The ongoing economic crisis in India and in other major countries has ended up thoroughly exposing the economists and their various prescriptions and theories. Today, economists – obsessed with increasing wasteful expenditure to prop up the GDP numbers – are making no sense about what is happening to the economy and what is the way forward. Even a practical person on the street would be able to hit closer home in making sense of the changes that we are going through.
What the Economists are Saying
From both the left-wing and the right-wing ideological spectrums, the sole cause for the economic slowdown has been pinned by the economists to the fall in aggregate demand. According to them, demonetization dealt a blow to the cash economy on which majority of rural and informal sectors depended, thereby leading to a fall in demand, while GST-demonetization together dealt a blow to Micro, Small and Medium Enterprises (MSMEs) which constitute about 95% of the industries in India and provide majority of employment in the country. All this has led to fall in people’s spending and rise in unemployment.
Repeatedly, to further buttress these points, data on low household consumption expenditure and low investment is being quoted, by arguing that despite successive interest rate decreases by the Reserve Bank of India (RBI), there has been little willingness to invest. Examples from slowdown in rural consumption in the retail and consumer goods market – such as biscuits and other goods – and the auto slump have triggered further debate.
In a nutshell, most of the current analyses is focusing on the grand slump of aggregate demand, the resultant slump in various retail/consumer industries and the consequent lay-offs and unemployment. Thus, the focus is desperately on the big question of how to revive aggregate demand. Our economy resembles a chronic, bed-ridden patient being frantically administered drug after drug to ensure revival.
Left-wing economists have been pedaling the narrative that the government should spend more on social schemes like MGNREGA which will boost rural incomes, providing more disposable money in the hands of people and, thereby, resulting in more spending by them, and thus, reviving rural demand. Right-wing economists are no different. They laud the government for cutting corporate tax rates and simplifying the GST, insisting that these will incentivize industries to invest more and this will result in more investment, more jobs, more incomes and thus a revival of demand and of the economy.
These analyses of causes and solutions to the economic downturn sum up the drift of the thinking of most of the present-day economists. Not once did they leave their obsession with aggregate demand. As if demand is an indicator of welfare or well-being of people.
Reaching a Natural Equilibrium
More than the self-certified wisdom shared by economists, even a lay shopkeeper would be able to present a more accurate picture of what is actually happening. The problem is not that people don’t have money to spend, but that expenditure has become more regulated, due to measures like demonetization and GST. Where people were spending madly before, and black money could be manipulated and represented through various innovating accounting machinations, there is now much more restraint. People think twice about where and how to spend and whether to hoard or not. Indeed, having too much money lying in a bank account has itself become a fearsome mental burden.
Thus, the tendency of accumulating more and more for oneself has been checked in a very effective manner. These checks are increasing in the times that are coming. Now it has become clear that demonetization was not a one-off phenomenon that took money away from the people, but was a framework for a systematic change that would ensure more and more stringency and transparency into where money is going.
It is no wonder that many consumption-based sectors – automobiles, real estate, jewelry etc. – where payments in black were rampant, are in a slump. This is nothing but a natural adjustment of aggregate demand to reflect its true levels. This consumption demand, which was earlier being vigorously fueled by credit bubbles, is now adjusting to the reality.
That is one of the reasons why despite the fact that the RBI has been successively reducing interest rates in the hopes of reviving investment, the response is still weak. In any other context, a low interest rate regime may have resulted in another credit bubble. But with such stringent frameworks being developed, this is difficult.
This natural adjustment of aggregate demand that is taking place and which is being blamed for falling growth numbers, is a positive development. It shows that the consumption that was being fueled by wasteful spending, living in excess and artificial bubbles to boost demand, is coming to an end. Such wasteful spending had proven to be destructive for our environment and for the psychological health and well-being of the country. The more we would prop up sectors like automobiles, property and fast food industry by going on a spending rampage, the more we were contributing to pollution, and to the kind of mindless construction of hotels and properties that had damaged our rivers, forests, wetlands and the whole ecosystem.
For instance, take the example of transport. The mind-boggling figures from as recently as 2016-17 show that personal transport was growing at a monstrous rate in our country with as many as 220 million non-commercial personal vehicles – a figure comparable to the total number of households in the country at 250 million (Jagannathan, 2017).
This does not mean that every household has a vehicle, since most poor households have none. But it means that those households which do have vehicles have been buying without replacing, since average replacement time for personal vehicles in India is around 10 years, showing how we reached a saturation point. In rich, gated colonies in metropolitan cities, it is not at all unusual to see how a family of four members has four cars, one for each member. These trends have caught up in recent years and shows the sheer power of unchecked indulgences.
Before the hue and cry over auto slump, if this was the saturation level that we had scaled, it is worth questioning what bogus model of growth we pledge our allegiance to – a model of development which destroys our health, environment and overall well-being, and one which only advances our greed and desires.
To take another example, Delhi, at one point, occupied the distinction of being the most polluted city in the world or that 13 out of 20 topmost polluted cities in the world belonged in India. In our country, when this consumption bubble fueled growth was scaling its heights, it had left nothing untouched by its scourge. Mountainous areas had witnessed a complete change of ecology thanks to mindless tourist constructions and properties, while even coastal areas faced the same problem, resulting in frequent landslides, earthquakes, over-flooding and pollution. Yet, ironically enough, it was this very growth that was fueling the economic numbers.
Similarly, the obsession with food is still rampant – people may have cut down their various other consumption expenditures, but they have still not given up spending on junk and fast food and on hotels. It is this obsession with food that is also boosting GDP numbers, not only through the revenues earned by the hotels and packaged food on which we spend additional money to satisfy our taste, but also through the money we spend on hospitals and doctors when we eventually contract diseases by leading such a lifestyle.
In all of the major examples taken above – transport, urban development, food – not a single instance can be found which actually leads to people’s well-being. Instead, the GDP numbers are being driven by more and more monstrous and harmful activities.
More importantly, in an age where the industrial era has been long overpassed by the era of technology and big data, and, where data is considered as the new gold, we are making ourselves and our country more vulnerable to foreign technology firms and foreign governments. They track our behaviour and can use the data in a variety of ways. At a time, when the next war of national interest is being waged over data – already, we see how India is fighting back against foreign pressures – our economists are advocating that we increase our fetish for commercial products more and more.
If today, economists’ prescriptions are going wrong and these mindless consumptive activities are in a mode of slowdown, isn’t that a positive and life-saving development?
For, effectively, we are measuring deprivation through GDP, as, the major economic activities that prop up the economy and fuel consumption and growth are precisely those which lead to more and more deprivation for us, in the form of pollution, bad food, bad water, environmental threats and illnesses.
As if this picture of reality is not dire enough, our economists are advocating propping up the economy by measures that will somehow, anyhow boost people’s ability to spend more and more. Such propositions will lead to only more disaster and it is nothing short of grace that this is not happening.
If the consumption of such harmful products and habits is going down, that is a positive rather than a negative sign for us, as a nation. Of course, since the GDP is a measure of deprivation, as our meaningless consumption goes down, so will the GDP. But this will result in a natural and real equilibrium and help in protecting our environment, health and psychological well-being.
Unemployment, for instance, is an example of market signaling to us to stop producing useless output that is not in demand – it is a message to us to stop awarding teeming useless educational degrees and certificates which compound the problem of educated unemployment. Indeed, today unemployment among graduates and above is twice the average unemployment rate of the entire labour force. This unemployment level rises with higher level of degrees.
This just means that there is a demand for specific kind of jobs – for the educated. But if the output produced is bad and large in quantity, it will not be accepted. Most of the educated end up unemployed. Indeed, those with even higher degrees like MA and PhD end up with nothing better than NGO-type jobs. Yet, every day, we have new colleges and degrees coming up and all kinds of ludicrous courses taking shape.
All this wasteful expenditure, with such mediocre quality, has to be curbed. And low GDP numbers are hardly a criteria for judging the quality – quite the opposite, in fact.
Propping Up the Real Economy
Instead of the demand-driven economy of today, where wasteful expenditures in areas that advance our deprivation and baser desires, what we should have, and seem to be increasingly moving towards, is the real economy, where demand should fall into a natural balance and all excesses are curbed.
The spending on critical strategic areas like defence and national security, infrastructure, space, and, science and technology, should be encouraged more than the wasteful expenditure that goes into all kinds of social schemes and subsidies. Here also, the point of spending on these critical strategic sectors is not that they will lead, hopefully, to a better economy, but simply that they are important from the point of view of the security of the nation and its interest.
At the same time, as the example of unemployment has shown, we need to stop producing mediocre output and mediocre youth. Today, the opposite is happening. Our spending on our critical sectors of national interest is minimal, but our economists are continuously pressurizing the government that the only way forward is to put money into the hands of people, so that their meaningless and harmful spending can give us good GDP numbers. Real well-being is, of course, on no one’s mind. The government too is listening to these voices, otherwise it would not be parroting the rhetoric of reaching a $5 trillion economy.
The bubble fueled by consumption sectors is deflating, not because of the government, but in spite of it and by Divine Grace. At a time, when almost all structures of the West are collapsing – their international institutions, their political wisdom and their economic wisdom – and their culture is changing, we, in the name of the economy, are making a grievous error by listening to the long-dead western wisdom.