The indifference to it is a result of the ‘reform’ led growth model that prioritizes corporates over it
The last few weeks have seen several steps from the finance minister to revive the economy. These range from sectoral interventions—for the automobiles and housing—to increased credit access. The government also announced the merger of several public sector banks. In addition, the corporate tax rate has also been slashed. For companies which choose to forego all exemptions, this has been lowered from 30% to 22%, which together with surcharge and cess would amount to an effective rate of 25.2%. For new companies, the rate has been kept at 15%. Understandably, stock markets are cheering, which may give the impression that the economy is back on track.
So many steps within two months of the budget does point to the government realizing, even though late, that not all is well in the economy. This dramatic shift from the triumphalism seen in the budget makes it clear that the government was caught napping while the economy slowed. Most analysts pointed out the structural weaknesses of the economy but these were ignored in the euphoria of the massive election victory. What is worrying is that despite the realization that the slowdown is far more serious than thought, the government has no clue of what caused it or what needs to be done.
It is now established that the slowdown is a result of a collapse in demand caused by a decline in incomes. Most macro indicators, including wage and income growth estimates, have suggested this for quite some time. Even private-sector data has pointed towards a demand crisis. This was precipitated by a collapse of the rural economy, which has seen the worst distress in recent years with both incomes and consumption declining. But nowhere in the numerous announcements that the finance minister made was even a single step aimed at boosting the rural economy; even a customary mention was missing. It was as if the rural economy had no role in the economic slowdown. Or even if it did, it was not significant enough to help in an economic revival.
The indifference towards the rural economy is not due to ignorance. Rather, it is part of a larger political economy framework that successive governments have followed after the 1991 economic reforms. Since it remains important for political mobilisation, governments only tend to remember it just before elections to patronize voters either through loan waivers, cash transfers or increased allocation of subsidies. There has hardly been an attempt to examine and correct the imbalances in input and output prices, market structures, access to credit and other support from the government, most of which are stuck in the same policy and economic structures that prevailed in the 1980s. But the nature of agriculture and the rural non-farm economy have changed dramatically in the last three decades. While these have shown dynamism, increased monetisation and integration with the broader economy has complicated matters.
The dominance of the ‘reform’ led political economy has meant that any effort to boost growth is aimed at appeasing corporates and the middle class. As a result, the only metrics of measuring the ‘reform’ friendliness of a government is the impact it has on corporate taxes and stimulus to the corporate sector. It is ironical that even at a time when the slowdown has been caused by declining incomes and consumption in rural areas, the response is to appease corporates rather than address the rural crisis. None of these steps will have any impact on aggregate demand. If government spending is increased—which is the need of the hour—to revive demand, these are also likely to contribute to fiscal stress.
In the absence of a sustained rise in demand, the benefits of the tax break will only be temporary. Without strong demand, the tax break is unlikely to lead to any increase in investment. It also raises an important question on the policy framework of the government. It is difficult to believe that the government is not aware of the reasons of the slowdown or its extent. But it continues to operate in a policy framework that shows no real understanding of the troubles of the economy. Unlike the previous United Progressive Alliance government, which was characterised by policy paralysis in its second term, this government seems to be operating in a policy vacuum. Like a village quack, it has the same prescription for every ailment. Like a stimulant, this may give the illusion of a recovery, but it only delays the treatment of the disease. That’s something the economy can ill-afford at this time.
