Flaw in the framework

The Indian economy has been recovering in 2021-22 with GDP growth figures standing at 13.7 per cent for H1 compared to 15.9 per cent in the previous year. Overall GDP is also estimated to grow at 9 per cent in FY 21. It is likely that we will reach the pre-pandemic figures soon but growth in real terms may still be elusive. Working class has seen a reduction in wages. K-shaped divergence between the formal and the informal sectors of the economy is visible. Kaushik Basu of Cornell University argues that while the aggregate economy is growing, the bottom half of the country is facing recession. It is a harsh truth. But, why so?

Root cause analysis

This is because we have become a devout follower of neoliberal economic policies over the past few decades.

Based on the principles of 'liberalization, privatization and globalization', neoliberalism reflects a change in the nature of state intervention for the benefit of international and domestic finance capital. It sets an imperative for free flow of capital, goods and services, which would impoverish the marginalised lot. Using their huge reserves, MNCs under-price products and succeed in occupying the market. Having done so, they start raising prices gradually to increase their income at the cost of the working class, forgetting that would lead to a fall in aggregate demand. The State, rather than generating demand, appears to neglect the needs of the working class and offers them 'Universal Basic Income' in alms for sustenance.

The essence of the above argument is reflected in privatization of essential services, dismantling of price support schemes for peasantry and cutbacks in public investment for keeping fiscal deficit within 3 per cent of GDP. Furthermore, one could see income taxes squeezing the real income at the lower strata while those at the upper end, apart from garnering high surpluses, also enjoy a cap in the highest level of income tax.

Notably, with the opening up of the economy, there was a genuine shift of activities from the North to the South to meet the global demands through leveraging

lower Southern wages. While China has been the major beneficiary in manufacturing activities, India gained big from the shift in the service sector.

However, these technology-intensive jobs fall far behind uplifting the laborers in the Third World, whose wages remain tied to a subsistence level. A process of impoverishment of petty producers starts in both stock and flow terms. Subsidized inputs are done away with, public procurement at remunerative prices is eliminated as unwarranted interference in the market and public extension services are curtailed. As a result, peasants and small producers are forced to enter into a direct competition with big MNCs — to whom they ultimately lose their lands at throwaway prices. The result is an overflowing army of unattended job seekers.

While the real wages don't increase, the vector of labor productivity keeps increasing everywhere on account of removal of restrictions on the pace of technological cum structural changes. As an impact, income distribution shifts from wages to surplus within each country and the capitalists keep growing richer. Neoliberalism, thus, propels inequality across countries — a fact that has been noted by many writers, including my teacher Prabhat Patnaik. Additionally, since the propensity to consume out of wages is higher than that out of surpluses, a planned tendency towards demand deficiency is created — leading to overproduction globally.

So, would the State intervene to raise aggregate demand under Keynesian economics? No, kowtowing to the demands of international capital, it wouldn't do so. Government's intervention may erode the real rate of return on financial assets, and divert demand towards necessities that the poor consume. State would continue to help the rich invest in booming stock markets and gold even while the bottom 50 per cent of the population faces deprivation. If the state dared to intervene, there would be a flight of finance from the concerned economy, creating a financial crisis and exchange rate fall. Notably, nation states in the past two years had run higher fiscal deficits to boost demand to overcome the pandemic-driven recession. The outcome has been inflation across the world.

Neoliberalism has brought the world economy into a crisis. None of the political stakeholders have the courage to free their respective economies. The reason is that they themselves are the beneficiaries in some way or the other. In this way, international finance capital continues to govern global policymaking.

India: an epitome of neoliberalism

India has been an ardent follower of neoliberalism, reflecting all the symptoms including demand deficiency, fiscal compression, unemployment and income inequality.

Demand deficiency

The country has been witnessing a demand deficiency since 2017-18, alongside falling consumption, low Investment, and stagnating public expenditure. This fall in aggregate demand is reflected in declining real GDP, and rising unemployment and income inequality.

⁕ Falling Private Consumption: This is a result of the squeeze in real wages of workers and rising surpluses of the capitalists whose marginal propensity to consume is much lesser than that of wage earners.

⁕ Falling Private Investment: No corporation would make an iota of investment when it does not expect demand to rise. "In the absence of exogenous stimuli, it would move towards a state of

simple reproduction, and remain stuck there" (Prabhat & Utsa Patnaik in Capital & Imperialism). The absence of exogenous stimuli is shown in the fiscal stagnation figures in Table 2.

⁕ Fiscal stagnation: If we look at the trend, a flat rate of around 12 per cent of GDP is maintained with the exception of 2020. There is no concerted effort to spend towards boosting aggregate demand.

Another indicator for assessing the fiscal stance of the Central government is reflected in the trend of fiscal deficit shown in Table 4.

Restricted fiscal deficit

The 2.7 per cent compression in a single year from 2020 to 2021 is very high and makes the unequal recovery lose its momentum.

Impact of demand deficiency

Demand deficiency leads to a fall in the GDP and rise in the unemployment levels.

⁕ Falling GDP: Please note that growth of 9 per cent on a contraction of 7.3 per cent is tantamount to a 1 per cent growth over 2 years. Overall, the GDP is on a downward trend from 2017 and the government fails to understand the need for continuous pump-priming of the economy.

⁕ Rising unemployment: The growth in unemployment has taken a sharp upturn from 2020, the year Covid set in.

Neoliberalism and income inequality

Oxfam report, 'Inequality Kills' — released in January 2022 — points out that India is among the most unequal countries in the world.

Key findings of the report include:

⁕ Income of 84 per cent

of households in the country declined in 2021 but the number of Indian billionaires grew from 102 to 142.

⁕ India's healthcare budget saw a 10 per cent decline from RE of 2020-21.

⁕ There was a 6 per cent cut in allocation for education, while the budgetary allocation for social security schemes declined from 1.5 per cent of the total Union budget to 0.6 per cent.

⁕ In 2021, the collective wealth of India's 100 richest people hit a record high of Rs 57.3 lakh crore (USD 775 billion). In the same year, the share of the bottom 50 per cent of the population in national wealth was a mere 6 per cent.

⁕ India has the third highest number of billionaires in the world, just behind China and the United States.

Conclusion

The primary need of the hour is: a) direct cash transfers to poor b) spending on social services like education and healthcare c) income tax benefits to the lower middle class who really spend to generate demand and d) infrastructure investment by the government to boost demand and ease the supply side. Else depending upon PLI for economic recovery would remain an MoU on paper only and the economy would remain at a simple stage of reproduction and a low-level equilibrium trap.

Views expressed are personal