First published on The Dialog.

The problem of “jobless growth” under the wider umbrella of Indian economy has attracted a lot of attention in media recently. Of all the challenges thrown up by the neoliberal reforms of the late 1980s and early 1990s, this one is among the most serious and the one with potentially catastrophic long-term consequences, if not addressed soon. One way to visualize the seriousness of the problem is via the data presented in Figure 1 below. It shows annual growth rates of GDP and of formal sector employment over ten year periods starting in the 1970s. Notice that while GDP growth becomes faster, employment growth becomes slower. During the pre-economic crisis spurt in GDP growth where the Indian economy grew at an average annual rate of over 8%, the rate of formal job growth was less than 0.5% per year. The result has a persistent informality and casualness of employment and lack of stable jobs with benefits and inflation-adjusted wages.

Figure 1: Jobless Growth

The previous UPA government’s inability to create jobs acted as a catalyst for a change and Modi campaign promised a much more rapid rate of employment growth. While more time may pass to see if they achieve this, the initial indications are that the problem will persist. Quarterly job creation data from the Labour Ministry shown in Figure 2 suggests that, if anything, jobs are being created more slowly under the present regime. The figure shows cumulative jobs added each quarter since the end of 2008 up to the end of 2015.

Figure 2: Quarterly formal sector job creation (Labour Ministry data)

Some of the reasons for such a sluggish growth might be mechanization, global competition, skill mismatch, and labor strife, however are these discourses being addressed at the policy level? While global economic conditions and factors outside the control of Indian policy-makers may be part of the reason, it is equally the result of self-imposed ideologically motivated constraints.

It is true that increased openness to trade and capital, places certain important constraints on developing country government who might want to pursue policies that depart from the “Washington Consensus.” But scholars such as Dani Rodrik have argued in his book, One Economics, Many Recipes, that developing country policy-makers are not even using the policy freedom that does exist in order to suit their own domestic conditions and meet their own challenges. Instead they are choosing to accept deregulation, liberalisation, and openness as goods in themselves rather than as one among many policy options to be followed selectively in the pursuit of broad development goals.

A case in point is the obsession with labour laws and lack of flexibility in the labour market as the reason for lack of formal job creation. Despite the fact that surveys show, constraints such as lack of infrastructure and weak demand are much more binding than labour laws (for e.g. see Kotwal, Ramaswami and Wadhwa 2011).This is even truer of employers in micro, small and medium enterprises, who often operate well under the ceiling at which labour laws apply and can hire many employees before the laws kick in, but who are still unable to expand employment because of inadequate electricity, lack of access to markets and/or credit, and weak demand.

Another case is aversion to the very mention of any “industrial policy” for fear of a return to the “license-quota-permit raj.” Never mind that the entire gamut of policies followed under the neoliberal regime, such as Special Economic Zones, FDI, Make in India and so on are all industrial policy measures, though not labeled as such. Industrial policy in the service of export promotion and foreign investment is welcomed and any policy focusing on domestic firms and markets is viewed with suspicion and has to prove itself twice as hard.

An employment-first development strategy will involve fundamentally different choices than the growth-first strategy that we have followed for the past 25 years and that has brought us to the present-day crisis. It is clear that such a strategy cannot be implemented if precedence is given to the latest technology (which almost always has been developed in labour-scarce, capital-abundant contexts) and to global competitiveness. But such is the hold of these two ideologies that the merest mention of departing from them invites allegations of wanting to “take India back” to some dark time. Of course these allegations come from those whom the present economic regime has blessed with well-paying, secure jobs; precisely the thing that is denied to the vast majority by the very same regime.

It is now abundantly clear that uncritically accepting deregulation, trade openness and openness to capital flows (FDI or short-term) leads to highly undesirable outcomes such as increasing capital intensity of production, resulting in growth without jobs. The solution to this is not more globalization and reliance on some mythical foreign demand (for which the moment may, in any case, have passed), but rather doing the hard work of designing appropriately open trade policy, providing key infrastructure, particularly to MSMEs, and raising rural incomes (and therefore demand) by raising public investment in agriculture. After all sound agricultural policy is the bedrock of any decent industrial policy.

First published on The Dialog.

“Despite many protestations to the contrary, the RBI, far from being the exclusive domain of experts and technocrats, is actually a site of politics.”

In the past week or so there have been several articles in the press on whether Reserve Bank of India (RBI) governor Raghuram Rajan will get a second term, come September. Rajan came under fire from BJP MP Subramanian Swamy for, among other things, not being Indian enough and for trying to wreck the economy deliberately.

Theatrical claims aside, substantive disagreements between the RBI and the government seem to be of the usual kind. The central bank is focused on keeping inflation low and is therefore, reluctant to keep interest rates as low as the government, looking for more growth, wishes. This is nearly always a point of contention between politicians and central bankers. And it is expected given the usual division of responsibilities, at least within the framework of a capitalist economy and a parliamentary democracy.

But the general point that the present controversy illustrates, yet again, is that despite many protestations to the contrary, the RBI, far from being the exclusive domain of experts and technocrats, is actually a site of politics. In this article, I want to use the current controversy as an occasion to reflect briefly on this political economy aspect, and on what democratically accountable central banking should look like. In my opinion we, in India, have not debated this question enough.

In mainstream economic thinking today, the principle of “central bank independence” is sacrosanct. This principle mandates that monetary policy should be the domain of a body of experts that is as independent as possible from the elected government of the day. Two reasons are usually given for such an arrangement. First, the macro-management of money is a complex affair and is best left to experts. Politicians and ordinary citizens do not understand the technical aspects well enough to make decisions that will ensure that the nation’s monetary goals are achieved. And second, independence will ensure the central bank does not become beholden to short-termism but instead remains consistently focused on a long-term goal of price stability. The specter invoked is one of a fiscally profligate regime that leans on a willing central bank to finance its spending by printing money. This debases the currency and causes runaway inflation and economic collapse.

“The way money works in modern economies is complex and there are lots of ideas out there about money, some of them not well-thought out and some plain crazy. So the role of experts is certainly crucial.”

Both these arguments have some merit in them. The way money works in modern economies is complex and there are lots of ideas out there about money, some of them not well-thought out and some plain crazy. So the role of experts is certainly crucial. And as a society we hope that the RBI governor and his team have all the details about the functioning of money and banking system in their heads, while also having the interests of the vast majority at heart. The second fear is also understandable and we can find historical support for it. Indeed, central banking in India during the Planning period was much more subservient to the government’s overall economic plan and brought some well-known macroeconomic problems with it.

But neither argument is immune to challenge. First, economic experts are notorious for disagreeing on fundamental issues. Witness the deep disagreements over fiscal and monetary policy that arose between Nobel-laureates in the aftermath of the 2008 economic crisis. Second, monetary policy is a key factor in economic performance and governments are judged by the performance they deliver. So they will always have a strong interest in formulation of monetary policy.

“Interest rates, the primary intervention of the central bank in the economy, change the distribution of income and wealth in society.”

But the central point that the argument for central bank independence obfuscates is that central banking is always an intensely political activity. Indeed it cannot be otherwise, because interest rates, the primary intervention of the central bank in the economy, change the distribution of income and wealth in society. Harry Johnson, an American conservative economist once said,

“From one important point of view, indeed, the avoidance of inflation and the maintenance of full employment can be most usefully regarded as conflicting class interests of the bourgeoisie and the proletariat respectively, the conflict being resolvable only by the test of relative political power in the society.”

Thus class conflict in a society is reflected in its monetary policy. Further to argue today that monetary policy should be formulated by experts insulated from political pressures is to ignore the ever increasing crucial role of international finance capital. Even if a central banker were to be insulated from domestic politics, in today’s financially globalized world, how independent is a central bank really? Does “independence” only mean freedom from the constraints of popular democratic control? What about independence from the global financial elite? These days, barring a situation of a deep economic crisis, a central bank that tries to be accommodative of economic growth and goes easy on interest rates at the risk of some (moderate) inflation is likely to find itself the target of ire from international investors who will threaten to move money out of the country.

“In today’s financially globalized world, how independent is a central bank really? Does “independence” only mean freedom from the constraints of popular democratic control? What about independence from the global financial elite?”

Rapid movements of portfolio capital and ever reducing controls on capital flows across national borders in effect mean a loss of control over domestic monetary policy. India has historically relied heavily on capital inflows to balance its persistent current account deficits (since export-led manufacturing never really took off for us as it did for China). This makes us vulnerable to volatility in capital flows. In fact for many years it is the RBI that has, wisely, resisted freer flows of capital across our borders. But it may be a losing battle. Cries for central bank independence are not really demands for independence of experts to take a long-term view in the interests of the majority of the people. Rather they are about control over monetary policy by the financial investing class who want freedom from democratic constraints imposed by the citizens of a country.

If we accept that central banks are never really independent, but rather are sites where competing interests clash (domestic elites, international financial elites, the professional and middle classes, the poor) then what are the institutional mechanisms by which they can be made politically accountable? What would central banking under control of the majority of India’s people look like? This is not an unproblematic notion. Many liberal democracies, including India’s, are very unequal societies where power rests with a tiny elite. Under such circumstances, it is not unreasonable to suppose that governments will not have long terms interests of the people in mind, but rather will cater to their elite masters while throwing some populist policies to the people periodically. In such a case, a central bank that is under the control of such a government is obviously not democratically accountable either.

But if the founding principle of democracy is that the people are sovereign and that they are capable of making decisions in their own interest, we should be able to have democratically accountable central banking that is still a separate power center from the elected government of the day. But this will require RBI governors to be courageous enough to face ordinary people (not other economists, specialists, or politicians) and be clever enough to explain their policy stances. Maybe even stand for elections and win them! Then hiding behind technocratic jargon would no longer be an option. Is it unreasonable to expect a central banker to be directly accountable to the people? After all his or her decisions profoundly affects us all everyday.

Further reading

Blinder, Alan (1996) Central Banking in a Democracy, Federal Reserve Bank of Richmond Economic Quarterly Volume 82/4.

Ray Partha (2014) Political Economy of Central Banking in India, Paper prepared for the Conference on the Political Economy of Contemporary India, IGIDR, Mumbai, November 20-21, 2014.

Stiglitz Joseph (1998) Central Banking in a Democratic Society, De Economist 146, No. 2,

I thank Arjun Jayadev for drawing my attention to the Johnson quote and for comments and criticism.

First published at Sanhati.com

INTRODUCTION
A popular quip goes, “a politician is that person who, when he comes to a fork in the road goes both ways.” This contains a significant truth about political decision-making. In an electoral democracy like India moneyed interests wield a large influence on policy. But the vast majority of votes lie with the poor. The former exert great pressures to steer government policy in an anti-people direction. But the latter ensures that extreme steps cannot easily be taken. Government must be at least seen to be taking both forks in the road.

The 2015-2016 budget presented by Finance Minister Mr. Arun Jaitley on February 28 is of this nature. One way of looking at the budget that has been widely reflected in its corporate media coverage is that this is not a “bold,” or “courageous” budget. It has not met expectations of “big-bang reforms.” Another way of looking at it is that the Narendra Modi government has not been able to move as decisively in the anti-people direction as the corporate sector wished it to. This has surprised some observers given that general elections are several years away. As one pundit observed on TV, every subsequent budget takes the government closer to the next general election and hence pulls it further in the “populist” direction (incidentally, a whole article could be written on how the word “populist” has been skillfully used to cast aspersions and suspicions on any pro-people actions).

But the 2015 budget also negotiates another tension, that between domestic and international capital. In the build up to the budget there was a noticeable tension between what the domestic capitalist class wants and what international finance would have liked to see. Taking into account the sluggish rate of economic growth over the past few years and continued anemic domestic demand, there were corporate voices asking for government to stimulate demand (“not just show us the money, but show us the market” as one put it). There were also domestic capitalists calling for larger investments in infrastructure. On the other hand, the pressure for “fiscal consolidation” continues unabated and international finance would like to see the fiscal deficit reduced as per plan since its financial returns are potentially placed in jeopardy otherwise.

For example, the fiscal deficit target of 3% of GDP has been postponed by one year to be achieved by 2017-18 instead of 2016-2017 (the fiscal deficit targets are 3.9%, 3.5% and 3.0% in FY 2015-16, 2016-17 and 2017-18 respectively). The space created for spending is supposed to go to infrastructure and welfare spending. In the words of the budget documents, “Despite pressure on Union Finances, Government has decided to run welfare programmes for poor and socially disadvantaged in an unchanged manner.” In this respect it is worth nothing that the MGNREGA budget has increased by around 4% from what was actually spent (as opposed to budgeted) on its last year from 32456 crore rupees revised estimate in 2014 to 33700 crore rupees. Of course accounting for inflation this is not necessarily an increase in real terms. Also in continuation with last year’s budget, money for Centrally Sponsored Schemes such as MGNREGA will be given to the States to spend.

The budget that has been presented could thus be seen as the product of these three sets of class forces: the working masses, the domestic corporate class (including its middle-class hangers on), and the international financiers. In addition there is the institutional inertia that comes with a large economy like India’s. Seen in this context, it is not surprising that the budget is more a continuation of medium-run trends than a radical departure from them.

EXPENDITURES
One way in which the budget is substantially different is a result of the implementation of the recommendations of the fourteenth Finance Commission (FFC). This involves the transfer of a much larger proportion of certain revenues to the states. A much-noted feature is thus the jump in States’ share of taxes from 32% to 42% of the gross tax revenue. Figure 1 shows that net resources transferred from central revenues to State and UT governments have been increasing steadily. While the spin that the Modi government has been putting on this goes by the name of cooperative federalism, it remains to be seen what the actual impacts will be on the ground. In principle of course, decentralization of finance is to be desired. However, a real danger is that under the guise of decentralization of decision-making states will be forced to compete for domestic and foreign investment. And they obviously have lesser resources to withstand the threat of capital flight than does the Centre. Further, what has occurred is a compositional change. Together with the substantial increase in tax revenues going to the states there has been a big decline in plan assistance to states, and some increase in non-plan assistance. As a result while total transfers to States have grown in absolute terms they remain the same in proportion to total government spending.

A little bit of terminology is useful here. For historical reasons expenditures are categorized in two main categories: plan and non-plan. Plan expenditures, as the name suggests are developed as part of the planning process while non-plan expenditures cover all spending not included in the Plan, such as expenditure that is obligatory in nature (e.g. interest payments, statutory transfers to States) and expenditures on essential functions (e.g. defence, internal security, external affairs). This distinction has lost meaning with the scrapping of the Planning Commission. And may soon disappear.

In keeping with the anti-planning view of the present regime, several critical analysts have noted the general reduction in plan spending over the proposed amount last year. In fact the actual amount of spending in this category fell far short of the proposed amount, as Figure 2 shows. When one sees the actual amount of plan spending over the past few years, it seems that it has been stagnant rather than falling, at least in nominal terms.

Figure 1: Net Resources Transferred to State and UT Governments

Source: Resources transferred to State and U.T. Governments (Union Budget 2015-16)

Figure 2: Plan spending (revenue and capital)

Source: Expenditures (Union Budget 2015-16)

However, within the stagnant or slightly declining plan spending, there are big differences in how different sectors have been prioritized. But these differences have largely been inherited from the previous regime, though the present government has put its own stamp on it also. For example, agriculture and rural development were very small parts of plan spending even in last the UPA budget, but the steep decline in social services and increase in transport is a feature of the NDA government (Figure 3). That social sector spending under different heads has been cut sharply can be seen here.

Figure 3: Breakdown of plan spending by sector

Source: Central Plan Outlay (Union Budget 2015-16)

TAXES
The Indian fisc continues to be plagued with the problem of a narrow tax base further narrowed by tax write-off and evasion at the top of the income distribution. The tax-to-GDP ratio has not grown in the past year. In 2013-14 it stood at 10% of GDP. The target for 2014-15 was 10.6% but the revised estimates show it to be 9.9%. As an article in the Wall Street Journal noted, even today, only about 3% of Indians are subject to an income tax, compared to 20% of Chinese. Total tax revenue as a percentage of GDP is only 10% in India, among the lowest in emerging economies.

But the tax regime is being made more regressive via a proposed cut in corporate taxes and a rise in indirect taxes. The proposed reduction in the corporate tax rate from 30% to 25% over the next four years has had a mixed reception. The fiercely pro-corporate ex-Finance Minister Mr. P. Chidambaram, now in the role of the opposition and hence suddenly concerned about the present government’s “pro-corporate tilt,” noted in a post-budget press conference that India already has a “competitive” corporate tax rate and that the effective rate is 23% right now. And this is the average effective rate. Breaking down the numbers by firm size shows that smaller firms pay close to the official 30% rate while larger the company the lower the tax rate it ends of paying (see Figure 5). Since one percentage point in corporate taxes represents Rs. 4,000 crore, the government has effectively promised a relief of this amount every year for the next four years to the corporate sector. This combined with the “tax expenditures” (projected revenue foregone due to exemptions) which amounts to Rs. 62398 crore, together this corporate subsidy comes to Rs. 78,398 crore or 32% of the entire subsidy budget for the upcoming year. As before, P. Sainath has analyzed the “Statement of Revenues Foregone” document that lists corporate write-off in detail (link). See point 7 in this Hindu article which has other useful charts and data.

Figure 4: Tax Shares for the upcoming year (top) and revised estimates for 2014-2015 (bottom)

Source: Receipts (Union Budget 2015-16)

Of course, the news media coverage of this is accompanied by Mr. Jaitley’s provisio that tax exemptions will be reduced to maintain revenue constant while simplifying the code. On the face of it this may appear reasonable. But really, what else was Mr. Jaitley expected to say? That we are reducing the tax burden of corporations, full stop? Obviously this would be politically difficult given India’s already low tax-GDP ratio. So the reduced exemptions sop is to be expected. Whether it will be realized in practice remains to be seen.

Figure 5: Effective corporate tax rates across firm size

Source: Statement of Revenues Foregone

BACK TO CONSOLIDATION
Finally, the government has continued the tradition of slashing expenditures to meet fiscal targets. Gross Tax receipts are estimated to be 14,49,490 crore. Devolution to the States is estimated to be 5,23,958 crore. Share of Central Government will be 9,19,842 crore. Non Tax Revenues for the next fiscal year are estimated to be 2,21,733 crore. With the above estimates, fiscal deficit will be 3.9 per cent of GDP. As has happened over the last few years, once again the tax receipts were overestimated (13.6 trillion estimated, 12.5 trillion realized). Hence the fiscal deficit target of 4.1% announced last year is being achieved by spending less than announced in last year’s budget (16.8 trillion instead of 17.9 trillion proposed).

Bulk of the reductions (94%) are to plan spending as expected. But slashing spending obviously has limits. So the Fiscal Policy Strategy Document notes that “Given the resource constraint explained above on the revenue side, only option to raise additional resources remains through borrowing…”

As if it were not enough that an insistence on fiscal deficit reduction (itself a symptom of the class interests of international finance as noted above) and corporate giveaways (class interest of domestic and international capital) create a situation where expenditures that would be in the class interest of the working majority have to be cut or kept stagnant, the government also continues to subscribe to the much-criticized “crowding out” theory of public spending. Thus the budget document notes:

…attempt to raise higher resources from the market [via borrowing] has to be viewed in the larger monetary policy context. Higher Government borrowing will adversely impact private investment and make it difficult for reduction of interest rates. This would adversely affect the revival of growth, which has just started to show positive signs. Therefore, government has decided to continue with the fiscal consolidation phase…

Never mind that investment depends much more on the state of expectations about the future than interest rates in the present. And never mind that there is ample evidence to show that government spending can create conditions for “crowding in” private spending rather than crowding it out.

This is not to suggest that borrowing to bridge the deficit is a class-neutral strategy. Far from it.
At 6 trillion rupees, debt servicing remains a large part of the budget as always (38%). Most of this is domestic debt that the government owes to Indian citizens (external debt now represents only 8.3 percent of total government debt). But this does not change the fact, as we have noted in last year’s article on the budget, that in class terms debt servicing represents a transfer of income from tax-payers to bond-holders.

In summary, the best that can be said for the budget is that the pace of anti-people “reforms” has not picked up to the extent that the corporate media was clamouring for. Though in conclusion, going beyond the budget, it is worth pointing out that various executive decisions of the government that have been taken already have been anti-people. For example, the decision to restrict NREGA to only the poorest districts, the decision to cap NREGA fund remittances to the state, the land acquisition ordinance were all take outside the budget. Needless to say these have important consequences on peoples’ lives and livelihoods.

I thank Deepankar Basu, Debarshi Das, and Partho Ray for comments.