While the Rajya Sabha was discussing the Modi government reneging on its poll promises of bringing back all the black money illegally stashed in tax havens abroad (“we shall bring back every paise of black money from abroad within 100 days”, “every Indian will be richer by Rs 15 lakh” etc, etc.), the corridors of Parliament were abuzz with another discussion: Forget bringing Indian black money back, bring back our prime minister from abroad to attend this session.
While a structured discussion on the state of our economy will hopefully take place in this session of Parliament, there are widespread concerns regarding the health of our economic fundamentals. Bewildering contradictory headlines hog the business pages of our newspapers. On the one hand, there is jubilation over our share market capping the benchmark of Rs 100 trillion and, on the other hand, GDP growth has dropped in the second quarter of the current fiscal year.
Media reports that, ‘The overall market value of companies listed on the Bombay Stock Exchange on Friday (November 28) hit a historic milestone’. This is being interpreted as the result of the ‘investor-friendly’ euphoria under this Modi government. Such buoyant investor sentiment, however, evaporates when it hits ground reality. In the second quarter (July-September), the GDP growth rate slipped to 5.3% from 5.7% in the first quarter (April-June). The Modi government was sworn in on May 26.
Despite India Inc acting as the Modi government’s ‘cheerleaders’, the manufacturing sector grew by 0.1% this quarter against the previous 3.5% growth. Further worrisome is the news that the CAG released showing that the Modi government has, in the first seven months, already exhausted 89.6% of its fiscal deficit target for the year ending March 31, 2015. This virtually exhausts the government’s capacity to undertake any further measures to boost private investment.
This is happening when the international prices of crude oil collapsed from $115 per barrel in June-July to $72. Every $1 per barrel decline should normally reduce our current account deficit (CAD — difference between India’s imports and exports) by about $1 billion. The current decline of $40 per barrel should have significantly lowered both our fiscal and current account deficits. Despite this fall in international prices, there is no corresponding lowering of domestic prices.
Rather than providing the much-needed relief to the people as this reduction eases the pressures on the fiscal consolidation front, it is being used to push further financial liberalisation reforms and simultaneously curtail labour rights. The consequent reduction in the fuel subsidies (estimated at Rs 63,427 crore, calculating crude oil price at $110 per barrel and a rupee at 61 per dollar) must be used for improving people’s livelihood standards rather than for reducing fiscal deficit.
Fuel price inflation, which hovered above 10% till June, fell to zero in October sharply lowering the overall inflation rate. This, in turn, is being used to put pressure on the RBI to lower the costs of borrowing for India Inc. Availability of more capital at cheaper costs, it is claimed, would boost private investment.
Already space for private investments is growing with this government informing the Lok Sabha that by its decision to reduce the government’s stake in public sector banks to 52%, Rs 89,210 crore would be available for private capital. Such privatisation of public resources is on the cards in all sectors along with increasing FDI limits.
Despite all these measures, growth in gross capital formation, which represents investment demand in the economy, slowed significantly from 11.24% of the GDP in the first quarter to 4.35% in the second. Growth in private consumption (by the people) decelerated to 10.92% compared to 12.03%. Thus, clearly, it is the fall in domestic demand that is leading to a contraction of investment.
What is required is to expand domestic demand by enlarging people’s purchasing power rather than making available greater amounts with lower costs of capital to India Inc. The latter will only lead to a sharp surge in speculative profit making, which, among others, explains the sensex boom. Further, the curbs introduced by the UPA 2 government in August 2013 to rein in surging gold imports are being reversed. Such curbs had ensured a drop in the country’s CAD from 5.38% of GDP in December 2012 to 1.7% this June. A reversal now would only feed speculative profits. This can be seen in gold hoarding, real estate and share markets.
Yet, for India Inc, ‘yeh dil maange more’! Across the board privatisation and permission for FDI to access Indian resources and markets for its profit maximisation at the expense of the Indian people’s livelihood are like cutting the branch on which we are sitting.
The route to put our economy back on a healthy high-growth trajectory lies in expanding domestic demand by generating greater employment through public investments to build our much-needed economic and social infrastructure. Favourable international oil prices should be used instead for releasing capital for such public investments.
Profit making through ‘speculative bubbles’ is dangerous. Keynes once warned that when this bubble grows large enough to cover the whole lake, it inevitably bursts, throwing up all the muck from the bottom.
(Sitaram Yechury is CPI(M) Politburo member and Rajya Sabha MP. The views expressed by the author are personal.)