The
Marxist
Volume: 14, No. 03
July-Sept. 1998
GROWTH
TRAJECTORY
OF
THE
POST-`REFORM'
INDIAN
ECONOMY
`Rolling'
Back
State
capitalism
Kartik
Rai
The
economic
regime
under
which
capitalist
development
was
sought
to
be
promoted
in
the
post-independence
period
had
at
least
four
important
characteristics:
the
setting
up
of
a
State
capitalist
sector
to
plug
gaps
in
the
production
structure,
especially
in
areas
involving
high
risks
and
long
gestation
periods,
and
also
to
expand
the
size
of
the
home
market;
the
cordoning
off
of
the
domestic
economic
space
against
the
free
imports
of
commodities
from
outside,
so
that
the
Indian
bourgeoisie
(and
foreign
capital
already
located
in
India)
had
priority
access
to
it;
close
scrutiny
and
monitoring
of
MNC
investments
in
the
country;
and
State
control
over
the
sphere
of
finance,
through
the
nationalisation
of
banking
and
insurance
and
the
setting
up
of
special
financial
institutions,
to
ensure
that
finance
was
made
available
at
low
interest
rates
(usually
at
negative
real
interest
rates)
and
in
a
more
even
manner
to
the
different
sections
of
the
ruling
classes:
the
monopoly
bourgeoisie,
the
landlords
and
the
capitalist
farmers.
Liberalisation-cum-structural
adjustment
entails
a
negation
of
each
one
of
these
features.
It
insists
on
`rolling
back'
State
capitalism
through
expenditure
cuts
by
the
State,
including
investment
expenditure,
and
the
privatisation
of
State-owned
assets;
it
insists
on
`import
liberalisation'
which
opens
up
the
domestic
economic
space
to
the
free
flow
of
foreign
goods,
to
the
detriment
of
local
producers;
it
enforces
the
soliciting
of
investment
by
the
MNCs
through
the
offer
of
lucrative
`incentives',
reminiscent
of
colonial
times,
and
through
the
handing
over
to
them
of
the
`commanding
heights'
of
the
economy;
and
it
imposes
financial
liberalisation
and
a
shift
over
time
to
a
regime
of
free
capital
flows.
Underlying
the
earlier
regime
was
the
view
that
the
assimilation
of
an
economy
into
imperialist
hegemony
gives
rise
to
stagnation
and
even
retrogression,
and
that
a
relatively
autonomous
strategy
of
development
is
essential
for
rapid
growth.
The
fact
that
this
view
found
expression
in
a
programme
of
capitalist
development
that
did
not
undertake
thorough-going
land
reforms
but
unleashed
on
the
people
a
process
of
ruthless
primitive
accumulation
of
capital,
because
of
which
the
rate
of
growth
remained
unimpressive,
the
impoverishment
of
the
people
persisted,
and
the
economic
regime
itself
became
unsustainable,
should
not
detract
from
the
correctness
of
the
view
itself.
Indeed,
the
experience
of
the
economy
since
the
introduction
of
the
so-called
`reforms'
whose
objective
is
to
assimilate
it
into
imperialist
hegemony
is
in
conformity
with
this
view.
Not
only
has
the
economy
become
a
victim
of
stagnationist
impulses,
and
exposed
to
the
caprices
of
international
speculators,
but
the
growth
in
inequality
which
is
a
necessary
accompaniment
of
`liberalisation'
has
resulted
in
an
increase
in
the
incidence
of
poverty
and
an
undermining
of
the
food
security
of
the
people.
The
cuts
in
social
sector
expenditures
have
made
matters
worse.
Growth of Production
Ever
since
the
introduction
of
`structural
adjustment'
the
government
has
started
manipulating
official
statistics
to
paint
a
rosy
picture
of
the
economy's
performance.
As
a
result,
Indian
statistics
which
were
of
a
very
high
order
of
reliability
until
a
few
years
ago,
based
on
a
system
which
was
among
the
best
organised
in
the
world,
have
become
exceedingly
unreliable.
Perforce
however
one
has
to
use
these
statistics
bearing
in
mind
their
inherent
bias.
Even
so,
what
emerges
clearly
is
the
slowing
down
in
the
economy's
performance
in
all
sectors.
Table
1
gives
the
annual
average
growth
rate
of
GDP
at
1980-81
prices
and
of
the
real
value
added
in
the
primary,
secondary
and
tertiary
sectors
for
the
seventh
plan
(1985-90)
and
for
the
period
1990-1
to
1996-7.
The
reason
for
taking
1990-1
as
the
base
year
for
these
calculations
is
the
following.
Because
of
the
drastic
deflation
which
was
imposed
on
the
economy
immediately
after
the
introduction
of
`structural
adjustment',
taking
1991-2
or
1992-3
as
the
base
years
for
comparison
is
illegitimate
(since
these
were
the
deflation
years).
On
the
other
hand
1990-1
was
pre-deflation,
and
a
good
agricultural
year
like
1996-7,
so
that
these
two
make
legitimately
comparable
end-points.
Table
1
Average
Annual
Growth
rates
(1980-81
Prices)
GDP
Agriculture
Industry
Services
Average
VII
Plan
(1985-90)
6.0
3.4
7.5
7.4
1990-1
to
1996-7
5.2
2.5
6.0
6.8
Source: Calculated from the Economic Survey 1996-97.
It
may
be
objected
that
one
should
not
look
at
the
period
as
a
whole
since
within
this
period
there
are
two
phases,
a
phase
of
deflation
during
which
the
economy
was
being
sought
to
be
stabilised,
and
a
subsequent
phase
of
recovery,
starting
from
1993-4.
This
argument
would
have
weight
if
the
recovery
had
continued
beyond
1996-7,
in
which
case
truncating
our
period
at
that
date
would
indeed
have
been
illegitimate.
But
the
economy's
performance
has
been
dismal
in
1997-8,
when
the
main
commodity-producing
sector
on
which
the
hopes
for
an
economic
breakthrough
are
usually
placed,
namely
indusry,
showed
a
remarkable
slow
down.
Table
2
gives
the
annual
growth
rate
in
the
index
of
industrial
production
(as
distinct
from
secondary
sector
value
added).
Table
2:
Industrial
Growth
Rate
(percentages)
1991-2
0.6
1994-5
9.4
1992-3
2.3
1995-6
11.8
1993-4
6.0
1996-7
7.1
1997-8
4.7
(April-Sept.)
The
euphoria
generated
by
the
recovery
since
1993-4
that
the
economy
is
on
to
a
higher
growth
path
has
completely
disappeared.
It
is
now
clear
that
this
recovery
was
not
due
to
some
sustained
new
stimuli
imparted
to
the
economy
by
the
policy
of
`structural
adjustment';
it
was
a
result
of
transient
phenomena,
the
stepping
up
of
the
fiscal
deficit
in
1993-4,
and,
even
after
the
fiscal
deficit
had
been
lowered
in
the
subsequent
years,
the
satisfaction
of
pent-up
demand
for
a
variety
of
hitherto-not-available
luxury
consumer
goods.
Since
the
rate
of
growth
of
the
demand
for
such
goods,
as
opposed
to
the
once-for-all
splurge
that
the
satisfaction
of
pent-up
demand
entails,
is
much
lower,
the
stimulus
which
such
demand
imparts
to
industrial
production
evaporates
quickly;
and
this
is
exactly
what
has
happened.
If
we
take
the
entire
quinquennium
1985-6
to
1990-1,
the
average
annual
growth
rate
of
industrial
production
comes
to
8.4
percent.
On
the
other
hand
for
the
seven
years
1990-1
to
1997-8,
on
the
assumption
that
the
growth
rate
observed
in
the
first
half
of
1997-8
holds
for
the
year
as
a
whole,
the
annual
growth
rate
would
be
5.9
percent.
The
fact
of
the
slowing
down
of
industrial
growth
as
a
secular
phenomenon,
not
just
a
short-term
consequence
of
`stabilisation'
but
an
expression
of
the
loss
of
expansionary
stimulus
that
a
`liberalised'
economy
entails,
through
the
decline
of
public
investment,
through
higher
interest
rates,
through
the
shrinkage
of
demand
owing
to
import
liberalisation,
can
scarcely
be
doubted.
But
a
slowdown
is
also
in
evidence
in
the
agricultural
sector,
where
the
growth
rate
in
the
production
of
foodgrains
in
particular
has
declined
sharply.
For
a
long
time
now
the
Indian
economy
has
experienced
a
secular
growth
rate
of
foodgrain
production
of
a
little
over
2.5
percent
per
annum
which
was
a
little
higher
than
the
population
growth
rate.
Even
during
the
12
year
period
1978-9
to
1990-1
(both
being
good
agricultural
years
are
comparable),
the
rate
of
growth
of
foodgrain
production
was
2.4
percent
which
was
above
the
population
growth
rate.
However,
over
the
period
1990-1
to
1996-7
(again
both
good
agricultural
years),
the
growth
rate
of
foodgrain
production
dropped
to
1.4
percent
which
was
distinctly
lower
than
the
population
growth
rate.
(Even
the
Economic
Survey's
growth
rate
based
on
the
index
numbers
of
foodgrain
production
comes
to
1.7
percent).
This
conclusion
is
no
trick
conjured
up
through
the
choice
of
illegitimate
end-points.
Even
if
we
take
1990-1
and
1994-5
(a
peak
year)
we
get
a
growth
rate
of
2.1
percent
which
marks
a
deceleration
from
the
secular
trend
and
just
about
keeps
pace
with
population
growth.
We
are
therefore
witnessing
the
emergence
of
a
serious
food
crisis.
The
fact
that
despite
this
reduction
in
output
growth
rate
there
has
been
no
actual
food
shortage
till
now
is
of
little
consolation.
It
merely
shows
that
purchasing
power
among
the
workers,
especially
the
rural
workers,
has
increased
even
more
slowly
in
real
terms
(i.e.
when
deflated
by
an
index
of
the
administered
prices
of
foodgrains).
The
reason
for
this
lies
partly
in
the
steep
escalation
in
administered
prices
of
food
which
occurred
in
the
aftermath
of
`structural
adjustment'
as
a
part
of
the
so-called
fiscal
correction
(for
which
subsidies
had
to
be
kept
down),
and
partly
in
the
shift
of
emphasis
towards
export
agriculture
and
away
from
food
crops.
Foodgrain
production
being
more
employment-intensive
than
the
exportable
commodities
which
substitute
for
it
in
terms
of
land
use,
such
as
prawn
fisheries,
sunflower,
orchards
etc.,
a
shift
of
acreage
from
the
former
to
the
latter
that
occurs
as
a
sequel
to
`liberalisation'
has
the
effect
of
restricting
employment
growth.
In
fact
this
latter
process
explains
inter
alia
both
the
decline
in
foodgrain
output
growth
and
the
decline
in
employment
growth.
There
is
however
an
additional
factor
behind
the
drop
in
foodgrain
output
growth.
And
this
is
the
drastic
decline
in
real
public
investment
that
has
occurred
in
agriculture
over
a
long
period.
Gross
capital
formation
(at
1980-1
prices)
under
the
aegis
of
the
government
in
the
agricultural
sector
was
Rs.1796
cr.
in
1980-1;
it
remained
way
below
that
level
throughout
the
1990s,
reaching
Rs.1154
cr.
in
1990-1
and
only
Rs.1310
cr.
in
1995-6.
The
deceleration
no
doubt
had
occurred
during
the
1980s
itself,
but
the
1990s
have
done
nothing
to
boost
public
investment.
During
the
1990s
there
has
no
doubt
been
a
step
up
in
real
private
gross
capital
formation
in
this
sector
from
Rs.
3440
cr.
in
1990-1
to
Rs.4991
cr.
in
1995-6.
But
even
if
these
figures
are
taken
seriously,
much
of
the
increase
in
private
investment
has
been
in
the
non-traditional
sectors
of
export
agricullure
rather
than
in
foodgrains
production.
It
is
noteworthy
that
the
growth
rate
between
1990-1
and
1996-7
shows
a
sharp
decline
not
only
for
the
coarse
grains
from
which
much
land
has
shifted
towards
export
crops
like
sunflower,
but
even
for
rice
(1.52
percent
compared
to
3.35
percent
for
1980-1
to
1995-6).
This
is
symptomatic
of
a
decline
in
investment
in
traditional
food
crops.
Capital Formation
But
this
is
part
of
an
overall
picture
of
investment
stagnation.
According
to
official
data
gross
domestic
fixed
capital
formation
as
a
proportion
of
GDP
behaved
as
follows:
Table
3:
GDCF
as
Percentage
of
GDP
1990-1
23.2
1993-4
21.6
1991-2
22.1
1994-5
22.4
1992-3
22.5
1995-6
24.6
Source:
Economic
Survey
1996-97,
p.3.
These
figures
reveal
a
picture
of
stagnation;
moreover,
even
the
slight
increase
in
1995-6
was
not
sustained
in
the
subsequent
years:
the
growth
of
output
of
the
capital
goods
industry
which
was
17.9
percent
in
1995-6
and
17.3
percent
in
1996-7,
has
witnessed
a
decline
to
less
than
3
percent
in
the
first
six
months
of
1997-8.
What
is
more,
the
monthly
growth
rates
were
minus
8.4
percent
in
August
and
minus
19.1
percent
in
September!
Since
the
level
of
investment
effort
in
an
economy
is
reflected
in
the
output
of
its
capital
goods
and
its
net
imports
of
such
goods,
a
stagnation
in
the
capital
goods
sector's
output,
such
as
what
we
are
witnessing
and
which
is
certainly
unmatched
by
any
corresponding
increase
in
net
imports,
is
indicative
of
a
stagnation
in
the
level
of
productive
capacity.
To
be
sure
the
output
of
what
are
labelled
as
`capital
goods
industries'
is
not
synonymous
with
total
capital
goods'
output;
nonetheless
what
is
happening
to
the
former
gives
some
indication
of
the
sluggishness
of
our
investment
effort.
There
are
reasons
however
to
believe
that
even
these
figures
represent
overestimates.
First,
the
method
of
estimating
capital
formation
is
to
take
some
goods
which
are
supposed
to
be
used
for
capital
formation
and
then
see
how
much
of
such
goods
are
used
in
a
particular
period.
For
coomodities
like
automobiles,
or
`machines'
which
are
used
boh
for
consumption
and
for
capital
formation,
the
method
is
to
assume
that
a
fixed
proportion
of
the
amount
used
in
a
particular
period
is
for
investment
purposes.
As
a
result,
in
any
period
when
consumer
durables'
purchase
in
the
economy
is
going
up,
this
would
also
boost
the
capital
formation
figures
spuriously.
Secondly,
construction
which
is
supposed
to
be
a
part
of
capital
formation
can
boom
without
actually
adding
to
the
productive
capacity
of
the
economy.
Anyone
familiar
wih
the
real
estate
boom
in
metropolitan
centres
and
indeed
in
urban
India
would
know
that
much
of
this
represents
speculative
investment
or
luxury
consumption
rather
than
any
addition
to
the
productive
capacity
of
the
economy.
In
short,
the
concepts
and
methods
used
for
capital
formation
estimation
in
India
are
such
that
increased
`consumerism'
would
necessarily
also
get
reflected
as
increased
capital
formation.
Since
the
post-`liberalisation'
period
has
been
universally
accepted
as
a
period
of
increased
`consumerism',
this
gives
an
upward
bias
to
capital
formation
estimates.
And
once
we
correct
for
this,
the
genuine
investment
ratio
would
show
a
decline
in
this
period.
No
economy
can
experience
an
acceleration
in
growth
unless
it
steps
up
its
investment
ratio,
i.e.
unless
it
devotes
a
much
higher
proportion
of
its
surplus
value
to
productive
capital
accumulation.
Countries
in
East
and
South
East
Asia
which
have
witnessed
extremely
rapid
growth
in
recent
years,
until
they
were
hit
by
the
currency
crisis,
maintained
investment
ratios
of
around
35
percent
of
GDP.
China
has
an
investment
ratio
of
nearly
40
percent.
By
contrast
the
investment
ratio
in
India
barely
reaches
25
percent.
If
the
country
is
to
step
up
its
growth
rate,
then
its
investment
ratio
has
to
be
increased
appreciably.
And
the
argument
of
the
`liberalisers'
was
that
if
only
the
policy
of
`liberalisation-cum-structural
adjustment'
is
pursued,
then
investment
ratio
in
the
economy
would
go
up
and
our
growth
rate
would
accelerate.
What
is
happening
to
our
capital
goods
industries
is
a
decisive
disproof
of
this
assertion.
Not
only
are
the
capital
goods
industries
facing
recession,
but
our
investment
effort
is
languishing,
which
makes
all
claims
about
India
stepping
up
her
growth
rate
(and
even
reaching
double-digit
growth
rates)
utterly
ludicrous.
The
reason
for
the
poor
investment
performance
is
not
far
to
seek.
The
proposition
that
if
only
more
surplus
value
is
handed
over
to
the
capitalists
they
would
automatically
invest
more
is
a
myth
perpetrated
by
the
ideologues
of
capitalism.
As
a
matter
of
fact
capitalists
undertake
productive
investment,
i.e.
add
to
the
capital
stock,
only
when
they
expect
to
be
able
to
sell
the
ensuing
larger
output
at
a
suitable
rate
of
profit,
i.e.
only
to
the
extent
that
they
expect
the
market
for
their
products
to
expand.
No
doubt
the
growth
of
the
market
is
something
to
which
their
own
investment
behaviour
in
the
aggregate
is
a
major
contributor;
but
obviously
the
whole
investment
process
is
supported,
and
has
to
be
supported,
by
some
additional
stimuli.
The
three
possible
sustained
stimuli
which
can
play
such
a
role
in
an
economy
like
ours
are:
public
investment
(and
expenditure
in
general),
the
growth
of
the
home
market
arising
from
rapid
agricultural
growth,
and
the
growth
of
exports
other
than
of
primary
commodities
(since
larger
primary
commodity
exports,
as
we
have
seen,
may
merely
mean
diversion
of
production
from
home
use
rather
than
larger
production).
Of
these,
exports,
no
matter
how
rapidly
they
grow
(within
the
bounds
of
course
of
plausibility),
can
scarcely
be
of
much
importance
as
an
investment
stimulus
for
an
economy
the
size
of
India.
On
the
other
hand
the
growth
of
the
home
market
arising
from
the
agricultural
sector
remains
constrained
by
the
absence
of
egalitarian
land
reforms,
and,
even
within
the
existing
agrarian
structure,
by
the
cutbacks
in
public
investment
that
have
been
imposed
of
late.
This
last
factor
(and
the
general
restriction
on
public
spending
of
which
it
is
a
part)
also
eliminates
the
stimulus
provided
by
public
investment
through
the
demand
it
generates
directly
or
indirectly
for
a
host
of
commodities.
The
`rolling
back'
of
State
capitalism
therefore,
far
from
increasing
the
investment
ratio,
causes
its
stagnation
and
even
decline.
The Crisis of Public Finance
The
usual
justification
for
cutting
back
public
spending,
which
typically
takes
the
form
of
cutting
back
investment
and
welfare
expenditures
by
the
State,
is
that
the
fiscal
deficit
must
be
cut,
since
it
is
a
source
of
`instability'
of
the
economy.
This
is
a
false
argument
for
a
number
of
reasons:
first,
the
main
cause
of
`instability'
in
the
sense
of
either
generalised
inflationary
pressures
or
an
unmanageable
trade
deficit
is
an
excess
of
aggregate
demand
over
aggregate
supply.
The
demand
of
the
government
is
only
one
component
of
this
aggregate
demand
in
which
the
demand
of
the
`corporate'
and
`household'
sectors
and
of
the
`rest
of
the
world'
constitute
the
other
components.
Hence
the
size
of
the
fiscal
deficit,
which
shows
the
net
demand
arising
from
the
government,
does
not
have
anything
to
do
directly
wih
`instability'.
Secondly,
the
fiscal
deficit
has
two
components:
there
is
the
deficit
in
the
revenue
account
which
shows
the
excess
of
government
current
expenditures
over
its
current
receipts
and
to
this
is
added
the
investment
requirements
of
the
government
which
have
to
be
financed
through
borrowing.
Now,
borrowing
to
meet
investment
requirements
is
common
practice
and
there
is
nothing
wrong
wih
it,
but
borrowing
to
meet
current
expendiures
does
require
scrutiny
(though
it
is
not
necessarily
reprehensible,
e.g.
in
a
recession)
since
it
is
indicative
of
"living
beyond
one's
means".
If
the
focus
was
on
a
reduction
of
the
revenue
deficit,
then
it
would
make
sense,
but
by
emphasising
the
fiscal
deficit
as
distinct
from
the
revenue
deficit,
the
IMF
and
the
World
Bank
deliberately
try
to
negate
the
role
of
the
government
as
an
investor,
i.e.
to
denigrate
the
public
sector,
for
which
there
is
no
justification.
Thirdly,
a
reduction
in
the
revenue
deficit,
or
in
the
fiscal
deficit,
can
be
brought
about
in
a
number
of
different
ways,
the
obvious
one
being
an
increase
in
direct
tax
revenue.
Indeed
in
any
third
world
economy
where
glaring
poverty
coexists
with
offensive
opulence,
increased
revenue
from
direct
taxes
is
urgently
called
for
anyway
as
a
means
of
reducing
inequalities.
But
the
Fund
and
the
Bank
invariably
underplay
this
avenue
of
deficit
reduction
and
emphasise
cuts
in
investment
and
welfare
expenditures.
Not
only
is
the
theory
underlying
such
cuts
invalid,
but
the
fiscal
deficit
which
is
invoked
to
legitimise
such
cuts,
both
acquires
importance
and
gets
aggravated
because
of
`structural
adjustment'.
Since
inviting
direct
foreign
investment
by
the
MNCs
becomes
an
overriding
objective
of
economic
policy,
the
rates
at
which
they
are
taxed
gets
reduced
in
competition
with
other
countries.
This,
for
reasons
of
symmetry,
means
that
direct
tax
rates
on
the
rich
as
a
whole
are
lowered,
though
spurious
concepts
like
the
so-called
`Laffer
Curve'
(which
"show"
that
reduced
rates
bring
in
larger
revenues)
are
invoked
in
justification
of
it.
Since
customs
duties
are
cut
as
part
of
`import
liberalisation',
and
excise
duties,
again
for
reasons
of
symmetry,
cannot
be
raised
as
a
consequence,
indirect
tax
revenues
too
suffer;
and
this
is
aggravated
by
the
sluggishess
in
the
growth
rate
that
`structural
adjustment'
engenders.
While
tax
reveues
cannot
be
raised
for
lowering
budget
deficits,
the
increased
interest
rates,
resulting
in
a
larger
interest
burden
on
the
government,
which
are
another
legacy
of
`structural
adjustment'
add
to
the
expenditure
side.
Thus
`structural
adjustment'
which
is
imposed
upon
the
country
owing
supposedly
to
the
fiscal
profligacy
of
the
State,
itself
works
to
further
aggravate
the
fiscal
situation,
through
lower
taxes
on
the
rich
and
higher
interest
rates.
At
the
same
time,
a
larger
fiscal
deficit
does
make
the
economy
crisis-prone
if
it
is
`liberalised',
irrespective
of
whether
there
is
any
theoretical
rationale
for
it.
This
is
because
speculative
finance
capital,
believing
in
this
false
theory,
can
precipitate
a
balance
of
payments
crisis
through
capital
flight
if
it
thinks
that
the
fiscal
deficit
can
not
be
sustained
without
a
depreciation
of
the
currency.
In
other
words,
what
matters
in
a
`liberalised
economy'
is
not
the
actual
relations
but
the
perceptions
of
relations
by
the
speculators.
And
because
of
this,
governments,
once
they
are
trapped
into
`liberalisation',
are
forced
into
curtailing
the
fiscal
deficit,
for
which
the
only
available
instrument
is
curtailment
of
investment
and
welfare
expenditure.
Putting
it
differently,
it
is
not
the
case
that
a
larger
fiscal
deficit
necessarily
leads
to
crisis
for
objective
reasons;
the
claim
that
it
does
so
becomes
a
self-fulfilling
prophecy
in
a
`liberalised
economy'.
And
its
curtailment
invariably
impinges
more
on
capital
rather
than
on
current
expenditures,
so
that
`fiscal
adjustment'
leaves
the
size
of
the
revenue
deficit
unchanged.
The
Indian
experience
fully
bears
this
out.
Table
4
gives
some
information
regarding
fiscal
developments:
Table
4:
Some
Fiscal
Magnitudes
as
Ratios
of
GDP
Revenue
Fiscal
Interest
Subsidies
Deficit
Deficit
Payments
1988-89
2.7
7.8
4.0
2.2
1989-90
2.6
7.8
4.3
2.6
1990-91
3.5
8.3
4.5
2.5
1991-92
2.6
5.9
4.8
2.2
1992-93
2.6
5.7
4.9
1.9
1993-94
4.0
7.4
5.0
1.7
1994-95
3.3
6.1
5.1
1.5
1995-96
2.7
5.5
5.1
1.3
Source:
Economic
and
Poliical
Weekly,
Budget
Number,
May
1997.
It
is
noteworthy
that
while
the
proportion
of
fiscal
deficit
in
the
GDP
went
down
from
nearly
8
percent
prior
to
the
imposition
of
`structural
adjustment'
to
5.5
percent
by
the
mid-90s,
the
proporion
of
reveue
deficit
remained
unchanged.
This
implies:
first,
that
the
reduction
in
the
fiscal
deficit
was
achieved
by
compressing
capital
expenditures
which
is
harmful
for
the
economy
in
the
long-run
since
it
leads
to
shortages,
especially
in
the
infrastructure
sector
(and
hence
to
supplication
before
MNCs
for
investing
in
this
sector);
and
secondly,
that
the
basic
fiscal
problem,
which
lies
in
the
very
existence
of
a
revenue
deficit,
is
by
no
means
addressed
by
`structural
adjustment'.
In
fact
since
within
current
expenditure,
the
weight
of
interest
payments
has
gone
up
owing
to
`structural
adjustment'
the
revenue
deficit
would
have
been
even
larger,
and
hence
the
fiscal
problem
even
worse,
if
the
squeeze
on
the
people
through
reductions
in
welfare
expeditures
and
administered
price-hikes
had
not
increased.
`Structural
adjustment'
in
other
words
entails
a
very
specific
fiscal
regime,
whose
purpose
is
to
increase
transfers
from
the
State
to
rentiers
in
the
form
of
interest
payments,
and
to
enforce
larger
fiscal
burdens
on
the
people
and
cuts
in
public
investment
(so
that
MNCs
have
to
be
wooed
to
step
in).
Inflation and Poverty
The
rise
in
prices
during
the
1990s
has
been
a
direct
result
of
this.
Since
there
has
been
a
curtailment
in
the
growth
of
public
investment
and
a
corresponding
curtailment
in
the
pace
of
growth
of
demand
in
the
economy,
inflationary
pressures
should
have
abated
in
this
period.
Instead
we
find
that
inflation
actually
accelerated
in
the
post-`structural
adjustment'
period
(Table
5).
Table
5:
Increases
in
the
Cost-of-Living
Indices
(percentages)
Agricultural
Industrial
Labourers
Workers
1985-6
to
1990-1
47.1
53.5
1990-1
to
1995-6
71.6
62.2
Source:
Calculated
from
various
issues
of
the
Economic
Survey.
This
acceleration
of
inflation
in
a
period
of
`slack'
demand
was
essenially
due
to
hikes
in
administered
prices
which
were
ordered
by
the
government
in
order
to
curtail
its
subsidy
bill,
and
thereby
the
fiscal
deficit.
The
commodity
whose
price
was
most
severely
affected
in
this
manner
was
foodgrains.
There
were
steep
hikes
in
the
central
issue
prices
of
rice
and
wheat
in
December
1991,
January
1993
and
February
1994.
As
a
consequence
of
these
hikes,
by
February
1994
the
issue
price
of
the
common
variety
of
rice
had
increased
by
86
percent
compared
to
the
immediate
pre-`structural
adjustment'
level
and
of
wheat
by
72
percent.
It
is
hardly
surprising
that
the
cost-of-living
of
the
workers,
both
in
urban
and
rural
areas,
went
up
so
sharply,
and
that
the
cost-of-living
of
agricultural
labourers,
for
whom
food
is
an
even
more
important
item
in
the
consumption
basket
than
for
industrial
workers,
went
up
more
steeply
than
for
the
latter.
Of
course
in
recent
months
there
has
been
a
slackening
in
the
pace
of
inflation,
though
this
itself
is
in
the
process
of
getting
reversed.
This
however
is
no
credit
to
`structural
adjustment',
rather
the
contrary.
Two
factors
have
been
particularly
responsible,
among
others,
for
the
slackening
of
the
pace
of
inflation.
The
first
relates
to
the
fact
that
after
February
1994
there
was
a
long
pause
in
raising
the
administered
price
of
foodgrains
which
indicated
that
the
earlier
sharp
squeeze
on
the
living
standard
of
the
people
had
reduced
the
scope
for
any
further
immediate
increase
in
the
squeeze.
A
second
factor
also
contributed.
And
this
was
the
struggle
launched
by
the
Left
forces
within
the
United
Front
to
prevent,
or
moderate
the
extent
of,
administered
price-hikes
in
a
variety
of
commodities.
The
kind
of
boost
which
inflation
would
have
got
if
these
hikes
had
been
carried
out
was
therefore
denied
to
it.
It
is
thus
the
pause
in
implementing
the
`structural
adjustment'
agenda
in
this
regard
which
accounts
for
the
pause
in
inflation.
The
nineties
have
seen
both
inflation
squeezing
the
working
people,
and
an
accentuation
of
unemployment.
The
latter,
as
already
mentioned,
has
been
a
result
of
the
shift
of
acreage
from
food
to
non-food
crops,
of
import
liberalisation
that
has
led
to
a
demand-switch
away
from
domestic
producers,
and
above
all
of
cuts
in
public
investment
and
in
public
development
expendiure
geerally.
The
Central
government's
total
development
expenditure
as
a
proportion
of
GDP
at
market
prices
declined
from
12.54
percent
in
1985-6
to
8.08
percent
in
1995-6
(RE)
and
7.74
percent
in
1996-7
(BE).
Since
government
expendiure
has
a
crucial
employment
generating
effect,
especially
in
rural
areas,
this
reduction
has
bee
employment-contracing.
The
form
of
such
contraction
has
been
a
decline
in
the
ratio
of
non-agricultural
to
agricultural
employment
in
rural
areas.
The
reason
is
obvious:
since
agriculture
is
a
sort
of
"residual
sector"
towards
which
the
unemployed
and
underemployed
workers
gravitate,
fluctuations
in
development
expenditure
by
the
State
resulting
in
corresponding
fluctuations
in
employment
opportunities
(which
are
in
a
proximate
and
direct
sense
ouside
agriculture),
manifest
themselves
through
fluctuations
in
the
ratio
of
non-agricultural
to
agricultural
employment.
The
rise
in
the
prices
of
essential
goods
and
the
decline
in
employment
opportunities
have
together
meant
an
aggravation
of
poverty
under
`structural
adjustment'.
The
head-count
ratio
of
poverty
for
rural
India
moved
as
follows
for
1989-94.
Table
6:
Poverty
in
Rural
India
Jul
1989-
Jun
90
34.30
Jul
1990-
Jun
91
36.43
Jul
1991-
Dec
91
37.42
Jan
1992-
Dec
92
43.47
Jul
1993-
Jun
94
38.74
Source:
Utsa
Patnaik
and
Abhijit
Sen,
"Poverty
in
India",
CESP
Working
Paper,
JNU.
A
comparison
of
immediate
pre-`structural
adjustment'
levels
with
those
following
`structural
adjustment'
clearly
shows
an
increase
in
poverty
in
rural
India.
Apologists
for
`structural
adjustment'
deny
this
fact
by
using
the
following
argument:
apart
from
1993-4
all
the
other
figures
are
based
on
a
"thin"
smaple
on
the
basis
of
which
no
valid
inferences
can
be
drawn;
but
if
we
compare
1987-8
with
1993-4
which
are
two
years
of
large
sample
surveys
then
we
find
a decline
in
rural
poverty
from
39.60
percent
in
1987-8
to
38.74
in
1993-4.
The
problem
with
this
argument
is
that
1987-8
was
not
only
a
drought
year
when
the
poverty
ratio
goes
up
anyway,
but
also
too
far
back
to
permit
any
inference
about
the
impact
of
`structural
adjustment'
on
poverty.
For
the
latter
purpose
we
have
to
take
some
immediate
pre-`structural
adjustment'
years
as
the
base
for
comparison.
And
since
for
these
years
we
have
only
the
`thin'
sample
we
have
to
make
the
comparison
on
the
basis
of
the
`thin'
sample.
And
the
conclusions
here
are
unambiguous.
Since
these
conclusions
are
in
line
with
the
trends
regarding
per
capita
foodgrain
availability
which
have
declined
on
average
between
pre-
and
post-`structural
adjustment'
years
and
regarding
prices
and
employment,
as
discussed
earlier,
they
have
to
be
taken
as
robust.
Accompanying
this
increase
in
poverty
there
has
been
a
cut
in
the
ratio
of
social
sector
expendiure
to
GDP
(Table
7).
Table
7:
Social
Sector
Expenditure
of
Union
and
State
governments
(Percent
of
GDP)
Education
Health,
Water
Supply
and
Culture
and
Sanitation
1989-90
3.36
1.26
1990-91
3.25
1.23
1991-92
3.12
1.19
1992-93
3.04
1.17
1993-94
3.04
1.19
1994-95
(RE)
3.00
1.17
1995-96
(BE)
2.84
1.12
Source:
Alternative
Economic
Survey
1996-97
Vulnerability
to
Speculation
The
effect
of
`structural
adjustment'
is
evident
not
just
in
the
fact
of
stagnation
or
growing
poverty
and
unemployment
or
the
growing
desperation
in
wooing
MNCs
to
overcome
the
infrastructural
shortages.
It
is
evident
above
all
in
the
increased
vulnerability
to
speculation
of
the
Indian
economy.
Notwithstanding
all
the
hype
about
direct
foreign
investment
inflows
into
the
economy,
the
actual
inflows
under
this
head
have
been
minuscule,
not
more
than
$
2
billion
per
year
on
average.
What
has
come
in
larger
measure
however
is
speculative
finance
capital
in
the
form
of
`hot
money'
on
the
basis
of
which
our
current
reserves
(on
Oct.24,
1997)
of
$26.3
billion
have
been
built
up.
But
as
the
experience
of
the
East
and
Souh-East
Asian
countries
has
demonstrated,
this
speculative
capital
can
totally
destabilise
the
economy
in
a
very
short-time
without
there
being
anything
objecively
wrong
with
its
performance.
A
credit-rating
agency
`downgrades'
the
economy
(for
reasons
it
alone
knows!),
or
a
rumour
about
an
impending
devaluation
is
floated,
or
a
Finance
Minister
is
changed,
or
a
government
announces
some
programme
of
expendiure,
and
`hot
money'
starts
flowing
out,
bringing
the
economy
to
a
crisis,
and
heaping
misery
on
the
people.
The
operation
of
speculative
finance
capital
represents
the
ultimate
irrationality
of
capitalism.
It
makes
the
livelihood
of
millions
dependent
on
the
whims
and
caprices
of
a
few
speculators.
It
sacrifices
the
livelihood
of
millions
of
people
in
order
to
appease
a
few
speculators,
so
that
their
`confidence'
in
the
economy
is
not
undermined.
The
real
crime
of
`structural
adjustment'
and
of
our
domestic
ruling
classes
who
have
embraced
it
under
the
directive
of
the
agencies
of
international
finance
capital,
such
as
the
IMF
and
the
World
Bank,
is
that
they
have
opened
the
economy
up
for
the
operation
of
these
speculative
tendencies,
which
essentially
negates
democracy,
freedom,
national
sovereignty
and
the
exercise
of
the
will
of
the
people.
The
Alternative
Extricating
the
economy
from
this
mire
is
as
necessary
as
it
is
tricky.
The
advantage
which
India
has
is
that
our
currency
is
not
as
yet
fully
convertible,
thanks
to
the
massive
democratic
opposition
to
convertibility
that
was
built
up
in
the
economy
even
before
the
dangers
of
it
became
manifest
in
East
and
South
East
Asia.
On
the
other
hand
however
the
very
crisis
afflicting
the
Asian
economies
puts
pressures
on
our
currency
which
makes
the
task
of
a
regime
change
for
insulating
the
economy
against
the
depredations
of
speculators
a
tricky
one,
since
any
such
attempt
may
itself
start
a
speculative
run
against
the
currency
and
precipitate
a
crisis.
The
immediate
task
is
to
halt
any
further
attempts
towards
financial
liberalisation,
autonomy
for
the
Reserve
Bank,
and
convertibility
of
the
currency.
Gradually
the
economic
space
available
to
the
State
can
be
widened.
The
alternative
economic
strategy
must
be
built
on
the
basis
of
four
main
elements:
egalitarian
land
reforms
which,
apart
from
their
economic
effects
in
terms
of
releasing
productive
forces
in
agriculture
and
expanding
the
domestic
market,
would
mobilise
the
rural
masses
behind
the
new
strategy;
a
revival
of
public
investment,
especially
in
infrastructure,
which
is
designed
to
promote
agricultural
growth
as
a
means
to
expand
domestic
food
availability
as
well
as
the
domestic
market;
vastly
increased
public
expenditure
on
education,
sanitation
and
health,
which
would
eliminate
illiteracy,
provide
free
and
compulsory
primary
education
to
every
child,
and
ensure
minimum
health
standards
for
all;
and
much
greater
accountability
of
the
State
which
can
be
ensured
inter
alia
through
the
devolution
of
decision-making
and
resources
to
elected
local
bodies
functioning
under
direct
popular
scrutiny.
A
revival
of
public
investment,
a
substantial
step-up
in
public
expenditure
on
education
and
health
would
of
course
need
resources,
and
these
have
to
be
mobilised
essentially
through
direct
taxation,
apart
from
a
lowering
of
interest
rates
and
thereby
of
the
interest
burden
on
the
State.
Bourgeois
economists
and
commentators
who
talk
incessantly
about
the
burden
of
subsidies,
including
food
subsidy,
do
not
say
a
word
on
the
far
more
substantial
transfer
payments
which
are
being
made
to
rentiers
in
the
form
of
interest
payments.
And
yet
while
the
subsidies
have
some
productive
or
redistributive
role,
these
transfers
have
no
such
jusificaion.
Likewise
bourgeois
economists
keep
hailing
reductions
in
direct
tax
rates.
But
India
has
the
tenth
position
from
the
bottom
among
all
the
countries
when
it
comes
to
the
ratio
of
central
government
tax
revenue
to
GDP.
(The
inclusion
of
state
government
tax
revenues
would
not
make
any
qualitative
difference
to
the
picutre).
The
nine
countries
below
India
are:
China,
which
has
a
completely
different
fiscal
system,
four
oil-rich
Middle
Eastern
countries,
which
do
not
need
tax
revenue,
and
Myanmar,
Burkina
Fasso,
Paraguay
and
Guatemala.
Leaving
out
China
and
the
oil-rich
countries
we
are
therefore
fifth
from
below,
the
other
four
being
abysmally
poor
countries.
The
proposition
about
India
having
high
direct
tax
rates
which
"stifle
enterprise"
is
a
complete
myth.
Foregoing
tax
revenues
in
he
name
of
attracting
direct
foreign
investment
is
the
height
of
folly.
Direct
foreign
investment
comes
in,
if
at
all,
only
to
those
economies
which
are
already
growing
rapidly.
One
can
therefore
say
that
public
investment
would
"crowd
in"
rather
than
"crowd
out"
direct
foreign
investment,
as
it
would
domestic
private
investment.
The
reactivation
of
public
investment
in
the
context
of
an
alternative
strategy
and
on
the
basis
of
an
alternative
correlation
of
class
forces
is
the
need
of
the
hour.