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Capitalism rests on the bedrock of legitimacy. A lot depends on whether voters see businessmen as robber barons or men of enterprise. The recent events at ICICI Bank and Fortis Healthcare are a case in point. Neither the management groups nor the boards of these companies have emerged with flying colours. This was preceded by the rampant corruption when natural resources were allocated in the first years of this decade, as well as the massive loan defaults by infrastructure companies with political contacts. Nirav Modi and Vijay Mallya are already seen as examples of how the rich can escape Indian law. Arvind Subramanian has described the situation well—India has moved from crony socialism to stigmatized capitalism.
The Indian economy has one of the highest growth rates in the world, but that growth hides disturbing long-term trends. Here are some of them that, illustrated by charts, exposing deep structural flaws in the kind of growth we have:
Chart 1 shows that while gross domestic product (GDP) growth in every decade since the 1970s has been higher than in the previous one, agricultural growth, on the other hand, has been steadily decelerating since the eighties.
The compounded annual rate of growth of agriculture, at constant prices, in the 1980s was 4.24%. It fell to 3.17% in the 1990s and to 2.37% in the first decade of this century. While the rest of the economy was revving up, thanks to economic liberalization, agricultural growth was winding down, as the push given by the Green Revolution lost momentum. The chart also shows that agricultural growth hasn’t been anything to boast about in the past five years. In fact, the contribution of agriculture to gross value added at basic prices in the past five years, at constant prices, has been a mere 6.3%.
Chart 2 shows that the share of institutional sources of credit in total loans has been coming down since 1991 in rural areas. For farmers, the share of loans from institutions has fallen from 63% in 1981 to 58% by 2012, leaving them to the tender mercies of moneylenders.
Chart 3, from the Reserve Bank of India’s (RBI’s) KLEMS database, shows the compounded annual growth in total employment has been decelerating. It was 2% in the decade between 1980-81 and 1990-91; 1.63% in the next decade and 1.35% between 2000-01 and 2011-12. During this last period, people left farm employment to take up jobs mainly in construction, which contributed more than half of the net addition to jobs. The recent slowdown in the sector, therefore, means that a prime source of jobs for the masses has dried up.
Labour productivity in agriculture, according to the KLEMS database, has just about doubled since 1980, not good progress at all (chart 4). Contrast labour productivity in textiles and leather products, which has gone up about six-and-a-half times since 1980. This is the reason why it is necessary to move labour out of agriculture to the far more productive industry or services sectors. But, as the chart shows, construction, too, has low labour productivity—its index of labour productivity is lower than in 1980-81. People moving out of farming are shifting to low productivity jobs, which don’t pay well. One big reason why productivity is so low in India is because the size of the average business is so small.
Chart 5 shows that the average non-agricultural business in 2013 employed a mere 2.39 workers. Worse, the data shows that this average is now lower than in 1980.
More than 95% of businesses employ between one and five workers. They do not have the resources to scale up or improve productivity and merely enable their workers to survive. The impact of these trends is best illustrated by chart 6, which shows the glaring inequalities in wealth in the country. The share of the richest 1% has gone up from 40.3% in 2010 to 58.4% by 2016. During the high noon of socialism in this country, Pakistani economist Mahbub-ul-Haq once said India had “ten per cent socialism”, meaning that 10% of workers had secure and safe jobs, regular wages and leave, provident fund, gratuity and medical benefits. The rest worked in nasty, brutish jobs—without any security—that paid a pittance.
We have now adopted capitalism, but little else has changed. We have an elite ten per cent, working in highly productive, globally competitive, modern sectors; below it are a few who do relatively well by clinging on to the coat-tails of the rich and powerful; and then we have the “huddled masses yearning to breathe free”. We now have ten per cent capitalism. In 2009, Rafael Di Tella of the Harvard Business School and Robert Macculloch of Imperial College asked why capitalism does not flow to poor countries, despite the clear evidence that it is more successful than socialism in raising living standards. The two scholars linked it to the problem of corruption. The usual assumption is that heavy regulation promotes corruption. Di Tella and Macculloch argue that people vote for interventionist policies because they see them as a form of punishment for corruption.
A lot thus depends on whether citizens believe that wealth has been generated through political leverage or competitive excellence—and whether the rule of the law applies equally to all. The populist backlash in the West is at least partly because of the unchecked power of Wall Street, though the big tech companies of Silicon Valley are also feeling the heat now. Economic reforms need to break the grip of stigmatized capitalism through more competitive markets, a reinstated fundamental right to property, greater reliance on rules rather than discretion, and a change in the way government contracts are awarded.
The new Insolvency and Bankruptcy Code is a case in point, because, for the first time, large borrowers who have defaulted on bank loans are losing control of their assets. The Real Estate (Regulation and Development) Act is another example of power shifting from developers to home buyers. These ideas serve as a useful backdrop to examine some recent policy initiatives—demonetization, the push for digital payments, the transition to a goods and services tax (GST), for example. Each has the potential to reduce the opportunities for corruption. The early record is a mixed one. There is as yet only slim evidence to support the belief that demonetization has struck a body blow to corruption. The use of bankruptcy laws by lenders to go after influential corporate groups that have defaulted on their loan commitments offers hope for a more dynamic capitalist system in India. GST is still in its infancy, but the use of input credit taxes that will be reconciled through the GST computer network offers hope of eventually less tax evasion in the production process.
By: Abhishek Sharma ProfileResourcesReport error
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