COMMENTARY
--
luxurious salaries and amenities and a
Global Recession and the Indian
in the white goods sector is not a signal of
Economy – Myth and Reality
a countrywide recession. If excess capacities are built up with the expectation that we shall have a 9% growth ad infinitum, Sugata Marjit it is not the social responsibility of the
There has been a clamour for action by the government to prop up certain sectors which are experiencing a slowdown. What should be the real priorities of the government and central bank?
Sugata Marjit (marjit@gmail.com) is with the Centre for Studies in Social Sciences, Calcutta.
Economic & Political Weekly
EPW
T
I shall be brief and to the point justifying what the RBI has done and in the process try to elaborate certain basic economic facts we all should be aware of.
It is well recognised by now that even if India hits a low 6% rate of gross domestic product growth in 2008-09, it will be still an all-time high on average compared to the periods till 2000, far greater than the well-known Hindu rate of growth. In all likelihood that will be the second fastest rate of growth in the world. This is no recession and not even close to the standard definition of recession. A decline in super rates of profit, fairy tale housing prices,
vol xliv no 9
RBI that such capacities remain utilised or unanticipated costs are recovered when expectations are not realised. The RBI surely did not get a cut of the excess profits and salaries in the good times and mother India should not be dragged to serve the cause of faltering markets. At least those who have always preached about the divinity of the invisible hand surely know that bad times are as much a reality as good times in capitalism.
Talk to any economist without vested i nterests and she will argue that there have been bubbles everywhere – in the share market, real estate, and white-collar top end salaries. When the inflation rate was close to 12% to 13%, the annual inflation in real estate prices in the metros was close to the tune of 70% to 80%. Was 70% a reasonable real rate of return? It is a child’s guess that extra liquidity was funding a massive upsurge in the stock market with a whopping rise in Sensex and with very l ittle impact on the overall rate of i nvestment. This also spilled over to the real estate m arket’s rising prices all around. It has been demonstrated that a lthough private corporate investment is positively related to stock market activities, such a link is very superficial, econometrically speaking. All the hype of the Sensex falling to the floor and the demand to pump it up with extra liquidity is simply wrong. We have shown
Resources from SAGE Inclusion and Exclusion in Local Governance
Field Studies from Rural India Edited by B S Baviskar and George Mathew
Inclusion and Exclusion in Local Governance: Field Studies from Rural India is a product of a rare national-level study conducted in 42 panchayats across 12 states to reveal how democratic decentralisation is working in Indian villages.This is done through stories of empowerment as well as discrimination against women, schedule castes and schedule tribes (SCs and STs).
2009 / 464 pages / Rs 750 (cloth)
Electoral Processes and Governance in South Asia Edited by Dushyantha Mendis
The strength of the book lies in highlighting the political trends in relation to the electoral processes…. the collation of articles is useful in understanding an important aspect of the democratic functioning of South Asian states. Some of the articles are rich in data and detailed discussion.
The Book Review
The book under review is a valuable medium to get first-hand knowledge about the election processes, which are now prevalent in the sub-continent.
The News, Pakistan
2008 / 480 pages / Rs 695 (cloth)
New Forms of Urban Governance in India
Shifts, Models, Networks and Contestations Edited by I S A Baud and J de Wit
This work looks at the impact of decentralization on local governance arrangements and citizen participation in urban democracy processes in India. To analyse the various issues, it includes case studies from the major cities throughout the country.
2009 / 420 pages / Rs 850 (cloth)
Democracy, Development and Discontent in South Asia Edited by Veena Kukreja and Mahendra Prasad Singh
The book brings together papers from a number of scholars from South Asia and outside who look analytically and thought-provokingly at the political and socio-economic posers which each of the states of the region is grappling with.
The Island, Sri Lanka
This book would greatly interest students and academicians in the field of South Asian Studies, Pakistan Studies, International Relations, Comparative Politics, Political Sociology, Development Studies, and Journalism.
Free Press Journal
2008 / 340 pages / Rs 695 (cloth)
The Intelligent Person’s Guide
to Good Governance Surendra Munshi, Biju Paul Abraham and Soma Chaudhuri
The Intelligent Person’s Guide to Good Governance is unique in that it takes the discourse on governance beyond its self-inflicted narrow perspective by providing an integrated treatment of various relevant issues, for example, the role of the state or the idea of civil society. In carrying out a lucid analysis of a fluid concept, this book offers a ‘one-stop’ resource for understanding the subject.
2009 / 212 pages / Rs 270 (paper)
Local Democracy in South Asia
Microprocesses of Democratization in Nepal and its Neighbours Edited by David N Gellner and Krishna Hachhethu
The book…is a significant attempt to study the methodologies adopted by the South Asian countries, while implementing local democratic institutions in their respective countries.
The News, Pakistan
2008 / 472 pages / Rs 795 (cloth)
Participatory Rural Appraisal
Principles, Methods and Application
N Narayanasamy
Participatory Rural Appraisal (PRA) methods, now known as Participatory Learning and Action (PLA), have been extensively used in development research, action and evaluation. This book is based on the author’s decadelong intensive field experience— each method is explained by drawing on field-based illustrations. The book vividly describes the methods of PRA, highlighting the essential features as well as the application, merits and limitations of each method.
2009 / 388 pages / Rs 550 (paper)
Challenging the Rule(s) of Law
Colonialism, Criminology and Human Rights in India Edited by Kalpana Kannabiran and Ranbir Singh
Challenging the Rule(s) of Law: Colonialism, Criminology and Human Rights in India contests unproblematic assumptions of the rule of law and opens out new avenues for a radical study of criminal law from the early colonial period and examines the problem of overt violence by state actors and their compliance with dominant private actors.
The Financial Express
2008 / 512 pages / Rs 1250 (cloth)
Los Angeles London New Delhi Singapore Washington DC
www.sagepub.in february 28, 2009 vol xliv no 9
EPW
COMMENTARY
earlier (Marjit 2008) that the real interest rate has been on the decline for quite some time even when the nominal rate was rising. The current real rate is pretty close to what it was at some phase of the good times. We should also remember that a gap between the local real rate and the global level reflects a risk premium and is also a factor that will not let the capital flow dry up.
Healthy Adjustment
It is also to be noted that if the global recession leads to a decline in the demand for housing, we should allow its price to come down and more so when the price was high not only due to the pressure of real demand but due to the bubble generated by excess liquidity. We must allow it to adjust to the right level. If buyers do not have the cash to buy, housing prices will come down. That is healthy. If cars are not selling, their prices have to come down so that excessive future investments in bad lines of business get restricted to a reasonable level. Why does the RBI have to cater to the need to a bunch of sectors whose forward and backward linkages with the rest of the economy and society are often in question? We must allow excessive debt-financed consumption to fall in line. The decline in the interest rate often leads to a profit cover rather than growth in investment. Interest benefits for sectors such as exports should be welcome, but one must be careful to make sure that it does lead to some sort of social externality, rather than just protect profits.
When markets are on the upswing, all hell breaks loose if there is an interventionist policy, but in bad times there is a deluge of socialistic ideas. A case in point is the late 2008 reduction in excise taxes, a direct consequence of pressure by the business lobby, so that the prices of cars could be adjusted downwards. The burden of a decline in profit, a natural textbook fallout of a slowing market, has been mitigated by a decline in the tax rate. That is how the public exchequer was drained to make room for market adjustment. A high return in good times might be reflective of risk that was involved, but that does not mean if risk materialises it should be someone else’s headache. We should not forget the fact that we have already earned a premium for countering this. If we make profits worth crores for the last five years, a loss of 50 lakhs for the next two
Economic & Political Weekly
EPW
years will not take away all the gains. Why hold the RBI hostage for that?
The additional sops provided earlier this week in the form of a cut in indirect taxes are going to reduce tax collections substantially. This is bad since we need more resources to spend on many announced programmes. Will tax cuts sustain employment and halt the slowdown when demand is the real problem or will it protect profits? Implementation of the Sixth Pay Commission’s recommendations will infuse extra demand. Should not that be an automatic support to the market?
Priority List
There could definitely be a reason if the entire country or at least the vast majority of it was reeling under recessionary pressure. But there is no white paper on the real effect of the slowdown on all segments of society. Moreover, there are nagging questions which still need answers even after we had achieved 9% rate of growth. We have to constantly remind ourselves of the priorities. The following is a list of areas which did not benefit in the high growth phase. Is the business lobby truly concerned about all of them?
vol xliv no 9
not true that restructuring often meant sacking people lower down while the top end continued to enjoy huge perks? Who keeps a tab on that?
(4) If it is an effective demand problem, an interest cut will not do much. This is a simple Keynesian argument, although I do not believe that we are in a truly Keynesian situation. But the fact is that even if interest rates are down, people will be cautious in spending. If income of those whose marginal propensity to consume is very high, rise substantially along with the hope that such a rise at least partly will be sustained in the future, there will be a demand upsurge (via the life c ycle/permanent income argument) and that will be truly beneficial
– slowdown or no slowdown. How are we faring on that count?
(5) Out of every 100 children that are admitted at the primary level only seven pass out. Such an average has not changed much in the entire high growth phase. The dropout rates are remarkable. We are running short of good quality engineers and scientists. What will a further drop in the cash reserve ratio and the repo rate do to mitigate such problem?
Without a recession share prices would not have fallen in line at least, to some extent, with the fundamentals. The run away rise in the Sensex without any res pect for real indicators is an economic menace the society has been paying for. I am sure the price/earnings ratio will be much more in line now than before. The same is true for the housing market if the banks are not pushed to the brim to refinance risky assets in the name of rescuing the national economy.
This is the time when corporate malpractice will not be sustainable, be it excessive reporting of profits or issuance of securities with no real cover. We have seen plenty of that. Surely we do not wish to live in a fool’s paradise for ever.
A noted economist, also a Nobel laureate, was recently asked in an interview to summarise the effect of the US recession in one sentence. He said that the world will definitely be a lot less unequal due to the meltdown. To some this is good news, for the rest, it is time to reflect in humility.
Reference
Marjit, S (2008): “Inflation and Public Policy – Contemporary Dilemmas”, EPW, 6 September.
