As many of you will know, general elections are currently underway in India, elections which the ruling BJP and the Prime Minister, Mr. Narendra Modi, are expected to win easily. Victory would give Modi a third term in government, a feat previously accomplished only by the country’s first Prime Minister, Jawaharlal Nehru.
Sections of the Western media and most of the Indian media are poised to attribute any such victory to Modi’s economic management, which has allegedly made the Indian economy boom as never before. However, as the elections proceed, this near-certain victory is receding into the distance, and a very different reality is coming into view.
With us to discuss this is a most distinguished guest, Professor C.P. Chandrasekhar. Welcome, Chandru.
C.P. CHANDRASEKHAR: Thank you. Thank you for having me.
RADHIKA DESAI: And you know, I have to say that we could not get a more knowledgeable and authoritative guest for this show. Dr. Chandrasekhar used to teach at the prestigious Centre for Economic Studies and Planning at the Jawaharlal Nehru University, and has held many other distinguished positions, including visiting lecturer at the School of Oriental and African Studies at the University of London, Executive Editor of the Deccan Herald Group of Publications, Bangalore, Consultant at the Bureau of Industrial Costs and Prices of the Ministry of Industry of the Government of India, and Research Associate at the Centre for Development Studies in Thiruvananthapuram.
He writes regularly on the Indian economy in high-quality publications such as the Hindu, Frontline, and the prestigious Economic and Political Weekly. He has also served as consultant to the UN Development Programme, the International Labour Organization, UNCTAD or the United Nations Conference on Trade and Development, the Economic and Social Commission for the Asia-Pacific, the Asian Development Bank, and the Economic Commission for Latin America and the Caribbean. So, Chandru is here to shed light on a very, very complex scenario.
The headlines in the Western press about the Indian economy have to be seen to be believed. The BBC reported on the 1st of March that, “India has retained its title as the fastest-growing major economy, as it expanded 8.4% in the last three months of 2023”.
Meanwhile, last fall, the World Bank stated that “India is one of the fastest-growing economies in the world and is poised to continue on this path, with aspirations to reach high middle-income status by 2047”, the centenary of India’s independence. That’s less than two and a half decades away.
This is music to the ears of those in the West who want to see India emerge as a Western-allied counterweight to China. And Modi, of course, has been boasting about his economic management and is asking for a third term by making promises about making India a developed country by 2047, and a 5 trillion economy, the world’s third largest.
Reading all this, one might think that the re-election of the Modi government for a third term is a slam dunk. However, the long-drawn-out election is proving a harder slog than Modi imagined. The opposition is far more united and progressive than it’s been for decades, and it is pointing to the acute joblessness crisis, the unprecedented rural distress, and even shocking indicators of declining food intake for the vast majority of Indian people.
What’s the reality of the Indian economy, and how can we expect it to play in the Indian elections? If, as James Carville, Clinton’s campaign advisor quipped when asked about why the incumbent George Bush Sr. lost his bid for re-election in 1992, ‘It’s the economy, stupid!’, his implication was that the state of the economy decides the outcome of elections. If that is so, shall we expect Modi to win or shall we expect him to lose?
So Chandru, few can cast better light on the subject than you. So why don’t you just begin by telling us what you think is really happening to the Indian economy? Why don’t we begin with the growth figures? I mean, is India really the fastest growing major economy?
C.P. CHANDRASEKHAR: Well, if you look at the numbers that come out of the Ministry of Statistics or the National Statistics Office, it is true that we are talking about rates of growth in the range of about 7, 7.5% per annum in recent times. And that relative to the rates at which other countries are going, particularly because of the slowdown in China, results in a situation where India becomes, if the official statistics are right, the fastest growing.
I think, there are two things to be said here. First, of course, it’s known that these growth rates are based on a new data series, not so new now, with 2011-12 as base. And that involves some methodological changes, in particular, the use of new sources of data for the growth of industry or the manufacturing sector, which was not the annual survey of industries, which was what was used earlier. But now, the reported performance of these companies as reported to the Ministry of Company Affairs [is used].
So this was commented upon by a number of economists and statisticians at the point of time when the transition occurred, because it was clear that there was a tendency for two things to happen.
One, it raised the level of GDP relative to what had appeared in the previous statistics for the years in which we had common numbers.
And of course, the other was that it seemed to actually result in a higher rate of growth, so much so that the former chief economic advisor of an India government, Arvind Subramaniam, basically suggested that as much as perhaps about a quarter of the GDP growth rate is an exaggeration which comes because of this statistical shift.
So we have to take these numbers cautiously. Maybe if we were still on a series which didn’t use this kind of change in methodology, the rate of growth would not be so high.
The second, of course, is that what we should take into account, which of course is true of other countries as well, is that there was inevitably a significant bounce-back after the pandemic.
So really, what we need to do is to look at where GDP is today relative to where GDP was in 2019-20. You know, that’s what we should look at. And if we don’t take the advanced estimates of now, but look at the figures till 2022-23, then we’re really talking about an average of about a three percent of three and a half percent growth.
So we are not talking about an economy which has even got back to the slowing trajectory it was on before the pandemic struck. So therefore, we shouldn’t be sort of taken up [with the high growth rates].
But on the other hand, we know that this is a government which not merely manipulates its statistics, but more importantly, uses every number possible to try and create this impression with a lot of investment in propaganda. And therefore, this is something which has been bought by the media, as you say, not merely in India, but across the world.
RADHIKA DESAI: But what you’re saying, therefore, would imply that, let’s assume that something like the estimates you are making are correct, then India is still growing less fast than China, which is a much more mature economy than India and so on.
Secondly, maybe you can say something more about the deep dip in GDP that occurred during COVID, which was presumably, I mean, was India’s much worse than before.
And maybe you could also say something, I’ve been reading that partly, of course, in your own work, but also that of your colleagues, like people like Prabhat Patnaik and others, that the new series that you’re talking about, tends to take the growth rates of the big corporations as a stand in for the growth rate of manufacturing and perhaps other parts of the economy as well. So if you could please say something about that.
C.P. CHANDRASEKHAR: Yeah, yeah, I’d like to say two things very quickly. First, of course, the point you’re making, referring also to the work of others, a number of people have pointed to this, that we know, not merely in the new series, but generally, we know that one of the problems with national account statistics in India is that India is an economy in which much of the economy is an informal economy, it’s really not part of something which either, is formal in the sense of having a formal workforce.
We know that something like 7% of the total workforce is formal in some definitional sense of, let us say, having a written contract, or having paid leave, or having some social security is attached with it.
RADHIKA DESAI: Or even having assured wages paid on time.
C.P. CHANDRASEKHAR: Yeah, exactly. Yeah. So, so, so we have this large informal economy. And we know that much of almost all of it is really kept out of national account statistics, except for some very feeble ways of trying to estimate, and the way it is estimated very often, merely tags the informal sector onto the formal sector. So what you’re really getting is, is, is the extrapolation of formal sector growth onto the whole of the economy.
And we know that not just the pandemic and the response to the pandemic, (which resulted in this huge reverse migration of informal workers to the rural areas), but [also] demonetization and the [implementation of] GST, which actually, had an extremely adverse effect, as many people have talked, many scholars have documented, on the informal sector, would have resulted in a situation where this component of the economy, which is, which is the dominant component of the economy, might have radically shrunk.
So, there is that fact as well. And so the dates really are not capturing possibly the performance of a sector, which is the sector which is doing badly, and really focusing, even to the extent that, you make adjustments, you’re still focusing only on the formal sector.
But I’d like to make one other point that, that even if we say even if we say that, okay, we’re not talking about a 7% rate of growth, let’s say that, okay, let’s sort of favor the state as it were, and say that, okay, let’s say, maybe it’s 5%, maybe it’s 4.5%. I mean, that’s not unreasonable, given, given all what the economy has been going through.
And we need to ask ourselves the question, what is the stimulus for this growth?
Because if you look at it, what we have is, India is not an economy in which you have a significant expansion of exports over a period of time, excepting for the expansion of services exports. So really, you’re talking about the material producing, I mean, the commodity producing segments of the economy are really not being stimulated as happened in East Asia and elsewhere by exports.
You’re talking about a system which claims to be or a state which claims to be, to have pushed fiscal reform and fiscal consolidation to a point where it’s keeping the fiscal deficit down to a considerable degree, even if not close to the target of 3% it’s been aiming at. So that means the stimulus which comes from state expenditure is not there.
So the question is, then, where is it coming from? And there was a point of time when people said that, listen, where it’s coming from is that there’s this huge amount of credit, which was being provided by the banking sector, the public banking sector, to private infrastructural investments in areas like power generation, distribution, ports, roads, etc. And that that investment was in some sense providing the stimulus.
But we know that what that led up to was that many of those projects were not profitable or did not even take off, resulting in the fact that non-performing assets in the banking system became huge. And finally, the banks had to cut back on credit. Okay.
So there is this puzzle. I mean, even if growth really is 5% or four and a half percent, where is this four and a half percent coming from? Because we know that if we look at the figures on unemployment, if we look at the figures on poverty, or, the income of the lower deciles of the population, we’re not talking about some mass consumption providing a stimulus to growth. So where is this coming from?
And I think what we need to look at is two things.
First, of course, is that there has been a shift in credit provision, because you must understand that liberalization in India had one consequence, which was that it successfully managed for a very long period of time and continues to manage to attract a significant amount of foreign capital coming not into productive investment so much as into the bond and stock markets.
But this infuses liquidity into the system from outside. When you have an infusion of liquidity of that kind, where does it go? It turns up at some point, as deposits in the banking system. [Now,] banks can’t sit on deposits, they need to lend.
So one thing which is happening, which you would have noticed people are commenting about, because there are signs the net savings in the economy of households are coming down quite, quite sharply, is that there has been a huge increase in what is called retail borrowing, that is borrowing by households or individuals, for housing purposes, for buying automobiles, for buying consumer durables, and so on, so forth.
So, if there was an earlier credit-fueled boom, as a result of infrastructural investments funded by bank capital, I mean, bank lending, now you seem to to have some kind of a private spending boom, essentially financed by bank capital.
But the second thing I think we need to take into account is that there has been an effort, despite fiscal consolidation of the center, [to expand] the use of a range of, of cesses, cesses and surcharges have become a very important component of the government’s revenues. And they’ve changed the rules. Earlier, these cesses and surcharges were supposed to be for a short period of time, and they were supposed to be, activity specific.
I mean, you put a, you put a cess on petrol, for example, to build roads, or you put a cess on, high incomes in order to finance education, they were supposed to be specific purpose, special purpose and short term, but these have become permanent. And they’ve changed the rules to make them accessible for any kind of expenditure.
So that is a component of spending, which is not I mean, of taxes, which is not shared with the states.
Secondly, what you basically have been doing is you have been in other ways [been] centralizing the tax system, including through GST. So the states are really suffering, because they are not getting the promised increase in GST revenues that they thought they would get, whereas the center is getting much so there’s a centralization of revenue generation in the hands of the center, which allows it to undertake some some expenditures in infrastructure, etc.
And the third, of course, is that there’s a lot of off-budget borrowing by the state. So, and this is done, say, let’s say, through the National Highways Corporation, or, in the Power Finance Corporation, and it doesn’t show up in the budget. So you seem to be consolidating fiscally, but actually are borrowing and spending, but through these special purpose vehicles.
So if you look at it in that sense, what we have is even to the extent that you have growth after, taking into account all the factors that we discussed, that the 12, 2011, 12 series, the informal sector, etc. Even that amount of growth, which occurs is growth, which is riding on a credit bubble, and therefore can go bust at any point of time.
And to top it all, that’s not a growth, which is delivering anything to those who can provide a mass consumption base to the system.
Employment is low, unemployment is rising. You have huge amounts in self employment, because it’s the informal sector which dominates and, and poverty rates are still high. You mentioned that, you know, even cereal consumption per capita is coming down as you know, Utsa [Patnaik] and others have constantly pointed to.
So, so all told, we are to the, even to the extent that we have growth, that growth, in some sense, rides on a bubble. And it’s, it’s, we don’t know [where it will end]…
RADHIKA DESAI: … Massively artificially contrived growth is also what you’re saying. And you know, this is also something where, typically, we have found that when you have neoliberalism, you also have a certain kind of financialization, obviously, with its largely public sector-owned financial sector, India has a very different type of financialization.
But one thing that occurs to me is that, of course, people have been pointing out that the Indian stock market is one of the most overvalued in the world. I mean, yes, people complain about the US stock market being massively overvalued, but we have scaled even greater heights in terms of that.
And as you said, the credit provision that’s taking place again, who gets credit, the so-called credit worthy, and the so called credit worthy are always the privileged sections of the population. So in that sense, and of course, when the government is borrowing and or taxing in, whether it’s off budget borrowing, or recesses, etc.
And when it gives these contracts, again, it’s giving contracts to a relatively small number, or a small section of the population who are the contractors, but this does not trickle down any further.
I mean, they pay really bad, they use casual labor, they pay very bad wages, etc.
So really, we’re talking about a completely dualistic type of economy. If you’re one of the 10%, life’s never been better. And if you’re not, you’re really suffering, isn’t it?
C.P. CHANDRASEKHAR: Yeah, well, I wouldn’t even say 10%. I would say the top 3, 4, 5%, maybe 3%. Yeah.
RADHIKA DESAI: Wow.
C.P. CHANDRASEKHAR: Yeah. That’s the way I, you made a statement about, it’s the economy stupid, while I see the point, and I hope, I hope that is true, because then we need a government which will bother about the economy.
I do think because of the fact that the BJP and the NDA have adopted this sort of divisive communal agenda, they have been operating on the principle that listen, the economy doesn’t matter. I mean, you can do what you want. You know, you can use your propaganda, you can say we’re great, you can say, but really, what matters is the ability to have a majoritarian agenda, which works to generate for you, to deliver for you, votes.
And the sort of shift you’re suggesting is occurring as the election process unfolds, seems to be one where that ability to exploit, it was ever since the breakdown of the Babri Masjid [the 13th century mosque pulled down by Hindu fanatics on 6 December 1992, marking a major ceasura in Indian politics], the ability to exploit the polarizing agenda, to deflect attention from the economy and from the rising inequality, that seems to be giving way. I’m not so sure, we’ll have to wait and see the results finally.
But if that is the case, then that’s a corrective. Otherwise, there is no corrective in a system where politics is driven by something which is completely dissociated from the economy itself.
RADHIKA DESAI: Yeah, exactly. Although I would say, that in 2014, it wasn’t really the Hindutva agenda that was front and center, it was corruption, and so on and so forth. So, the development and blah, blah, Gujarat model, whatever, claptrap that they trotted out.
And then, of course, in 2019, they suddenly produced the Balakot strikes and national security and all of that, which seemed to have helped them a great deal. So, in a certain sense, I mean, I’m not saying that the BJP is not trying very hard to infuse, especially this time, the election with communal agenda, but it’s not necessarily a vote getter and hopefully, let’s hope anyway, but maybe we can go from here to like if you were to characterize, or let me propose something.
If I were to characterize the government’s economic program, I would say that they have a one point economic program, which is to do what the corporate sector wants them to do, particularly the very top echelons of the corporate sector. Some people say maybe five or six big business houses at most, and then everything else can go, wherever it wants to go. I mean, how would you characterize it?
C.P. CHANDRASEKHAR: Yeah, that the nexus between state and capital in India has actually, I mean, solidified the sort of relationship. I mean, if a criticism of the early Nehru was that he never listened to the voice of corporate India. And you know, Tata is known to have complained about this, that no, we’ve done so much for the country, but never has Nehru actually called us to ask our opinion on what should be done.
So there was the whole idea that, given the nature of the national movement, the whole idea that you must maintain a distance from private capital. And that began, even during different Congress regimes, it got diluted to a significant degree, there was a growing—
But we haven’t seen this kind of a sort of integration of state and capital in India for a very, very long period of time.
And this can be done in two ways, I mean, seen in two ways. One is the way the state government is presenting it, which is to say that, listen, we are promoting our national champions, that are Adanis and Ambanis, they’re not only successful, not only do they succeed in the country, but they’re successful in Sri Lanka, in Australia, in the Haifa port, and God knows, I mean, you really want to say that these are our national champions. And that’s how, BJP is trying to pose as a kind of developmentalist state.
But the other aspect, I mean, the other, the other way to look at it, which is the reality is that this nexus actually is one of the collapse of representative democracy, because of the fact that you can’t fight elections without a large amount of money. And you can use the state apparatus, if you’re shameless in the way in which the state apparatus is being used, so that representative democracy doesn’t exist, but you need the money to actually be able to operate behind this facade of representative democracy in order to be able to stay in power and in place, sort of implement an authoritarian agenda.
And you need therefore also to pay off those who need to accumulate the money to give to you, and who would be willing to give it to you because they think there is some benefit from it. So it’s, it’s really, this, this nexus is really returning to sort of, I mean, episodes in history in which you need that to establish authoritarian or fascist regimes. And it’s so it’s a nexus of a different kind than we see in developmental state environments. Yeah.
MICHAEL HUDSON: What extent is the foreign sector linked with foreign trade, the export trade, and how does it affect the balance of payments?
C.P. CHANDRASEKHAR: Well, as I mentioned, that if you look at the export side of the Indian balance of payments, it’s not manufacturing exports, which really matter. And there was a period of time when we were successful exporters of pharmaceuticals, and so on. Now we are importing most of our active ingredients, pharmaceuticals from China, despite the standoff with China, etc.
It’s really, one is we have a significant inflow, the rate of growth is been slowing, but it’s still a significant inflow on account of export of services, which is both software services and business services. And that actually is significant enough to give you a certain degree of flexibility on the balance of payments front, despite your imports.
Though, if you look at it in terms of the relative share of the net exports of services, the net exports after taking imports into account, you’re really talking about something which can make a difference to GDP in any given year of about half a percentage point, because it’s relative to the economy as a whole, net exports of services is still not large, even though, as I said, from a balance of payments, from foreign exchange point of view, it gives you flexibility.
But the other advantage which India has, and has continued to have for a very long period now is, of course, the large volume of remittances which come in. And these remittances are of two kinds. One, of course, the remittances which has its history in the migration trail to the Gulf after the two oil shocks, where masons and drivers and doctors and nurses and accountants and all sorts of people went to the Gulf and set themselves up there. And that was short term migration.
Whereas, those who migrated to, let us say, the United States or the United Kingdom, that wasn’t short term, they didn’t get too much remittances from there.
Now, the Gulf remittances continue. But what really has happened as a result of the software services boom, export boom is that a lot of services have to be provided on site to the client. So which is why Indian workers are the biggest bidders for and winners of H1B visas.
And those are short term workers, again, they’re not there forever. They go for periods of time. And therefore, there’s remittances which come from them. So even after the Gulf remittances sort of started tapering off, not really significantly declined, but tapering off, we’ve been seeing an increase in remittances, because of this new source of remittances.
And we are basically talking about those remittances accounting for a significant share of inflows of foreign exchange. So put the software, I mean, the software and business services exports, I mean, it’s not just software, it’s also IT enabled businesses, back office work, and etc, but call centers, etc.
But if you take it and IT-enabled services, plus you take remittances, it gives the Indian government a considerable degree of flexibility, because the balance of payments constraint is not binding anymore, you can always manage the current account. And because of that you remain the flavor of the month as far as foreign financial investors are concerned, who want to come into bond market, because the currency risk is relatively low.
You know, you’re not gonna, you’re gonna have depreciation of the Indian rupee, but you’re gonna have a collapse of the rupee of the kind that you can have other context. And therefore, we are seeing this constant inflow of foreign exchange, which results in a situation where you have huge reserves. But these are not reserves, which actually are explained by your earnings from services, exports or remittances, because your current account is still in deficit.
It really is a reflection of the liabilities, which India is building up both to lenders who invest in bonds, etc. And to investors who come to the stock market for short term capital gains, and can always leave when they find the Indian market [unattractive].
So it’s borrowed reserves, rather than earned reserves, unlike in the case of China, where it is earned reserves, if they have a current account surplus, which helped them build reserves over time.
MICHAEL HUDSON: My understanding is that India is re-exporting a lot of Russian oil. Because of the sanctions against Russia, Russia sends it to India, and India will export it, it takes a commission on all of this, but it pays for the oil in rupees to Russia. But now that Russia has said, well, now we want to cash in the rupees. And these are blocked rupees.
Is Russia able to spend the rupees that it gets for the oil that it sends to India? And if it is, does it just end up with rupees that there’s nothing to spend on? Or can it buy gold or Chinese currency or something else?
C.P. CHANDRASEKHAR: Well, I mean, the rupee trade with Russia has a long history. And there was a point of time when for Russia it mattered. I mean, the rupee trade mattered if—
For example, one of the main destinations of pharmaceutical exports from India used to be Russia. And in Russia, meaning the Soviet Union, I mean, at that point of time, and that was because of the fact that, I mean, India had a strong pharmaceutical sector. We didn’t have product patent laws in that, applying at that point of time. So we could, we could deliver a range of drugs and they use their rupees to import.
Now, therefore, that’s no more true. I mean, they really cannot, I mean, India cannot be a major source of quality imports for Russia. And in any case, Russia is also a major exporter of defense equipment to India.
So not only that you have a situation where because of China, America and its allies are willing to turn a blind eye to the fact that India is actually, buying oil from Russia, not necessarily even at the capped price or perhaps at the capped price, but definitely at a discount.
But this cannot go on beyond a point, as you say, correctly, that because of the fact that what is Russia going to do with these rupees, because how much can it continue to import without affecting its own domestic capacity, etc.
But I don’t think there is another… there is another aspect to it…. even if India is required to pay in dollars for these imports, if it buys these imports of crude, then does some, some, refining, create some products, or just, does minimal refining and is allowed by the West to export it to Europe, because of the fact that, I mean, Europe still, still is dependent on imports of, of fuel.
Then it’s still going to deliver huge profits to the likes of Ambani, I mean, who are the ones, who hold the refineries and import at a certain discounted price, put it through the refining process and export it to destinations which are still open, just because of the fact that it has been sanitized by coming to India and going back.
So long as that is the case, then even if India pays a dollar price, I think so long as you can get Russian oil at discounted prices relative to the world market price, this would continue to happen.
But we don’t know how long Russia is going to be agreeable to that as well, as things, settle down, I mean, if they are going to settle down, and, Ukraine is not as much of a pressure as it is, then possibly it would start saying that, listen, I not only want dollars, I want, I want international prices. And in which case, of course, it would be very difficult for India to continue this kind of a process.
RADHIKA DESAI: Or even if Russia demanded renminbi instead of dollars, I think India would be badly placed. So yeah, Michael, we can’t see you, but I guess you’ll come back.
MICHAEL HUDSON: I’m here.
RADHIKA DESAI: Okay, good. Okay, so I just wanted to say, Chandru, that, what you said about the contrast you made between China and India in terms of how China has a huge current account surplus, India has a borrowed surplus, and so on.
I mean, this really throws light on one of the key promises that Narendra Modi had made, he said he’s going to make India into a manufacturing powerhouse. And he had this “Make in India” program. And we’re sort of 10 years down the road. And it has really, from what I know, fizzled out. So can you just discuss, discuss that a little bit exactly what was the idea? And why has it not worked?
C.P. CHANDRASEKHAR: You know, I mean, it’s, well, let’s say that the different components, I mean, okay, there was, if we go back to, let’s say the period immediately after independence, I mean, there was so much promise in India as a country, which had a huge domestic market, even at a low level of per capita income, just because of geographical size and its population. Okay, it was a country which had a century of factory based industrialization. I mean, the first textile mills were set up in the early 1850s. And, factory based textile mills.
So we had the experience with, even if it wasn’t a diversified manufacturing sector, there was manufacturing experience. And you had a state, which was completely committed to industrialization, that was the whole Nehru-Mahalanobis strategy.
So the expectation at that point of time, really was that here was one country which, by focusing on its own market, would be able, in some sense, to become a significant industrial power over a period of time, and definitely be among the most successful industrializers in the postcolonial countries, I mean, in the so called less developed underdeveloped countries.
But that didn’t happen. And the only way I mean, I can’t make we can’t go into the details of it. But the only way we can explain that is to say that, listen, if you want to grow on the basis of your domestic market, there are two components to it.
One, of course, you can start by growing on the basis of your domestic market by putting protectionist laws. So you actually have high tariffs, you prevent imports of certain, commodities, you say that this is going to be domestically produced, etc.
Now, if you do that, of course, you’ll get industrial growth as India did get in the period till about the early 1960s or mid 1960s, because of the fact that, you’re actually creating a sudden vacuum, a market which used to be catered to by imports is no more catered to by imports. And therefore, you get some industrial growth.
But that’s a once for all market. Once you occupy that space, you need the market itself to grow. And if you need the market itself to grow, you must be able to make that market and to make that market you have to create, I mean, you have to put incomes in the hands of the masses, you need mass mass consumption, manufacturing demand. And that’s what even the Congress failed to do even during the Nehru period.
Now, if you look at it that way, you can say that, okay, if you look at that failure, which is what Modi was pointing to and saying that, no, no, we’re going to resolve this problem. There are two ways that you can resolve it. One, of course, you can resolve it by saying that, no, I’m going to do exactly what they didn’t do, I’m going to create this mass market within my tariff borders, and therefore, generate for me this growth.
Obviously, they’re not interested in doing it, they’ve actually engineered, engineered, the state has engineered a sharp increase in inequality, at the expense of the much of the population, which are trying to buy off by saying, I’ll give you some free food, and I’ll give you a little bit of social security, or whatever it may be, without significant allocations in the budget for those purposes.
But anyway, that’s your strategy. So you’re not creating a mass market. So if you’re not doing that, then you’re basically saying, I’m going to do it on the basis of exports.
The first argument was that the way we’re going to do this on the export front is to get India to plug into global value chains. Now, that did not happen. In any case, it’s very clear that if you plug into global value chains, without actually creating a significant manufacturing sector of your own, which is domestically based, you’re not going to get very much in terms of value added. So you’re not going to get very much in terms of employment, you’re not going to get very much in terms of manufacturing value added.
Anyway, but we didn’t even manage to plug into global value chains.
The second was to say that, okay, the world is following a China plus one policy, they’re withdrawing from China, so they’ll come to India. Well, we know they went to Vietnam, you know that some of them come to India, but those who come to India don’t come to India predominantly to use India as a base for world market production. They come to India because of the fact that there is a market middle class and upper middle class and rich rich person’s market, which is significant because of the size of the country.
And therefore, you’ve shifted at one point of time to saying that, okay, what we’re going to do now is to subsidize those who are willing to produce in India to manufacture India. So the whole production linked incentive scheme is basically saying that, listen, you make an investment. If you have an increment in production, which exceeds a certain amount, I’ll give you 4%, I’ll give you 6%, depending on the sector.
4 to 6% is virtually saying I’ll give you a 4 to 6% profit margin by taking state money and handing it over to you. And who gets the benefit? I mean, there’s supposed to be some 27 companies or something like that, which are, in the IT sector, which are going to start producing under the PLI scheme this year, and next year.
Which are the companies? It’s HP, Lenovo, Acer, these are the companies, so you’re really not talking about creating a base, and who are they going to be producing for? They’re not going to be producing the world market, they’re actually going to produce for the large number of Indians who think that the best way to get their children to get ahead in life is to give them a laptop when they’re at an early stage, and, and they’ll, become computer savvy, and this is going to get you a job or take you to America, whatever it may be.
So you’re, you’re actually undermining, it’s a process of undermining any ability to generate a domestic manufacturing base by actually subsidizing a set of people who are going to come and produce using that subsidy for your own market, ostensibly.
RADHIKA DESAI: So, it’s a subsidy, what you’re saying is it’s a subsidy to de-industrialization.
C.P. CHANDRASEKHAR: Yeah, exactly, exactly.
So in all of these ways, it’s very clear that this whole strategy of Make in India, whatever it may be, is a completely failed strategy, and, but, but, I mean, even the international media keeps saying that, India is a great future, because it’s got a young population, and it’s, China’s, not the flavor of the month anymore, and therefore, India can take its place, and so on, so forth.
And there are other people keeping quiet, like Vietnam, and maybe some Latin American countries, which actually might, are getting the benefit of this.
So, yeah, I don’t think this manufacturing boom is going to come very soon. Yeah.
RADHIKA DESAI: And really, that is exactly the sort of thing India needed. And it’s definitely not happening. This government has no idea. And as a result, we have a massive, massive employment crisis.
We talk about, as you rightly say, everybody talks about India’s demographic dividend. But actually, if you’re not going to educate the young people, if you’re not going to give them jobs, you don’t have a demographic dividend. You’ve got a demographic time bomb.
And, so maybe you can talk a little bit about the joblessness crisis. I mean, Modi came to power saying that he was going to create two crore jobs every year, which is like 20 million, if I’m right, 20 million jobs every year. Well, he has not created a fraction of that.
And so the result is that we have a young population where every time there are a handful of job openings, there are not just thousands, sometimes hundreds of thousands of applications. There is in, the public sector is cutting back, is essentially not filling jobs from what I read in the paper. And there are even very, very high rates of suicide among young people who are looking for jobs and are not finding them.
So maybe you can just give us a sense of like, the magnitude, the absolutely horrendous magnitude of the joblessness crisis.
C.P. CHANDRASEKHAR: Yeah, there are many things here. One, of course, is that if you look at the work participation rate, the number of people identified as workers, if you leave out the the funny thing that, unpaid helpers in, household enterprises are included among those employed [when] the international definition, which is used, [does not include them] because, I mean, women involved in care work are also unpaid helpers, but they don’t get treated as employed [in the international definition]. But if you if you are an unpaid helper in a household enterprise, and that the share of that has become quite significant in the total, and you use that to say that, oh, look, we have a large amount of employment [in India], that is what the, the latest, the PLFS [Periodic Labour Force Survey] has been used to argue.
But if you discount for that, we’re really talking about the fact that you have relatively low work participation rates, and particularly among women, extremely low relative to international standards. And I mean, by that, I mean, poor economies and other less developed or underdeveloped economies.
And of course, you have a high, high unemployment rate, even though we know that in a country like India, where there’s no social security, I mean, it’s very difficult to be unemployed, because you will starve.
You know, there’s no protection in any way, the only protection is to fall back on the family, so. So what you have, therefore, is this high level of unemployment.
Now, one thing, whenever this argument is made, people say, No, no, but you know, manufacturing is not the solution to it. And it’s not the solution to it, because of the fact that the nature of manufacturing has changed, it’s become very capital intensive. So how many jobs can you actually generate even if you have a significantly high rate of manufacturing growth.
The problem with that argument, of course, is that it fails to take into account the fact that you cannot have growth elsewhere, in particular, in services, unless you have a significant manufacturing infrastructure to create the basis for that growth.
I mean, you can’t have a software, export success, unless you’re in a position to be able to build a telecom infrastructure. And you can’t have a telecom infrastructure, unless you have telecommunications equipment and, components and so on needed to set up that infrastructure.
So, you need manufacturing, not only because of the fact that that endures the system with a certain degree of dynamism, but you also need it because that’s the way in which you can build other sectors, which would then provide services of a kind which can be employment intensive.
But, but, but there is this larger argument, which I think we need to face, which is to say that, listen, I mean, you’re missing out.
I mean, [some experts say] India is different. India is different, because here is a country which is actually pursuing a different [services based] growth trajectory. [However, in reality] You’re stuck in the old traditional Kuznets kind of economic transformation, where the structural diversification in favor of manufacturing, before you move into services, where it is a country which is in a position to be able to move into services [is stalled]. And it’s doing it [or stalled] both in terms of domestic demand, as well as in terms of more crucially, exports.
And the presumption, of course, is that services is more labor intensive. And if it is more labor intensive, if you have some services growth, you would also have employment intensive growth, because of the fact that this is the labor intensive sector.
Now, we need to, we need to think this thing through carefully.
First of all, as I said, we’re really talking about, if you take the volume of net exports from services, we are really talking about a level of services, net exports, which is relative to GDP, is relatively small.
So the direct contribution which services exports can make to growth, and therefore possibly to growth of employment is not that large.
Of course, you can say that it’s going to have an indirect effect, it’s going to have an indirect effect, because of the fact that, you have these, these jobs being created, and because the jobs are being created, that will generate demand, and that demand will generate domestic investment, and you’ll have growth, okay, it has multiplier effects, you could say.
Now, the point is, if you look at the figures, the share of services in Indian GDP is currently, I mean, to the extent that we take those GDP figures seriously is currently in the range of about 55, 53 to 55% of total GDP, more than half of Indian GDP is services, okay.
If you look at this, the contribution of services to employment, the contribution is about 30%. So you’re not talking about a sector, which is going to, generally its growth is necessarily going to give you this kind of large employment to start with.
But there’s more to it than that. If we take what can be called modern services, that is we take sectors like, like health and education, and, of course, business services, and software services, and it enabled services of various kinds. And you put all of that together, a large part of it is, of course, public, because a lot of public even though it’s been, it’s falling, but public expenditure is responsible for a significant share of health and education in the country. Okay.
But you say that all of these are modern services, and you put them together. And you cannot explain more than half of the GDP in services, there is another half of the GDP in services, where is it coming from? It’s coming from a kind of services, which is, which is the informal services.
One, of course, you have the retail and wholesale trade. And we know what it is, you have restaurants and Dabas [traditional rather ramshackle roadside restaurants] and, things of that kind, you have people jumping on trains and selling peanuts, because there’s nothing else to do.
You know, and therefore, what you’re saying is that it is not only agriculture, or agricultural involution, which provides a sink for the unemployed, it’s also that a large chunk of services is actually merely a sink for the unemployed without social security.
RADHIKA DESAI: Exactly.
C.P. CHANDRASEKHAR: And if that is the case, that is the labor intensive component, that’s not going to give you income growth, that’s not going to give you any indirect effect, in terms of demand, etc, because there isn’t very little income out there, it just is a sink for the unemployed.
So you’re really talking about a small segment, and of that small segment, a part of it is government expenditure. So this whole idea that we are actually on a trajectory, which is going to generate for you both, income growth, as well as employment growth based on services, is completely misplaced, it doesn’t look at the structure of the economy as a whole, and the services sector in particular. And I think that’s what’s crucial.
RADHIKA DESAI: So on the one hand, the government is entertaining these delusional ideas about how, it’s going to make India develop on the basis of services.
On the other hand, it’s actually making the employment situation worse by promoting casualization on every front, including in the army, for example.
C.P. CHANDRASEKHAR: Yeah, that’s right.
RADHIKA DESAI: They’re not going to have proper soldiers anymore, you’re going to employ soldiers for four year contracts at a time. I mean, by the time they’re even semi trained, they’re probably ready to leave.
Even from, if you were a right wing thinker, and you thought about national security as a big priority.
C.P. CHANDRASEKHAR: Absolutely. And when you’re sort of flexing your muscles at all sorts of borders, exactly.
RADHIKA DESAI: I mean, yeah, we are going to well, if Modi is reelected, we will see the result of that. I hope he isn’t.
But there is also the whole issue you referred to agrarian involution earlier, and, Indian agriculture until about a couple of decades ago, I would say was one of the success stories. You know, India had done well, not exactly very well, but at least India was producing enough so as to not be dependent on too much food imports and so on and so forth.
But over the last couple of decades and more, we’ve seen Indian agriculture really decline. And under Modi, the level of agricultural distress has reached new heights and including you saw the farmer’s agitation vis-a-vis the farmer’s laws.
And I’m happy to say that the farmers were in this case able to defeat Modi. But can you kind of elaborate on that? I mean, what will be, what is the level of agrarian distress?
C.P. CHANDRASEKHAR: So, let’s go back. I mean, after the mid 1960s crisis, but it was a huge agrarian crisis, 67, 68 and so on, which is when we had the turn to the green revolution strategy, fortunately for India, some would say not so fortunately, perhaps, you had the new new high yielding varieties which came out and you combine them with the whole package of fertilizer, credit, pesticide, etc, etc.
And so a country which was supposed to be living from ship to mouth, because you’re so dependent on imports from abroad, particularly PL480 [US programme of food aid at the time], which kept of course domestic prices down, suddenly became to a certain extent, increasingly self sufficient, at least as far as the staples were concerned, because of the boost given to wheat production, subsequently, the fact that you could you managed to move that to rice as well. Not so much to pulses, but at least to rice.
So yeah, so you can say that, everything else about the green revolution, it had a terrible impact on the water table, with acidity and arsenic and all sorts of things, which is polluting the water. [This happened because], you had to go deep down. Because you didn’t have adequate investments in irrigation to support that strategy. And therefore you basically when we’re not using surface water, you’re, you’re going, deep into the ground.
So there are all sorts of [effects], and then there’s the whole thing about the impact that pesticides and fertilizers, chemical fertilizers, etc, had on health as well as on the soil nutrition, etc. But the fact remains that there was a period in which, because of that [the green revolution], we managed to move to a situation where we were near or if not in many years, adequately self-sufficient in terms [or or], at the level of demand growth that we had at that period.
Now, the thing is that what we’ve had over the last, well, I’d say last couple of decades, is a situation where India is self-sufficient not because of the fact that you’re producing so much more, that you’re self-sufficient. The reason you’re self-sufficient is because you’re consuming less or your consumption is not growing so fast.
So your self-sufficiency comes from the fact that you actually have kept through many, many mechanisms of deflating the system, kept consumption down and therefore, a certain amount of production is generating for you surplus food, okay.
But you’re doing that in a context in which what you actually have is an increasing threat to the viability of crop production. You have people who cannot move out of agriculture. Yes. But in agriculture, increasingly crop production is becoming unviable, and if that be the case, you basically say that the state has to come in and that was part of the promise.
The promise of a minimum support price, which came along with the Green Revolution strategy, was to say that, listen, we will give you a cost plus price, a remunerative price, which will actually make crop production viable. And that was something which you, in some sense, gave up on.
So if you’ve given up on that, you end up with a situation where this problem of viability becomes something which brings the farmers onto the streets. I mean, they have a real problem that they can’t move out of the soil, they don’t want to move out of the land, but then on the other hand, they can’t make a living which is good enough on the land, okay.
So given all of that, what we really need to do is to ask ourselves the question, how long can this continue?
And I just want to end with this point, you see, that what you had in the period of the 1960s is you had some kind of a self-correcting mechanism. If agricultural production was not adequate and you were not in a position to be able to import additional food, food prices went up. When food prices went up, you actually had a situation where you squeezed manufacturing demand because people had to allocate more income to food consumption. That affected manufacturing and because it affected manufacturing and the state was more sensitive to non-agricultural activity and less sensitive to agricultural activity till, of course, the Green Revolution period, you had some kind of a corrective mechanism, which is why we had the Green Revolution.
Now, what we’ve had in the period after the 1990s is one, this trajectory of growth has been one with 53 percent coming from services with manufacturing to the extent that it exists in infrastructure being capital intensive, where the employment generation associated with the unit of growth is extremely low.
And if the employment generation is low, you’re not generating demand growth, which is very high. And in addition to that, you’re actually having a situation where deflation is resulting in keeping the system income wise [unable to generate growth].
So you don’t have a situation in which if you’re not producing enough, you’re going to have [the self-correcting mechanism of] a huge inflation in agricultural prices, which will affect manufacturing demand, which will force you to respond.
Rather, all you can say is that, listen, let’s get the corporates into agriculture and the problem is going to be resolved, which is what the farmers have been fighting against, against the farm laws, which are trying to do that, etc.
So you basically also have, a kind of self-correcting mechanism which existed, does not exist anymore, partly because of the whole deflationary strategy, partly because of the nature of economic growth in the Indian context, etc. And that’s because that is what making this crisis, the agricultural crisis is very deep. Yeah.
RADHIKA DESAI: Yeah. I mean, although food prices may go for the consumer, the farmer does not see that.
C.P. CHANDRASEKHAR: Absolutely. Absolutely. Exactly. And, one of the farm laws was allowing private trade to enter into, you wanted to put an end to the Mandi system [system of marketing farm produce]. And everybody was saying, well, the Mandis exploit the farmers, but the farmers know, they know that if this happens [if the proposed farm laws are implemented], and they come [into force] that whatever be the price, which the final consumer has to pay, they are going to get peanuts because of the sort of monopsonistic position, which the buyers [of farm produce] would have, because it would be these big buyers, these same corporates, which would come.
RADHIKA DESAI: Yeah, so just to wind down this, this fascinating conversation, Chandru, exactly how do you think, what are the main ways in which the scenario that you have described is most likely to affect the BJP electorally adversely? What are the bits, what are the aspects of this is going to hurt the BJP?
I mean, obviously, we cannot predict the election result, but if the election result goes adversely, which aspects of this scenario do you think will have been the most effective in leading to a bad electoral performance for the BJP?
C.P. CHANDRASEKHAR: Yeah, I think, well, I mean, there are two segments. One, of course, and rural India, I mean, the farming community in rural India, not the rural rich who, control the transport and the storage and, etc, etc, and the cinema halls and, and so on, but the peasantry.
So that’s going to be a segment, which has now been expressing the fact that it really is not able to sustain itself, given the non viability of crop production.
The second is the young people. I mean, there are no jobs, as you mentioned, each time there’s, I mean, I just saw, I think it was yesterday, or something like 80% of the recruits into the State Bank of India are engineering graduates.
So you pay a large amount of money to get into a private engineering school, get an engineering degree, and then we’ll go and work as a clerk, because, okay, at least there’s a job out there, so you’re ending up with a situation where, where, yeah, you, you’ll have this large youth population, which should vote against a regime which is not able to give it a minimum amount of, security as far as obtaining employment is concerned.
And finally, of course, I would say that any segment which requires decent social security, whether it be, the old age population, whether it be those who have some kind of, were challenged in some fashion, and so on, that they have been, they’ve been hung out to dry.
I mean, they really don’t get very much despite these claims, these innumerable schemes, all of which are linked to the Prime Minister or to the Prime Minister’s Prime Minister, haven’t actually delivered very much.
So put all of that together. If, as you say, if it is the economy, which is going to determine the election, we should expect, this image is going to be completely overpowering.
But we also should know that after COVID, you had an election in a northern state where bodies are floating down the Ganges, and at the end of it, so a divisive agenda can do all sorts of things. The only thing is, there is this, this possibility that it’s not working as strongly as maybe it worked earlier. I don’t know.
RADHIKA DESAI: Okay, so one final question, and I hope I’m not putting you on the spot. But supposing we had an India Alliance government tomorrow, and they said, Professor Chandrasekhar, we would like you to head our Economic Policy Committee. And what we want you to advise us on what we should do, what would be the four or three or four or five main things you’d ask them to do immediately?
C.P. CHANDRASEKHAR: You know, I think, I think people have waited for too long. So therefore, to realize a social compact, which was there as part of independence, and you need to tell people that, listen, we’re going to guarantee a certain degree of access to food, to subsist, to food, to health, free and universal, to education, to jobs.
That is, there must be a minimum level, which you have to guarantee, and that minimum level can’t be cash. You can’t say that I’m going to give you, to 3000 rupees. I mean, I don’t think that, because you don’t know where prices are going to be, you don’t know what supply is going to be.
So you really need a strategy in which you say that, that we would identify this five or six things, which we think any sort of humane society should provide a minimum of.
RADHIKA DESAI: And get people producing those things.
C.P. CHANDRASEKHAR: Yeah, so, so, so that should be the role of the state. And it should do it in a way which would obviously have its own multiplier effects and therefore generate growth along with this basic access to, to what should be, what should be rights. I mean, it’s actually that it should be your right rather than something which the state gives you as patronage because of the fact that it wants to help out the poor or whatever it is. It should be recognized as a right that broadly, I mean, I mean, the details have been worked out, but that’s probably what I would think.
RADHIKA DESAI: Well, that’s really great. Thank you so much. And this has been a really enlightening discussion. And we will, as, as people know, we will have the elections are still taking place. I think the last day of voting is on the 2nd of June. And I think on the 4th of June, we will know the results. So we will, you can all see whether what we’ve been discussing has any relevance to it. And in the meantime, thank you so much. Wonderful. Wonderful.
C.P. CHANDRASEKHAR: Thank you. Thank you. That is an enjoyable conversation.
RADHIKA DESAI: Yes. Thanks.
https://geopoliticaleconomy.com/2024/05/30/india-economy-gdp-growth
