January 17, 2016

Economy in Trouble

THAT the economy is in trouble is seen by two figures which have come out. The first is the index of industrial production which contracted by 3.2 percent in November 2015 and the second is the retail price index which registered a 5.61 increase in December.  The industrial output figure is cause for worry as the manufacturing sector within this index has declined by 4.4 percent.  Capital goods sector has declined by 24 percent, a clear indication that investment is not forthcoming. The slowdown in industrial production is also attributable to the continuing fall in exports.  Exports have registered a decline for the twelfth consecutive month since December 2014. In fact exports are showing negative growth of minus five percent. There is no domestic demand either to boost production.

The global economic slowdown has a direct impact on our economy and its export performance. All the tall talk of “Make in India” is dependent on attracting foreign capital into India. Given the state of the global economy, this is unlikely to happen, with foreign funds coming only into the speculative financial sectors, the stock markets and currency markets. The Modi government claims that India is the fastest growing economy in the world. The Mid-Year Review of the finance ministry has pegged the GDP growth rate at 7.2 percent (as compared to the projection of 8 to 8.5 percent) at the time of the budget. But these figures are suspect as they do not match the ground realities, whether it be industrial or agricultural production.

With a global recession looming ahead in 2016, the Modi government will have to review its bankrupt policies. What is required is stepped up public investment. But for that the government has to raise resources by taxing the rich and reversing the cuts in public expenditure. However, there are no signs that the government, committed to fiscal orthodoxy, will do so in the coming budget.

The retail inflation is the highest in the last nine months. This is mainly due to the sharp rise in food prices, with pulses showing an increase of 46 percent.  Kharif production of crops in 2015-16 has fallen by nearly 3 percent. With two successive drought years, the prospects of agricultural growth this year is also bleak, indicating that prices of food items will show no signs of relaxing.


It is at a time of agrarian distress and rising food prices that people desperately need the public distribution system. But the way the Food Security Act has been implemented has left the poor totally vulnerable.  The FSA was adopted in September 2013. It provides for coverage of 75 percent of households in the rural areas and 50 percent in the urban areas making an average of 67 percent of the population. The Act is yet to be fully implemented all over the country. There are still 11 states and union territories yet to implement the Act. Some have done it only partially.  After the BJP-led government came to office, three extensions have been given to the states. The latest deadline for implementation by the states is April 1, 2016. Tardy implementation of the Act has left many without even the limited allocations provided for, or exclusion due to faulty eligibility criteria. 

The price being paid by the rural poor at such a time due to the lack of a proper PDS is graphically illustrated by the plight of the poor in Bundelkhand in Uttar Pradesh.  UP is one of the worst performers in the PDS where the bulk of the food supplies are siphoned off by corrupt bureaucrats and traders. If the FSA had been implemented then 80 percent of the people in Bundelkhand would have been covered. Instead, in the face of a severe drought, the poor have been reduced to eating grass to fend off starvation.

The Modi government has shown no urgency whatsoever in getting the FSA rolled out properly. Probably, the government does not mind saving the funds allocated for the food subsidy, given its zeal to curb the fiscal deficit.

A substantial increase in public investment in infrastructure and agriculture is called for if demand is to be revived and the slowdown reversed. Along with that, there has to be stepped up allocations for social sector expenditure and for food security and the MGNREGA if the rural distress is to be addressed.

(January 13, 2015)