K M Chandrasekhar
K M Chandrasekhar

Plunging Demand, Flagging Economy

K.M. Chandrasekhar

K.M. Chandrasekhar

Earlier this week, on the 14th to be precise, I read an article in “The Hindu” by Parakala Prabhakar. I had not known him, but I later found out that he is a very distinguished person, who had made major contributions to the country in civil society and to governance in Andhra Pradesh. I also came to know that his spouse is the Finance Minister of India.

“While the government is still in denial mode,” he wrote, “data flowing uninterruptedly into the public domain show that sector after sector is staring at a seriously challenging situation. Private consumption has contracted and is at an 18 quarter low of 3.1%; rural consumption is in a deep southward dive and is double the rate of the urban slowdown; credit off take by micro and small industries remains stagnant; net exports have shown little or no growth; GDP growth is at a six year low with the first quarter of FY 20 registering just 5%; and unemployment is at a 45 year high.”

His solution? He says that the ruling party must stop turning backwards in time and denigrating Nehruvian philosophy and the “commanding heights” economy that characterised Indian economic thought in the early years after Independence. Nehruvian thinking was jettisoned in 1991 by the Narasimha Rao- Manmohan Singh duo. “The BJP”, he says, “could, therefore, have released itself from that limiting agenda by wholly embracing and even owning the Rao- Singh economic architecture”, the way they appropriated the political persona of Congressman Sardar Patel.

Nehru’s economic thinking should be viewed in the context of his time. In the early fifties, the private sector was still in its infancy and could not have taken up the giant steel mills, fertilizer factories and hydroelectric projects that the country needed. This situation had changed by the seventies and eighties and it was time now to change track. And, as PM Manmohan Singh showed in 2008, it was possible to find answers even to the Great Recession within the contours of the system he had built.

The reforms of 1991 changed not only the economic structure but the way of life of the Indian people. We had been living for too long in a narrow, restricted world. Shortages, delays, corruption and influence typified life in the pre reform period. When my father, in Delhi, was sanctioned a residential telephone by his Department in the late fifties, it took a year and a half for it to be installed. Cars were available only from a limited number of manufacturers and were of quality not comparable to the models available elsewhere in the world. Purchase of a new vehicle, whether it be a four wheeler, a three wheeler or a two wheeler, involved registration and a waiting period of months. Indeed, relatively new second hand cars sold at prices higher than those of new cars. Severe restrictions on imports into India meant that smuggling became a highly lucrative profession and the names of big time smugglers were known far and wide. The rupee was valued too high and a flourishing black market in foreign exchange grew as a result. While China had started economic reform in 1978, we had to wait till 1991 to let into the country a breath of fresh air and unleash entrepreneurial energies which we never knew existed in India.

Even the 1991 reform was largely forced upon the country. The preceding couple of years had been marked by great instability in government. VP Singh’s government of 1988 was an uneasy one, never stable, never secure. Waiting in the wings was Chandra Shekhar, a “ Young Turk” of earlier times, elected many times to the Lok Sabha , a leading political figure . The “ Mandal” agitation, following VP Singh’s attempt in August 1990 to implement reservation in government jobs for Other Backward Classes as recommended by the Commission headed by BP Mandal, weakened him considerably, split his party and led to the formation of a government headed by Chandra Shekhar with support from the Congress Party. Yashwant Sinha was the Finance Minister. Following years of high fiscal imbalances, the Indian economy plunged further into chaos when the Congress Party refused to let the government pass a budget. The fall of the Chandra Shekhar government and its continuance as a caretaker until the new elections further exacerbated the crisis. India’s foreign exchange reserves came down to less than a billion dollars, barely enough to pay for three weeks of imports. India had to pledge its gold reserves to get a loan from the IMF to meet its immediate needs.

I was then working as Chairman of the Spices Board and was in Singapore for some meeting when the government announced a string of harsh measures to conserve foreign exchange. Imports were to be linked to exports and foreign exchange outflows were to be severely curbed. I recall lunching with an Indian businessman, who said angrily, “India is gone. Even Pakistan will get ahead of India.” Yashwant Sinha writing in “ The Hindu” on 29th July, 2016, said of that period in his article “1991, the Untold Story”, “The only credit I can claim was we tried to be self-reliant by imposing new levies and mortgaging gold that got us about $400 million and instilled a sense of confidence in our lenders abroad.”

Manmohan Singh often says that India rises to the occasion when we are confronted by crisis. There could be no crisis deeper than the one that India faced in 1991. India had no choice but to depend on the IMF and World Bank to tide us over the immediate situation and this involved accepting their conditionalities on freeing up the economy. It required the wisdom of Manmohan Singh and the political daring of Narasimha Rao to push through a reform of such magnitude even as political insecurity prevailed. It speaks volumes of the strength of Indian democracy that it was accepted and implemented.

1991 was only the starting point of reform. Since then, successive governments have followed the same path and introduced new changes. Trade was opened up, bureaucratic controls on industry dismantled, the provisions of the Monopolies and Restrictive Policies Act relaxed to allow growth of the corporate sector, foreign direct investment encouraged. In the so-called “ dream budget” of 1997, then Finance Minister Chidambaram, in the government headed by Deve Gowda, slashed income tax rates, increased limits of foreign investment, reduced import duties.

More than the measures introduced in 1991, path breaking though they were, in a new way of thinking began, which persisted despite changes in government. The recent measure announced by present Finance Minister Nirmala Sitharaman to reduce corporate tax rates and to bring our rates on par with other Asian countries is also another step in the same direction. When I worked with Dr. Manmohan Singh, there were occasions when he would seem depressed, as I presume any PM would be from time to time. I would tell him then that he would be remembered in history as the man who changed the face of India. Increasingly, as days go by, his image as an economic thinker and planner is gaining recognition and respect.

When the new economic policy was first announced in 1991, I must confess I was a sceptic. Used as I was to the “socialist” way of thinking, this new wave of what is now called “neoliberalism” by the Left was not easy to swallow. I remember telling my then minister, Kunhalikutty, now an MP, that we will have to wait and see how it will turn out. He repeated the conversation to me in 2011, with a twinkle in his eyes, when I came back to Kerala in 2011 after a long sojourn of 15 years at the Centre. Growth rates have zoomed upward, inflation has been under control, new investment has taken place, technologies have sprung up, the service sector has boomed. India now is a credible rival to China. The World Bank says that India has halved its poverty rate since the 1990s and achieved 7 percent annual growth on the average in the last fifteen years.

Yet problems remain. India is 102nd out of 117 countries in the Global Hunger Index 2019, lower even than neighbouring countries, Pakistan, Sri Lanka, Bangladesh and Nepal. The disturbing fact is that we have declined considerably in the Global Hunger Index scores since 2005. Inequality continues to pose political and economic threats. The immediate challenge before us is to preserve our gains. The country is clearly exhibiting signs of economic slowdown. This is partially induced by global economic conditions. In its report of June 2019, the World Bank talks of the depressed global economy and says, “ Risks remain firmly on the downside, including the possibility of escalating trade tensions, sharper than expected slowdowns in major economies and renewed financial stress in emerging markets and developing economies.” A situation is growing that is not dissimilar to the Great Recession of 2008-09.

India, with its huge market, has the strength and the resources to pull itself out of the crisis. Some reform measures, like corporate tax cuts and bank mergers have been announced. These are supply side measures. For supply side measures to work, demand has to pick up. I have already talked in these columns about the woes of the automobile industry. Recently, I read that a Nielsen study shows that the rural market in India grew at 5% in the quarter ending 30th September as against 20% in the same quarter last year. The sale per store is one fourth that of what it was in the same quarter last year. The fast moving consumer goods sector grew at 7.3%, compared to 16.2% in the same quarter last year. According to National Sample Survey data, average consumption expenditure fell from ₹ 1587 per person in 2014 to ₹ 1524 per person in 2017-18 in rural areas and from ₹ 2926 to ₹ 2909 in urban areas. It should be even lower now.

Supply side reform alone may not be sufficient. The expectation is that monetary policy will boost demand, and the Reserve Bank has been undoubtedly active. Is this enough? Gita Gopinath, Chief Economist of IMF, says in her blog of 15th October, ”To fend off other risks to growth and to raise potential output, economic policy should support activity in a more balanced manner. Monetary policy cannot be the only game in town.” Considering that fiscal space is limited, demand side measures would probably require a reordering of government expenditures.

Serious thinking on how to build effective demand is the need of the hour.


The facts and views expressed in the article are those of the writer.