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Subaltern Economics

The RBI-appointed KV Kamath Committee, which worked out the financial parameters for loan restructuring, has concluded that 72 per cent of banking sector debt worth Rs 37.72 lakh crore was under stress. Further, according to the Committee, the coronavirus pandemic is not solely responsible for the stressed loans; Rs 23.71 lakh crore, or 45 per cent of banking sector debt, was already under stress


Economics, for Indians, is a branch of study that seldom engages itself with the concerns of the poor. While the Government consistently focuses on building the biggest and the best in everything, the poor are supposed to remain satisfied with their subsidised rice and MNREGA payments. The slightly better off, the farmer, the small businessman and the casual worker are supposed to let the Government and big business think for them.

Therefore, the sharp public reaction to the cut in interest rates on small savings, with even the pink papers joining in the criticism, caught the Government unawares. Probably the public, which took demonetisation in its stride is now hesitant about its savings with the Government.

The Finance Minister rescinded the rate-cut order before the ink was barely dry, blaming ‘oversight’ for the faux pas. Anyone who is familiar with Government working would know that all important proposals travel from the desk of the Desk Officer to the room of the Secretary, with everyone in between vetting the proposal. So, to blame ‘oversight’ for the rate cut order is disingenuous; more probably, the Government had a brief spell of amnesia about the ongoing elections. Those who claim to be in the know predict that the rate cut order would now be passed by the Government at the end of the first quarter, when the elections are over.

The motivation for reducing the rate of interest could be the humongous fiscal deficit of financial year 2020-21, approximately Rs.18.5 lakh crore i.e., 9.5 per cent of the GDP –about double of the actual fiscal deficit of financial year 2019-20. Consequently, the interest payable by the Government on its borrowings worked out to more than Rs.6.92 lakh crore for financial year 2020-21. The current year would bring no relief; according to Budget Estimates, the fiscal deficit for financial year 2021-22 is pegged at Rs.15.06 lakh crore i.e., 6.8 per cent of GDP, and the interest payable on borrowings at Rs.8.10 lakh crore, which would amount to 23 per cent of total expenditure and 41 per cent of the expected revenue receipts. Ergo, the ‘brilliant’ plan of reducing interest rates was probably conceived to reduce the Government’s interest liability.

According to another school of thought, the Government wanted to reduce the rate of interest on small savings to bring down interest rates prevailing in the economy. The Government assumed that lower interest rates in the economy would lead to capital being available to businesses at a lower cost – a proposition which is not borne out by experience. The Repo Rate – the rate at which the central bank lends short-term funds to the commercial banks has declined consistently from 8 per cent in January 2014 to the present 4 per cent, but the interest that banks charge for business loans has not declined proportionately.

A rate cut in small savings for either of these two reasons reflects poorly on the Government. Typically, retired people and people with small means invest in small savings. Significantly, earlier, on 31 March 2020, the Government had reduced the interest rate by .7 percentage points to 1.4 per cent. Two such rate cuts, in quick succession would play havoc with the income of many elderly people, who rely on interest from savings to get by. As it is, with failing companies and stressed banks offering minimal returns, the average person does not know where to park his hard-earned money.

Probably, a rethink in Government policy is required. After the tryst with LPG (liberalisation, privatisation and globalisation) in 1991, successive Governments have increasingly relied on the trickledown approach ~ a belief that more money in the hands of the rich through tax cuts and other measures would stimulate business investment in the short term and benefit society at large in the long term.

The volume of trickle down in the Indian economy has been meagre. According to the RBI Report of 2019, 22 per cent of our population lived below the poverty line but, at the same time, the richest Indian, Mr. Mukesh Ambani, had a daily income exceeding Rs.300 crore. According to an Oxfam study the top 10 per cent of the Indian population holds 77 per cent of our total national wealth. Disturbingly, the rich are getting richer; according to the same Oxfam study, 73 per cent of the wealth generated in 2017 went to the richest 1 per cent. The Coronavirus pandemic that saw a 23.9 per cent decline in the Indian economy in the first quarter, with a loss of 2.1 crore salaried jobs till August, also saw the wealth of most Indian billionaires rising dramatically.

The underlying idea of achieving rapid growth, financed by cheap credit to big businesses, so assiduously promoted by successive Governments, has failed. The RBI appointed KV Kamath Committee, which worked out the financial parameters for loan restructuring, has concluded that 72 per cent of banking sector debt worth Rs.37.72 lakh crore was under stress. Further, according to the Committee, the coronavirus pandemic is not solely responsible for the stressed loans; Rs.23.71 lakh crore, or 45 per cent of banking sector debt, was already under stress, even before Covid-19 hit the economy. All these stressed bank loans are, ultimately, to be paid for by the Indian public through taxes like GST, VAT and Income-tax.

The availability of easy credit has prompted many promoters to overvalue their assets and then borrow to the extent of their actual investment, leaving them with no financial stakes in their enterprises. More dishonest promoters have borrowed against non-existent assets or have fraudulently disposed of their assets and hotfooted to foreign shores. The interest cost on borrowed funds ensures that only established and well-run businesses can thrive on borrowed funds; investors flock only to such enterprises, an example being the Reliance group that has attracted approximately Rs.2 lakh crore of foreign equity investment, in the last financial year.

Post-Budget 2019, the Finance Minister rolled back the higher taxes for the super-rich and announced a tax cut of Rs.1.45 lakh crore for corporates, in addition to relief packages totalling Rs.1 lakh crore, for specific sectors. Thereafter, the stimulus measures announced in 2020 leant disproportionately towards big businesses. But, pampering big business has not created a robust and stable economy. If after availing so many incentives, our manufacturing sector cannot stand up to China, South Korea or even Vietnam, then something is decidedly wrong with our policies and their implementation. Before offering further sops, the Government should ensure that the basic principle on which big businesses operate viz. “profits are personal while losses are public” is discarded for good.

On the other hand, despite being starved of resources, with spending falling short of allocated expenditure by Rs.29,000 crore, agriculture was the only sector that survived the Coronavirus- induced economic slowdown with aplomb, growing by 3.4 per cent while the economy contracted by 23.9 per cent, imparting a lesson to those advocating the entry of big business into agriculture.

A better way to contain the fiscal deficit could be to curb the wasteful expenditure of the Government. For example, according to Budget Estimates for the current year, an expenditure of Rs.14.32 lakh crore is earmarked for the more than 160 Schemes of the Central Government. The cryptic and incomplete, “Output Outcome Framework 2020-21 for Major Central Sector and Centrally Sponsored Schemes,” is the only publicly available review of the Central Schemes. The bureaucratese of this document is unable to hide the fact that many flagship Government Schemes are floundering. For example, the review of Pradhan Mantri Fasal Bima Yojana (PMFBY), shows that in addition to farmers’ contribution, the Government paid Rs.15,695 crore to insure the crops of 5.64 crore farmers for Rs.2,35,277 crore but only 28 per cent farmers received the sum claimed under the Yojana. Probably, insurance companies profited more than farmers from PMFBY. As noted by the 15th Finance Commission also, axing and modifying money-guzzling Schemes is urgently required.

Making the tax system more efficient and productive, by levying taxes on wealth and inheritance is another option before the Government. Currently, the Government has adopted the easier method of raising revenue by an extortionate levy on petroleum products that has resulted in misery for everyone and has set an inflationary cycle in motion.

The futility of the trickledown approach has been summarised in the famous words of the economist John Kenneth Galbraith: “Trickle-down theory – the less than elegant metaphor that if one feeds the horse enough oats, some will pass through to the road for the sparrows.”