Indian policy maker often appear obsessed by China’s double digit growth for the last decade or so. In fact, prior to eruption of global financial volcano, under Manmohan & Montek Singh (known as M– Squared Economics) polices backed by World Bank bandwagon (led by Dr Reddy, Dr Suresh Tendulkar, Dr Panagaria, Dr Chaudhary and others) predicted double digit growth for the Indian economy. Their misdirected policies of globalization and divestment had taken India into double digit inflation. In fact, contrary to election promises, last year’s budget offered nothing more than an obituary to people of India and the recommendation of the 13th Finance for a Rolling Budged has rolled on the people of India.
The current budget, once again has added an insult to last year’s obituary to people of India as India is already well ahead of double digit inflation (over 18% increases in prices of basic consumption goods). In the Union Budget 2010-11, the prices of petrol and diesel would go up by about Rs. 3 a liter as a result of the hike in basic duty and this was in addition to the increase in import duty on crude oil. Further, contrary to the Finance Minister’s promise that the agriculture sector would be redeemed from the crisis he had cut the subsidy on fertilizers and there are proposals for dismantling the public distribution system and privatization of FCI warehouses. Given a decline in agriculture production and essential consumption goods last year, no economic theory could justify the hike in fuel prices and cut in subsidies. No doubt the Budget would further accelerate price rise and privatization which in turn would have adverse impact on agriculture production and would increase hardship on the common man.
Further, the Union Finance Minister had stated that the recommendation of the Kirti Parekh committee for lifting of price control on petroleum products was under consideration of the government. This meant that worse is yet to come following the Budget.
In attempt to overcome the deficit the Union government proposed to raise Rs. 25,000 crores through disinvestment. The disinvestment of public sector units was the policy of the UPA government, and that was being speeded up. Despite the slow down in housing sector there is increase in cement prices and levied service tax on rail shipments (without the knowledge of Rail Minister) and on constrcution in the budget that would hit the housing sector. Although the Finance Minister appear to give some relief by way of increasing income tax band from Rs. 160,000 to 500, 000 which is a drop in the ocean and will be more than offset by nearly 18% rise in prices of essential commodities. Hence, there is nothing to stimulate demand in already ailing housing sector. In India rollout started with 0.4% of GDP, which increased to 5% of GDP in the annual budget of 2009. The focus of the stimulus package is limited to fiscal measures to stimulate Industrial production and consumption demand by tax cuts and subsidies. Clearly, India hopes to ride out economic slowdown without a major stimulus package.
In sharp contrast, the size of China’s stimulation package is over 4 trillion Yuan ($586 billion) or 13.3 percent of 2008 GDP over time frame of November 2008 to end of 2010. Rollout began in fourth quarter and strategic focus of the stimulation is 37.5 percent on roads, rail and water; 25 percent on post-earthquake reconstruction; 10 percent housing; 9.25 percent on rural infrastructure; 9.25 percent on economic upgrading; 5.25 percent on environmental protection; 3.75 percent on health and education. Although senior officials are pleased with initial impact; will watch data before deciding whether more is needed, there is a plan 2.
Regardless of conflicting claims about the ambitious growth rate, India’s growth is going nowhere as it is driven by growth of energy intensive consumer durable goods and financial sector and very little growth in other sectors (e.g., agriculture) leading into emergence of two India, rich and poor. Mechanism which is causing this is: (i) output growth is higher than the growth in employment, (ii) efficiency, i.e., productivity growth, (iii) sensitivity of financial sector due to uncertainties of financial markets, and (iv) increasing disparities between profits and wages. Hence India’s growth strategy continues to accentuate inequalities of income and creating a unique demand pattern (a black hole). History of past financial crises has witness that some of the reasons for the period of financial turmoil included huge debt-servicing expenses and an inequitable distribution of wealth, as most of the wealth remained in the control of a few elite. Unfortunately, some consciously and the so-called left unconsciously caught into the Neo-Classical and Keynesian cobweb. Clearly, Budget 2010-2011 would further accentuate the inequalities and would widen the gap between the rich and poor India. Hence, M2 – Economics seems to work against Rahul Gandhi's dream for poor India.
In conclusion, the sign of any real boost for stimulating the economy from the quagmire of worldwide recession is nowhere near a real recovery as there are no signs of stimulation in either investment or consumption demand. To add insult to plight of common recently Dr Choudhary, a Member of the Indian Planning Commission told the media that the medicine (a mere 5% fiscal stimulation) has cured the problem despite Bank of Scotland’s Chairman’s statement that, "UK economy is bumping along the bottom". One wonders readers how India could make such exaggerated claims? In defence of this criticism, Dr Manmohan Singh & Dr. Montek Singh (M2- M Squared Economics), in a joint enterprise, relied upon the external help in case a further stimulation was needed, without realizing that the developed countries themselves are heading for a deep crisis.