallow criticism from most fragments of an opportunistic opposition, which the government will likely successfully manage as it diverts attention from such deep-rooted aspects of the crisis as income equality, social justice and welfare. Thumping steps such as corporate tax cuts distract attention from underlying causes and flaws in the very foundations of economic policies. They also imperil the supporting buttresses and sophisticated considerate frameworks that hold society in place. By 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 in the crises that befall India in the near future.  

In its abstraction, the Cobra Effect is the occurrence of an attempted solution aggravating the problem, as a type of unintended consequence. As with the colonial pest purges, relying on symptoms and superficial indicators that are taken for granted, although they only present a partial picture, led to administrators dwelling in prolonged delusion, never realising the futility of their efforts. The same symptomatic targeting, misreliance on select, convenient indicators, manipulation, and a feel-good enthusiasm to approach effects head-on, rather than curtail the causes is evident in the Finance Ministry's drastic new steps. Using sheer scale for the sake of shock and awe of the act serves a twofold purpose: it distracts from the crisis at hand, and creates an illusion of government willpower and determination to act. If the government is criticised only by citing the GDP growth rate, such criticism imperils the nation, by provoking a mindless government to take GDP growth rate increase and maintenance as an end in itself.  

 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, or intends. Prabhat Patnaik, emeritus professor of the Centre of Economic Studies and Planning, Jawaharlal Nehru University, wrote that as this 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, all else being the same, reduce consumption demand in the economy, as working people have a higher propensity to consume than the rich, who prefer to keep their extra income partly as undistributed profits, and even when they distribute it, the propensity to consume remains low. Patnaik argues that since corporate investment depends on the anticipated expansion in market size, which remains unaffected by any rise in post-tax profits, the recently-granted concession will be futile in generating any further investment. Thus, aggregate demand would decline, and in turn feed a lower investment in the next quarter, spiralling the economy into doom.  

 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 indiscriminate, myopic leeway. Unfortunately, criticism directed at dated macro parameters is ignorant of more modern, refined and inclusive vital statistics that do not alienate welfare or individual development.  

As far as the salient character of the Indian economy is concerned, it has time and again been theorized and practically corroborated that reforms only work bottom up, not top down. Moreover, neglect of the labour-intensive nature of the manufacturing sector as well as consideration towards 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 the vast swathes of informal labour employed in these industries. Elementary secondary goods often employ low-income or rural labour and thus crippling of their manufacturing generates mass-unemployment, debasing the multitude of local multiplier effects that result from it. The government has failed to acknowledge the significance of migratory rural labour.  

The ego on display of the government and its penchant for showy action, prevents it from partaking in prudential, well-thought, long-term, steady and patient strategies that only bear fruit after a while. Such is not the chestbeating, thumping, shock-value reliant policymaking of the BJP government. Here is a government which wishes to bring inflections in public opinion and reflect its political will by making split-second, bolt-from-the-blue decisions with little regard for continuity, acclimatisation, convenience and risk of alienation from the existent framework. Everything from demonetisation to the GST, and implementation of the draconian UAPA Act to the scrapping of Article 370 is reflective of this tendency.  

The lesson that needs to be learnt is that the critic must never play the same games as the subject of their rebuke and chastisement, and then try to claim the higher moral or intellectual ground. It is not prudent to counter authoritarianism, corporatism and crony capitalism by citing macro indicators, lest a top-down approach bolsters them at further expense to the working classes. Dissent must never trade cold, factual veracity for the sake of sensationalism, lest the dissenters become the very demons they seek to rout. So far, every brick pelted at the upper echelons of the looming, authoritarian, government has only consolidated its impenetrable wall. The more bricks we hurl at the top, the higher the authoritarian edifice grows.  

It is thus crucial that the opposition, if it is genuinely and selflessly concerned about the state of democracy and the people of the country, pluck out the fuel from the grassroots of the fire, and not fan it further.  

The author is a columnist, journalist, writer and amateur researcher, having previously written in over 30 newspapers in 18 countries.    

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