Hard Times

If the government does not do something quickly enough, the slowdown evident through the falling growth rate will become so severe that it might trigger a cycle of social pain and mass unrest

Sanjay Kapoor Delhi

On February 20, 2013, Bharat woke up to an angry bandh. All the public sector banks were closed. Most of the factories in industrial estates were shuttered. Largely peaceful and organised, those who dared to resist the bandh were met with sporadic violence. Workers’ fury was most visible in Noida and the Okhla industrial estate near Delhi, where they burnt offices, cars and fought with the police. Their demands included abolition of contract labour, wage index to be linked with price rise, and social and economic rights for the vast unorganised labour sector which constitutes over 90 per cent of the working class in India. 

The trade union movement in the country, that had been listless all these years, has been re-charged by people’s anger against the policies of the UPA government that is slowing down growth with a sudden spike in unemployment. Billionaire corporates are singularly being pampered, they are getting richer, and the poor are being hit where it hurts most; this is a universal view shared across the fragmented and unequal Indian landscape.

The levity visible in the economy in the last few years of UPA rule when growth was around 8-9 per cent was replaced, when the need was to raise it to 9 per cent or more to absorb the youth bulge. Why did the growth rate turn gloomy while uncertainty lay in store for the economy and the country? Why has the growth rate stuttered to a 5 per cent low?

So why is the economy that was doing a robust 8 per cent after recovering from the 2008 slowdown now threatened with a growth rate of 4 per cent in the next quarter of 2013? The blame should squarely go to RBI Governor Subbarao, who, single-handedly, squeezed life out of the economy

Some perceptive economists believe that growth does not fall from the high of 9 to 5 per cent in a space of three years unless there is a war or a major calamity. In India’s case, there was a combination of events that brought the economy to its heels. 

The Economic Survey released before the annual budget of 2012 states that the economy, that had recovered from the slowdown of 2008-09 due to monetary stimulus, has begun to stumble due to tighter monetary policy in 2011-2012. Within the government there is clear recognition that such a policy initiated by the Reserve Bank of India (RBI) to control inflation was the reason for the slowdown. The Economic Survey also lists a weak monsoon and the slowdown in Eurozone and uncertainties around fiscal policies in the US.

These are not the only reasons for the wreck that the economy has become. Large-scale corruption, organised loot by crony capitalists due to inadequate regulatory mechanism, the poor quality of governance, have all contributed in their own way in hurting the aspirations of a large mass of people who expected the advantage of the headwinds that were blowing in favour of the country. The net result is that the India that was pumped up to take on neighbour China in this unequal race is falling far behind.

So why is the economy that was doing a robust 8 per cent after recovering from the 2008 slowdown now threatened with a growth rate of 4 per cent in the next quarter of 2013? The blame should squarely go to the RBI and Governor Duvvuri Subbarao, who, single-handedly, squeezed life out of the economy.

Subbarao, who has been giving precedence to controlling inflation over growth, has forgotten the RBI’s larger mandate of maintaining stable prices with growth and financial sector stability. He has narrowed his play to pursuing a monetarist policy based on correcting the excesses of fiscal demand. His over-enthusiasm has been strange; the prices may not have really spun out of control over the last few months and there was a strong and compelling case for the RBI to cut down the rate of interest and increase the bank credit.

Since controlling inflation is shown as the holy grail by the RBI, some politicians have urged it to ease off and let businesses breathe. A senior communist leader patted the RBI governor for controlling inflation, but when asked about the impact it was having on growth, he blamed the government for the slowdown. The demand on the RBI to ease off interest rates has come from Finance Minister P Chidambaram, but the matter did not meet the necessary traction.

Although the last budget of Pranab Mukherji was flawed in many ways, the biggest harm was caused by the RBI’s monetarist policy. In those days there were suggestions that Mukherji’s budgetary initiatives were deliberately hurt by his opponents in the government, who were working closely with the RBI governor. Was there any merit in this conspiracy theory?

 Thousands of people have lost jobs, businesses have shuttered down and the pain seems unending. What is galling for ordinary people is that the fortunes of the super rich have grown multi-fold. Reports abound how the rich have become richer 

The RBI had raised the policy (repo) rate 13 times from 4.75 in 2010 to 8.50 per cent in October 2011. It also increased the cash reserve ratio. All these steps were taken to limit the credit supply in the market. According to an article in the Economic and Political Weekly (February 23, 2013), the growth rate, consequent to these steps, fell rapidly from 8.4 per cent during 2009-10 and 2010-11 to 6.7 per cent and is now going southward to less than 5 per cent.