Purchasing power rise a must to boost economy

Arvind Subramaniam has no doubt correctly spoken of the downturn in the Indian economy, but he has not gone deeper and gone into the cause and remedy.

Purchasing power rise a must to boost economy

(Representational Image: iStock)

The recent research paper published by the former Chief Economic Adviser to the Government of India, Arvind Subramaniam, now at Harvard University, has created quite a stir in government circles.

In his paper Dr Subramaniam has said that the Indian economy did not grow at 7 per cent between 2011-12 and 2016-17 as earlier claimed by the Indian National Statistical Office but at 3.5-5.5 per cent, and this was due to relying on wrong data sources and methodology.

He analysed data on 17 different economic indicators e.g. industrial production, exports and imports, tourism, auto sales, airline passenger traffic, electricity and petrol consumption, etc and concluded, “The entire methodology for GDP estimation must be revisited by an independent task force “.


Predictably, the Ministry of Statistics and Programme Implementation, Government of India, has rejected the assertions of Dr Subramaniam. However, without going into the details of this controversy, there is no doubt that the Indian economy is in the doldrums. Almost every businessman I spoke to said that business is bad.

Consider the facts

Even according to official figures (and these may not be accurate, as Dr Subramaniam has mentioned) GDP declined rapidly from 8.2 per cent in the quarter April-June 2018 to 5.8 per cent in April-June 2019. In recent years one has not seen such a decline in four successive quarters. Manufacturing has been particularly hard hit.

According to the HSBC Securities Chief Economist for India, about 70 per cent of the 40 odd indicators for growth which it tracks like automobile sales and steel/cement production, have weakened in recent quarters. Car sales were down 16 per cent in April 2019, and 21 per cent in May, the worst decline in eight years. The real estate sector is in a slump.

Large swabs of private investment in infrastructure have turned NPA (Non Performing Assets), as last year’s Reserve Bank of India report indicates. In the power sector, 52,000 MW of assets are deeply loan-stressed. Government-owned State Electricity Boards (SEB), which are power generators, owe Rs 38,000 crore, a 60 per cent increase since last year. In addition, they owe another Rs 17,000 crore as regulatory dues, making a total debt of Rs 55,000 crore.

In the road sector much of the investment is stuck, with little hope of recovery.

In the oil sector, India imports 84 per cent of its oil requirement from abroad, much of it from Iran whose oil price is cheaper than from other countries. But with President Trump’s abolition of waiver to India on sanctions on Iranian oil from May 1, oil prices have risen in India, affecting prices of everything.

Big infrastructure companies in power, roads, telecom, aviation etc. have a debt of over Rs 3 lac crore.

Domestic consumption has tanked sharply. Bellwether sectors like two-wheeler manufacturing companies showed decline of 20-40 per cent in sales in March 2019. Sales of Hindustan Lever are flat. Maruti Suzuki cut its production by 38 per cent in the three months starting February 2019. Air passenger traffic is at a record 5- year low.

Among the worst hit are car and two-wheeler sales. Stockyards and dealerships are chock full of unsold cars and two wheelers. According to the Economic Times, current inventories are 500,000 cars and 3 million two-wheelers. Seven of the top auto makers have shut down their factories, and many car showrooms across the country have closed down, while others like Mahindra and Maruti Suzuki are either observing no production days, or about to observe them.

Investors want safety of their investments. But a large part of private investment in India has been laid to waste. A large number of plants do not have gas, and many have not got a power purchase agreement (PPA) since the cash-strapped SEBs are reluctant to sign them. Without a PPA the investment is dead.

Major disruptions like demonetisation and GST have made businessmen wary before investing.

President Trump has written to Congress that India will lose preferential trade terms with US under the GSP programme, saying India had failed to assure the US it would provide equitable and reasonable access to Indian markets.

Recently Rajiv Kumar, Vice Chairman of Niti Ayog, the chief economic planning body of the Government of India (whose Chairman is the Prime Minister ), said that there will be a ‘Big Bang’ in the Indian economy within the next 100 days to revive it, and he mentioned privatising 46 public sector undertakings, amending the labour laws and having a land bank for industries.

All these are sound gimmicks. Who will buy these sick PSUs ? Last year an attempt was made to sell 76 per cent equity of Air India but there was not a single bid. Job security to workers is already almost non-existent due to the widespread contract employment system which permits ‘hire and fire’, so what will amendment to the labour laws achieve? And where will one get land except by dispossessing poor farmers?

Arvind Subramaniam has no doubt correctly spoken of the downturn in the Indian economy, but he has not gone deeper and gone into the cause and remedy. In my opinion the cause is increased production but lack of corresponding increase in the purchasing power of the Indian masses.

There is no difficulty in increasing production in India since we have a huge pool of engineers, technicians, scientists and managers (Indian IT engineers are largely manning Silicon Valley in California and Indian Professors are in Science, Engineering, and Maths departments of many Western Universities), and we have immense natural resources.

But what is produced has to be sold, and how can it be sold when our people are too poor to buy? So how then can the purchasing power of our masses be raised? This is the cardinal question which must be solved if our economy is to revive. In the Soviet Union industrialisation on a large scale began in 1928 when the first 5 Year Plan was adopted.

The broad methodology which was then adopted was this: prices and wages were fixed by the government, and every 2 years or so prices of most commodities (food, clothes, etc ) were reduced by 5-10 per cent (and sometimes wages raised by 5-10 per cent). The result was that by state action (not laissez faire) the purchasing power of workers was raised (since wage is relative to the price index).

So even with the same wages the worker could now buy more goods. In this way the domestic market steadily expanded. Simultaneously, production was stepped up, and the increased goods could be absorbed in the domestic market. Thus the Soviet economy rapidly grew after 1928 with full employment, at a time when the Great Depression (following the Wall Street Slump of 1929) resulted in huge decline in production and massive unemployment in the Western countries like USA, UK, Germany and France.

Here it may be mentioned that we must mainly rely on our domestic market if we want stability, because over-reliance on foreign markets is often precarious, as it may be cut off by another power, or there may be a recession in the foreign country.

Today there is a world wide recession, and we will find it difficult to compete with the Chinese and others in foreign markets. On the other hand, we have a huge population of 132 (or 135) crore, and if our people’s purchasing power is raised our industries will have a huge domestic market for the goods they produce.

I am not saying India must follow the Soviet model. We can find out any other way of increasing the purchasing power of our masses. But unless we do that the economic situation will not improve, and in fact will in all probability get worse.

(The writer is a retired Judge of the Supreme Court of India)