Economists could borrow from the weatherman: Economy growing at 7% but feels like it is four !

For the last several years, government’s budgets have ceased to reflect any long term planning or even any coherent economic philosophy. They are more in the nature of fire-fighting exercises attempting to pour water on some burning issues of the day or some hastily drawn up programme to win the favour of the electorate.

There are only two features which reflect long term intent of the government. One is to reduce deficit financing and the second is to reduce the rate of interest in the hope that that this will increase investment. There are in 2019 two burning issues in the economy, farmers’ distress and unemployment that the budget is expected to address.

This year we may expect some attempt to reduce the woes of farmers especially since the Prime Minister has already committed to double farmers’ income by 2022. Now that June has come to an end and the prospect of a normal rainfall is receding, one apprehends a lower agricultural production, a reduction in farmer’s income, and food inflation.

The hurried decision to reduce the interest rate on small savings recently does not indicate that government has factored this in. It will be interesting to watch whether any attempt is made to increase the number of cold storages or break the stranglehold of mandis and the big operators who control them. When retail chains were permitted to market agricultural products, it was expected that they would invest in cold storages, refrigerated vehicles, etc. and eliminate the intermediaries. But this has not happened. Some fresh thinking is clearly needed.

Any cost plus pricing formula which incentivises increasing cost and disincentivises reduction of cost is obviously fatally flawed and will help neither the farmers nor do the society at large any good in the long run.

Retail price of agricultural products is not very low. The problem is farmers get only a small percentage of this, the rest is accounted for by wastage, transportation and the intermediaries’ commission. What is needed is a serious effort to reduce the cost of marketing these products. Lack of capital investment and fragmentation of agricultural holdings have long been known to have contributed to inefficiencies resulting in increasing cost.

A dole of Rs 6000 will do nothing to address these problems. One cannot expect any measure to address these problems in the Budget either.

But the basic fact is that 55% of the population continue to be engaged in Agriculture and have a share of less than 15% of the National Income, while the balance 45% of the population corner 85% of the national income. An average farmer’s income is therefore 1/8th of an average non-farmer’s income. Hence the poverty of the farmer is endemic.

The solution is therefore to create jobs in the non-farming sector, particularly in the SME sector and at a fast rate. To do that one needs to understand the reasons for the investment famine that we are currently witnessing.

Whatever the pundits may say, the real reason is always the perception that investment will not bring back the returns expected. In other words, the perception is that there will be no buyer for the goods or services produced by the incremental investment. This denotes pessimism that the economy will not grow at a sufficiently fast pace. But why such pessimism when our growth rate is supposed to be the highest in the world?

It is perhaps time for economists to adopt the weatherman’s language: “The temperature is 30 degrees Celsius but feels like 39 degrees.” Let us admit that the growth rate is 7% but it feels like 4%. And it is this feeling which leads to purchase, savings and investment decisions. The issue is therefore how to make people feel that the growth rate is 7% so that consumption and investment increase.

Obviously, this feeling cannot be changed till people get more money in their pockets, and they see their unemployed sons and daughters start having a regular income. How to make that happen?

The lakhs of crores spent through Gramin Rozgar Yojana have obviously failed to create capital assets which increase production and productivity. This needs to be urgently looked into. Instead of just auditing the expenditure, the effectiveness of the assets created also needs to be audited. So should the effect of all public infrastructure projects.

For the last few years, the government has assiduously followed the path prescribed by the supply-side economists. Reduce the corporate tax, bring down the interest rates, put more money in the investors’ pocket and thereby induce them to make more investment which will create more jobs which in turn will create more consumption leading to even higher investment, thereby start a cycle of increasing investment, employment and consumption.

This simply has not happened. Isn’t it time to try it the other way? Start by putting more money in people’s pocket and concentrate on manufacturing goods of mass consumption? Obviously, this will need the cooperation of the business class. They should concentrate on the cheaper end of the market, maximise hiring, and pay as decent a wage as possible. The government must put the extra money in such pockets from which it will be spent, rather than be invested in Mutual Funds.

I would therefore like to see the Income Tax reduced at the lower end, have a stable interest regime so that those who depend on interest as a source of income have some assurance of a stable future income. Senior citizens are paid 1% more than the normal rate of interest, and the beginning of a universal minimum income, by adopting NYAY proposed by the Congress in some form or the other.

Obviously again, the extra money will have to come through deficit financing. Of course the risk is that Inflation will increase. But a CPI inflation of up to 5% should be tolerated. It is perhaps time for government economists should bring down Keynes from their shelves, remove the dust and delve into it.

(The author is a former chairman of a PSU. The views are personal)