Is feel good real in India

The ruling party is in election mode with daily pronouncements about how well the Indian economy is doing and benefitting not just the well-off but also the poor in the country. It has claimed a big reduction in poverty in India. It is stated that the Indian economy growing at about 7% is the fastest growing large economy in the world. Further, inflation is said to be tamed and employment generation robust, in spite of global head winds due to the Ukraine war and the pandemic.

It is claimed that India has weathered these global storms better than most rich countries, so, it has become `Vishwaguru’. The Presidency of G20 has been cited as evidence of India becoming a dominant player on the world stage. It is claimed that India’s stock in the world has gone up since it is getting respect from other countries and its stand on various world affairs like, wars in Ukraine and Gaza, is being appreciated. Another sign of good performance is stated to be the desire of major world corporations to invest in India.

Incomes and Poverty

For the ruling regime, international approval is crucial since people view it as unbiased. But, is that the case? On most international metrics, India is doing poorly. Whether it be per capita income, hunger, democracy, etc. The size of the economy is large because India is the most populous nation in the world. But this hides the plight of the average Indian compared to other countries. That is captured by the per capita income and in that metric India is at the 137th rank in the world. Even this hides the reality of the average Indian given the huge inequality in the economy.

India has the 3rd largest number of billionaires. So, the per capita income does not represent the pitiable situation of the vast majority of the Indians. According to the government there are 30 crore Indians registered on the e-shram portal. More than 90% of them reported an income of below Rs.10,000 per month – which is two thirds of the per capita income. And, these are the better-off workers in the unorganized sector.

The worse-off have no access to computers or internet so are not registered. Their incomes would be lower – even below poverty line incomes. No wonder, the government has to offer free foodgrains to 81 crore Indians (58% of the population) since they are perceived to be unable to buy adequate nutrition for their families.

It is claimed that Indian economy is now the 5th largest in the world, ahead of India’s colonial master, Britain. It is claimed that at the current rate of growth, India will become the 3rd largest in 3 years and reach $7 trillion by 2030. International institutions like the UN, IMF and the World Bank back these figures. How can they not? They are not data gathering agencies and have to use the government data. So, errors in the government data are also reproduced in their data and analysis. These agencies only tweak the data and carry on since they are mandated to use official data.

Shocks and Inequality

The answer to the question of how well is the economy doing depends on who one asks. The well-off and businesses are happy since they are being pampered and given concessions. Most of the increase in the incomes have accrued to businesses and professionals. Some in the middle classes who have organized sector employment have also gained. The real losers are those belonging to the lower middle and poor classes.

These people are in the unorganized sectors which have been losing out. They also lose real incomes since inflation has been high, especially in items of day to day consumption like, food items.

The unorganized sector and those employed there have lost due to the policy induced crisis – the implementation of a) sudden demonetization, b) structurally faulty GST, c) sudden lockdown and d) to an extent the NBFC crisis starting in 2018. The net impact of all these missteps has been that the organized sector has grown at the expense of the unorganized sector. This gives the picture of the economy doing well, whereas it is not.

Since the organized sector employs few people due to high degree of automation and mechanization, it has jobless growth. Displacement of the unorganized sector means loss of jobs/ non-availability of work. So, in the net, there is a growing unemployment (of different kinds). This causes family poverty to increase.

The result of this differential growth is a rising inequality between the rich, the middle class and the poor. It results in inadequate purchasing power of the huge numbers of the citizens at the lower rung of income ladder. So, demand for mass consumption items remains low and that leads to a slowdown in the economy. This was witnessed even before the pandemic when the rate of growth fell from 8% to 4%.

The impact of the 4 shocks to the economy, mentioned above, has been that the unorganized sector has been losing an average of Rs.12 lakh crore in the last 7 years, that is, a total of Rs. 84 lakh crore. Compared to this, what has been given to the poor under various welfare programmes is only Rs. 25 lakh crore in the last 7 years. Thus, in the net the poor have been the losers

Yet, in spite of so many difficulties, the citizens’ continue to vote for the present ruling party in the national elections and many of the Assembly elections. In spite of the distress during the COVID pandemic, the ruling party won in the UP Assembly elections.

There are several reasons for this. First, there is an effective propaganda about India doing well. Further, the religiosity of the majority community is being cynically exploited. And, the poor are being turned into `labhartis’ by not only the ruling party but all those in power. The poor are offered food, cash, free bus rides, laptops and so on.

This legitimizes the bribing of the voters by the ruling party. Finally, the middle classes’ inferiority complex viz.-a-viz. the rich countries is being exploited. India being a world leader appeals to the middle class since they are insecure and this gives them a reason to gloat that they are equal to the citizens of advanced countries

Data Manipulation

Data is a huge issue since the government is manipulating it to present a rosy picture of its performance. All governments do that but the present ruling dispensation has raised this to new heights. But, its own top functionaries have questioned the quality of the data. Further, when the data does not suit its requirements, it does not release the data (like, on unemployment) or claims that it is not correct (like, regarding GDP).

Most importantly government is using limited data and incorrect methodology to generate its own inaccurate data. This is the case with the recent poverty data and the national income data.

For the national income data the declining unorganized sector is represented by the growing organized sector. It has now come to light that Agriculture sector data is also inaccurate. So, the unorganized sector employing 94% and producing 45% of the output is incorrectly estimated.

The government is promoting the organized sector while ignoring the plight of the unorganized sector. Concessions are being given to the former like, cut in corporation tax rates, PLI scheme, digitization and GST. Agriculture marketing is sought to be handed over to the corporate sector. Agriculture workers, small farmers and workers in the micro sector have inadequate incomes and live at close to the poverty line.

These segments of workers in the unorganized sector have a wage below the `living wage’, promised in the constitution, and their condition is pitiable. They cannot cope with a crisis as seen during the lockdown and pandemic.

Since the declining unorganized sector is ignored, there is an upward bias in the GDP. If a correction is applied to the government’s GDP data then the economy is not growing at 7% but at 1-2% per annum. The situation was much worse at the time of the demonetization in 2016 and deteriorated after introduction of GST in 2017. Even the official rate of growth had dipped from 8% in 2017-18 to 4% in 2019-20 before the pandemic. So, the actual rate of growth must have even turned negative.

In brief, the economy has hardly grown since 2016-17 when demonetization was announced. Thus, India’s growth at between -2% to +2% has not been the highest among the world’s large economies. So it cannot be the 5th largest and will not soon be the 3rd largest world economy.

This also explains why unemployment is high. It is also a pointer to the persistence of poverty – its levels could not have come down. If the unorganized sector employing 94% of the workforce is declining then employment and incomes for the vast majority will be declining. Since the poor belong to this sector, poverty can only be rising and not falling.

The government claims on the basis of NHFS data for 2015-16 and 2019-21 that multi-dimensional poverty has declined. This is most curious. Everyone is witness to the decline of incomes in 2020-21. Government’s inaccurate data also shows that the steepest fall in income since Independence took place in 2020-21 due to the pandemic.

Further, a large number of unreported deaths took place that year. Finally, the third parameter in this poverty index is education. It is known that schools and colleges were shut and teaching was devastated not only in India but also in a rich country like the USA. So, no way could poverty have been less in 2020-21 compared to 2015-16.

Current Issues

Compared to the official data, if the actual growth is less and unemployment is higher, then poverty would be higher. Also inequality would be higher than indicated by official data. As stated above, this is due to the decline of the unorganized sector due to shift in demand to the organized sector. In brief, there is marginalization of agriculture and micro sectors of the economy.

Not only the GDP data is over stated, inflation is under stated for the poor because of the sharper rise in the prices of commodities that the poor consume. In the consumer basket of all India CPI, there are many items that are consumed by the well off and not the poor. This leads to a lower rate of inflation even though the poor face a higher inflation which results in reduced purchasing power.

Inflation does not matter if incomes rise in step. But, for the marginalized sections, incomes have mostly risen less than inflation thereby denting their real incomes and their living standard. Middle class has savings so it can weather the impact of inflation by cutting back on its savings. The real gainers are the businesses and the well-off. For these people the incomes rise more than the inflation. So, inflation redistributes incomes from workers to the businesses and professions.

It should be noted that when the inflation rate falls it does not mean that prices fall. They continue to rise but at a lower rate. Thus, the poor continue to be impacted even if the inflation rate comes down. Even the middle classes are affected adversely.

RBI is supposed to control prices but it cannot do so in India because it can only reduce demand through interest rate increase or tightening liquidity. But the problem often originates from supply constraints like drought or flood or oil shock due to disturbances in West Asia. These are not in RBI’s control.

Baking sector is crucial to the health of the economy. It not only promotes savings but most importantly enables investments to occur which spurs growth of the economy. Thus, saving and borrowing is a part of the growth process of an economy. As long as borrowing is covered by investment which gives a return it helps boost business.

Government also borrows for its expenditures when there is a deficit in the budget. If the borrowing is for purposes of earning a return like, in capital formation it is useful. If it is used for current consumption then it has no return on it and it leads to a buildup of debt. If it is used to build up the capacity of the economy like expenditures on education and health then also it is useful since the economy will get a boost and become more productive and in the future more taxes will get collected.

So, there are two kinds of problems for the banking sector. First if the private sector borrows and is unable to return the money borrowed because of losses to the business. Second, if the government borrows more and more due to persisting and rising deficit in the budget.

In the first case, when default in payment takes place it leads to `Non-performing assets’ (NPA). This is what happened over time and led to a crisis in banking in 2018. The result was lending from banks and `Non-Banking Financial Companies’ declined and this led to a further slowdown of investment which was already suffering from a decline in demand consequent to growing inequalities.

To clean up the balance sheets of the banks, a lot of loans had to be written-off by the banks, leading to losses. This was like a loan waiver to the big businesses that had borrowed and could not return the money. The situation of NPAs has now improved.

Why did the NPAs build up? Banks lent without doing due diligence – loans were given without checking whether the borrower could get the return to repay the loan. Two factors underlay this. First, government was promoting big infrastructure projects which have a long gestation period and secondly the cost of setting up the infrastructure was high which in a poor country like India is hard to recover.

Second, there was crony capitalism. Since loans were being given without due diligence crony capitalism took deeper roots. Political and bureaucratic pressure was mounted on banks to give loans to favoured businessmen who did not even have a viable project. Due to their clout these businessmen felt they need not return the money to the bank and they could further expand business by leveraging the assets created. Crony capitalism persists.

Another problem has been rising Government borrowing for current consumption. This leads to a growing debt burden. Government’s debt has risen from around 50% to about 80% of GDP in the last few years. While this generates demand in the economy, it also leads to rising interest burden on the budget which is now the single largest head of the budget. That pre-empts resources for public investment and welfare schemes resulting in economic slowdown and the poor getting hurt.

The government borrows internally from the economy as well as from abroad as foreign loans. Foreign funds are being invested in the markets. There are Foreign Portfolio Investments (FPI) and Foreign Direct Investments (FDI). The latter is more stable than FPI and cannot leave the economy immediately.

If a balance of payment (BOP) problem arises in the economy then foreigners experience a loss of confidence in the economy and they start pulling out their funds. That aggravates the situation further and the economy goes into a crisis like happened in 1989-90 and again in 2012-13. Today, the foreign debt is about $ 630 billion while the foreign exchange reserves are about $ 620 billion.

This is an unstable situation. Any loss of confidence in India can lead to a crisis and a decline in the value of the Rupee compared to other currencies. This will be inflationary since imported goods become more expensive. It should lead to cheaper exports but in a situation where the world economy is slowing down this does not happen. The result is a decline in investment and especially public investment which worsens the economic slowdown.

Economic slowdown adds to unemployment. 24 million young are ready every year to take up work but only half a million jobs are created in the desirable organized sector. The rest have to go into the crisis ridden unorganized sector at low incomes. Mostly, they have to generate work for themselves like, rickshaw pulling or head load work or selling peanuts on the road side. Many of the educated young spend years of life preparing for examinations for police, army, civil services, etc.

Unemployment is highest among educated youth and women. This leads to frustration among the young. The government is not sensitive to this growing problem of unemployment even though its report in 2019 suggested that unemployment had reached a high of 45 years. Based on a faulty definition of unemployment, it claims that only 5-8 million jobs need to be created.

The problem is that there is a backlog of 280 million jobs and every year 24 million jobs need to be created. But the government is promoting capital intensive organized sector and not the labour intensive unorganized sector. So, there is not only jobless growth but job loss growth.

Present day technology is labour displacing like, in agriculture or banking or construction or trade. Machines are used in agriculture and construction. There is growing automation in banking and trade sectors. So, these sectors which could employed many have been shedding jobs, in spite of investment in these sectors.

More Achieved in 10 Years than in Earlier 60 Years?

It is claimed that most of the country’s progress has occurred in the last 10 years and nothing much happened prior to 2014. Example is given of road construction, electrification of villages, provision of toilets, construction of airports, expansion of telecom network, etc.

This is the property of compound rate of growth of the economy. If the number of airports increase from 10 to 50 over 20 years and then in the next 10 years double to 100, then one can claim that what has happened in 10 years equals what had happened in the earlier 20 years. In absolute numbers that is correct but in terms of growth rate, in the earlier period the number had increased fivefold compared to a doubling in the later period.

In the earlier period the annual growth was 8.4% while in the latter period it turns out to be 7.2% annually. Thus, absolute numbers look big but actually growth has slowed down in the second period. This is the power of compound growth where increase takes place on rising absolute numbers. So, the achievement looks impressive compared to the earlier period. India is undoubtedly better-off today than 75 or 20 years back.

Further, as the economy grows there are more resources to invest. So, growth should also pick up. Compared to 1950 when the country started its development process, in 2014 there were 240 times more resources to invest. So, growth is expected to pick up. The country should have 240 times more houses, schools, dispensaries, roads, toilets, electrification, etc.

Poverty should have ended, but the gains of development have been cornered by the well-off leaving little for those at the bottom. So, we have homeless, standards of education and health remain poor for the vast majority, electricity may have reached more homes but for the marginalized it is erratic. Thus, uncivilized living conditions persist for the majority.

Poverty is Space and Time Specific

Poverty, defined as lack of `socially minimum necessary consumption’ has increased since the majority does not get the `social minimum necessary’. The Constitution promised a `living wage’ which would have eliminated poverty but many do not even get the minimum wage.

Data is fudged to show a decline in poverty, using the multi-dimensional poverty index. Unfortunately, this index does not capture the citizens’ plight. It only captures what is given on paper to the people. Whether or not it reaches the people is not measured. For instance, school enrollment has increased but ASER Report shows that 50% of the children in the age group of 14 to 18 cannot do most of the things a second grade child should be able to do.

Poverty will decline if children are able to get work but if they do not have the skills neither will they be able to get proper work nor be able to generate work for themselves. They would only be able to do menial work at low incomes and will remain poor. Due to the pandemic, schools were closed and large number of people died so how could poverty have declined?

The `socially minimum necessary consumption’ is space and time specific and is forever changing. So, the poverty line was different in the 1960s compared to 1990s and even more different in 2020. Poverty line is a moving target and not a fixed line. Compared to the fixed line of 1960 or 1990, India has less poverty in 2020. But compared to what is needed or what other countries have achieved, India is not better off.

For instance, in 1990, China and India were at the same level of production but today China produces 5 times more than India and has become the manufacturing hub of the world selling high value added products compared to India. India imports from China not only high end products but also cultural symbols like, Ganesh statue and Holi colours. So, in spite of strained relations India has a huge deficit in trade with China.

Is India a Vishwaguru?

India could have been better-off than it is, if a) polices had not led to problems and b) the basic needs had been fulfilled. This is due to the pro rich and pro-business bias of policies – a result of the elite capture and cronyism – resulting in India not achieving its potential.

Cronyism and consequent uncertainty and social strife are resulting in many high net worth individuals (HNWI) leaving India. Large number of the young and skilled are also leaving the country – as witnessed by the queues outside embassies of the rich countries. Less skilled Indians have also been leaving the countries in search of jobs in West Asia and East Asia. Desperation to leave is so great that many pay lakhs to labour agencies to go abroad. This, in spite of frequent reports of migrants being cheated and/or often having to face severe hardships as migrants.

If India was a `vishwaguru’, why would so many Indians be leaving the country to not only work but to settle down abroad. They are leaving because the conditions in India are not conducive. It was stated in parliament that lakhs are giving up Indian citizenship. How many Canadians or Australians or Americans are migrating to India to work/settle down? Finally, a `vishwaguru’ has to be acknowledge by others and should not have to self-proclaim its status.

Presidentship of G20 rotates among the member countries and does not imply that India is number one. In fact, India has the lowest per capita income and is the poorest out of the G20 nations.

What makes a nation a `Vishwaguru’? It is the capacity to give its citizens a civilized existence, being a leader in cutting edge technology, having trade surplus and stable currency, etc. Unfortunately, a vast majority of the Indians live in poverty. In technology, India lags far behind the advanced nations. It is dependent on imports for all the modern civil and military equipment like, aircrafts, rifles, mobile phones, telecom equipment and capital items.

India’s exports are of low value items while imports are of the more sophisticated products. Further, India’s production has a lot of imported inputs, like, in the case of pharmaceuticals, mobile phones and automobiles. So, India has had a trade deficit for a long time. Rupee has been depreciating against the dollar and other major currencies due to weaknesses in the balance of payments. So, none of the conditions for being a `Vishwaguru’ are fulfilled.

One of India’s key weaknesses has been a large black economy. It results in policy failure for three reasons. Data is faulty so policy is formulated on inadequate data. Second, expenditures do not lead to outcome. Third, it makes inequality worse than what the white economy reveals. This is because black incomes are concentrated in the hands of the top 3% in the income ladder. As argued earlier, inequality aggravates the demand shortage in the economy and that slows down the economy, leading to increased unemployment.

The government claims to have acted against the black economy by steps like, GST, the Foreign Money Bill, the Court monitored SIT, demonetization, DBT and digitization. Underlying black income generation is a triad. The measures undertaken do not help dismantle the triad. Daily new cases of corruption and black income generation are being reported. GST itself has become a big source of black income generation through creation of fake companies to claim input tax credit (ITC). Black incomes are also generated through misinvoicing, fake e-way bills and so on.

If the black economy had been impacted, by the steps undertaken by the government, the abysmally low direct tax/GDP ratio would have sharply risen to 12-15% but it has remained more or less unchanged between 5.75% and 6.1%. Checking black incomes implies bringing them under the income tax net. Since these are high incomes, they would have paid tax at the highest rate and tax to GDP ratio would have risen sharply.

The government argues that both direct and indirect tax collection has risen. It reflects the growth of the organized sector at the expense of the unorganized sector. The latter has low incomes and lies outside the direct tax net. It is the growing organized sector that pays most of the direct taxes. GST is also mostly paid by the organized sector producers. So, the increase in tax collection in absolute terms is not due checking the black economy.

The government also claims that many more people are in the tax net. A number of about 8 crore is mentioned. But, the PM has himself revealed that only about 1.5 crore are effective tax payers. This is because half the people filing returns file nil return since their income is below the taxable limit (Rs.5 lakh till 2022-23 and Rs.7.5 lakh from 2023-24). Another 2.5 crore pay very little income tax because they declare a low income.

So, increase in the number of people filing tax return is no sign of better tax compliance. It is a reflection of inflation which raises nominal income and brings people in the range where they are required to file a return even if they do not have a taxable income.

In brief, the Government’s claim of bringing black income generation under control is incorrect.

Obfuscating the Issues – Weakening Democracy

While the economy expands in size, as more resources become available, its performance is weak in key variables, like, growth rate, reduction in poverty, checking black income generation, becoming a `vishwaguru’ and tackling unemployment. Any comparison with earlier ten years has to be in terms of changes and not absolutes and of actual data and not the officially manipulated data.

With manipulated data, a glorious picture of Indian economy’s performance is presented through high pressured marketing and cynical political manipulation of the citizens. Public attention is diverted through raising emotional, religious and cultural issues. People are resigned to mostly accept their uncivilized existence.

To protest against their plight, people need to be mobilized by the opposition which has gone silent because of fear of victimization by government agencies. Past corruption cases and new ones are being systematically raised against opposition leaders and they are being put behind bars to finish off their politics. Opposition governments are being toppled by buying out legislators and engineering mass scale defections.

Mainstream media is also largely fearful of the ruling party since media houses have business interests which are vulnerable to direct and indirect pressures. For instance, advertising can get stopped. So, voluntarily it has become `godi’ media. The NGOs and intellectuals have faced harassment through cases against them and cancelling their permissions to raise funds. In effect, resistance to the ruling party is systematically being snuffed out.

A narrative is being created of feel good with the promise of `Aache Din’ in the future. For instance, on the basis of incorrect data it is said that India has become the 5th largest economy and will become the 3rd largest in 3 years. Further, using emotional issues the citizens are being polarized to paper over the distress in the unorganized sector, of farmers, workers, youth and women. A sense of insecurity has been aroused in the majority community and based on that triumphalism is propagated to get votes.

Conclusion: False Feel Good

The economy has grown marginally since 2016-17, much less than officially claimed. Inequality has risen because the well-off and crony businesses have cornered the gains. The unorganized sector consisting of agriculture and micro sector employs 94% of the work force and is in decline, causing rising unemployment, poverty and hunger.

Unemployment leads to low wages which benefits the well-off and businesses. The attention of the marginalized sections is diverted from growing stress by raising religious and emotional issues and weakening democracy.

Data is manipulated to create a feel-good and project India as Vishwaguru. Further, it is claimed that more has been done in the last 10 years than in the preceding 60 years. This is simply compound growth rate which leads to greater availability of resources. Same could also have been said about the 2000s compared to the preceding 50 years.

Black economy, a cause of policy failure has not been dented. Finally, the crisis in the 2010s was policy induced – a self-goal – while in the 2000s the crisis was due to global factors. So, economic management has been weak in the recent decade compared to the earlier decade. Support from Global institutions like, UN and IMF is a result of their using government data and reproducing the errors in the official data.

In brief, the ruling party is creating a false feel-good about its performance in the last 10 years.

Arun Kumar is a Retired Professor of Economics at the Jawaharlal Nehru University. He is the author of `Demonetization and Black Economy’ (2018, Penguin Random House). 

The article was first published in Mainstream weekly as The False Feel-Good About Indian Economy’s Performance Since 2014 | Arun Kumar‘ on May 4, 2024.

Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organisation.

Read more at IMPRI:

The Cost of Peace: Biden’s Dilemma in Israel-Palestine Conflict

The Evolution of India’s Labour Landscape

Acknowledgment: This article was posted by Mansi Garg, a researcher at IMPRI.

Authors

  • IMPRI Desk
  • IMPRI

    IMPRI, a startup research think tank, is a platform for pro-active, independent, non-partisan and policy-based research. It contributes to debates and deliberations for action-based solutions to a host of strategic issues. IMPRI is committed to democracy, mobilization and community building.

    View all posts
  • Arun Kumar

    Arun Kumar, Malcolm S Adiseshiah Chair Professor, Institute of Social Sciences, New Delhi and author of ‘Indian Economy’s Greatest Crisis: Impact of the Coronavirus and the Road Ahead‘.

    View all posts