India's bubble economy booms as poverty grows

Express India

by Praful Bidwai

In the 1990s, India added more than a million individuals to its list of millionaires. During the same decade, 56 million more Indians sank below the official poverty line, defined in terms of pure animal-level survival and consuming the minimum number of calories necessary to stay alive. In the era of neo-liberal economics, India’s GDP growth has averaged 6 per cent. But market capitalisation on the Bombay Stock Exchange has risen at an unbelievable 100 per cent a year.

Surprised? Welcome to India’s bubble economy. Under the bubble phenomenon, the dissonance between the country’s real economy and its financial sector has scaled dizzy heights. Growth has become more lop-sided, and mal-distribution, always notorious in hierarchical India, has worsened.

Agriculture, central to people’s survival, has stagnated. And the structure of industry has become more skewed, with the information technology (IT) sector absorbing huge speculative investment while infrastructure decays.The term `growth’ hides more than it reveals in India. The share of services in India’s economy is now one-half. But almost a third of that is accounted for by the bureaucracy and defence-hardly a sign of progress.

Similarly, the statistics add to growth negative contributions such as pollution, which alone is estimated to cost the economy up to 10 per cent, or more than its annual growth rate.

As the economy registers an artificial boom, India’s savings and investment rates decrease by three percentage points and the government’s profligacy reaches new peaks.

The combined fiscal deficit of the Central government and the states now exceeds 9 per cent of the GDP or the same level as the entire tax revenue of the Centre. Each Indian is indebted through the government to the extent of over 50 per cent of his/her annual income. The government has become increasingly parasitical. Its spending upon itself exceeds its entire revenue income by 3.6 per cent of GDP, which would be considered wholly unacceptable in most countries. India is macro-economically back to the critical situation of 1991, which triggered severe neo-liberal restructuring. The fiscal deficit then reached an alarming 8.2 per cent of the GDP.

In the coming year, estimates former finance minister P Chidambaram (himself a committed neo-liberal), the fiscal deficit will be 8.3 per cent. With the government going bankrupt, public services are collapsing, hitting the poor. The government is cutting spending on rural development, including agricultural programmes, and rural employment and anti-poverty schemes, as well as on health, drinking water supply, education and sanitation. Income growth in the rural areas, where 70 per cent Indians live, averaged 3.1 per cent in the 1980s. It has sharply declined to 1.8 per cent. Real wages of rural workers decreased last year by more than 2 per cent.

Infant mortality rates are rising even in states like Kerala and Maharashtra, which have relatively good social indicators. But luxury consumption is booming within the upper crust.

These contradictory economic features were further accentuated in the national budget. The finance minister failed to tax the rich, and took the easy option of borrowing, raising that target by almost 40 per cent.

He raised the prices of wheat and rice sold through India’s rickety public distribution system to the officially recognised poor by a cruel 68 per cent at one go in the name of cutting subsidies in International Monetary Fund (IMF)-style. But he doled out concessions to the thriving IT, communications and entertainment (ICE) sector by exempting or cutting taxes on export profits, computer chips, cellular phones and satellite equipment.

He raised India’s already bloated military expenditure by 28.2 per cent, the highest such increase in a single year. Today, defence spending exceeds total public and private expenditure on primary education by 68 per cent. The mere increase in military spending exceeds the Centre’s investment in health, education and social welfare. To finance its deficit, the government, led by the right-wing Bharatiya Janata Party, has resorted to selling off public sector assets, too. It has set a target of $2.5 billion for such disinvestments from highly profitable oil and petrochemicals companies and the domestic national airline. There is no economic rationale for such creeping privatisation. India’s private sector is not more efficient than the public sector and has a higher incidence of industrial sickness.

The Indian government has over the years divested more than 2 per cent of the GDP from its public sector holdings. This money has not gone into modernisation, workers’ retraining or the infrastructure, but into unproductive government consumption. The infrastructure is in an advanced state of decay: Only a third of the target for new electricity generation has been achieved in the last four years. The government is now looking for private investment. This means gold-plated projects. The worst example is Enron, a US company, which will sell electricity near Mumbai at a rate three times higher than the price charged by the public utility. The bubble economy has created the illusion of wealth and progress-firstly, by concentrating high incomes in the hands of a small number, and secondly, by hyping up the IT sector.

Since the mid-1990s, a new class of upwardly-mobile, high-income professionals has crystallised in a handful of cities, which has first-world lifestyle aspirations. Today, young graduates from management schools command starting salaries as high as $120,000 a year. Such huge disposable incomes are being spent on luxury items, white goods and cars.

Automobile sales have recently risen at 30 per cent plus a year, especially for new models of mid-sized sedans, as distinct from sub-compact cars like the Maruti-Suzuki, which launched the automobile boom a decade ago.Following this class in its aspirations, but with lower incomes, are hundreds of thousands of people with a stake in TV, entertainment and telecommunications, who too are on a spending spree lubricated by liberal credit.

India’s IT sector has burgeoned into a $6 billion business. Its exports clock roughly $4.5 billion, which is small volume both by international comparison (1.5 per cent of the global software market) and in relation to India’s GDP ($400 billion). But the IT hype is enormous and driven by wild speculation on the stock market-itself consciously buoyed up by the government through numerous concessions, such as tax breaks for mutual funds.

IT scrips now account for a third of total market capitalisation. Typically, their price-earning ratio is 200 to 300 (but 10 times higher than the average). This can only be premised upon the new economy companies’ future profits growing steadily at 50 per cent a year-an unrealistic assumption. For the moment, this speculation acts like a self-fulfilling prophecy. The sub-index of IT scrips has risen 40 per cent in the past two weeks, while the prices of shares of bricks and mortar or old economy companies have fallen by a similar magnitude.

This growth cannot last. Sooner or later, the bubble must burst. The reality will then dawn on widespread deprivation, backwardness and persistence of regional and class disparities in India. Until then, however, the bubble will create, and in turn be inflated by illusions about shortcuts to development, which bypass most people and their basic needs. – IPS