Rebooting Economy 50: Economic reforms for whom and for what?

Rebooting Economy 50: Economic reforms for whom and for what?

Top-down reforms since the demonetisation of 2016 have already derailed the economy and brought misery to millions, yet the great zeal to do more of the same amidst protests from several segments of population demonstrate that the intent is far from public welfare

Of late, all economic decisions, howsoever rash and demonstrably damaging to the economy and people's wellbeing, are described as "reform" and thrust on unsuspecting people Of late, all economic decisions, howsoever rash and demonstrably damaging to the economy and people's wellbeing, are described as "reform" and thrust on unsuspecting people

The word "reform" carries a rare potency that often lulls critical minds. Every time India faces a crisis, a call goes up for more of it, sometimes couched in colourful phrases like 'the unfinished agenda of 1991'. Of late, all economic decisions, howsoever rash and demonstrably damaging to the economy and people's wellbeing, are described as "reform" and thrust on unsuspecting people.

Farmers from Punjab, Haryana, and other states who have gathered in and around Delhi to seek rollback of three new farm laws are being told that these are reforms meant to benefit them.

Is "intent" of farm reforms to benefit them?

The three new farm laws - permitting trade in farm produce by bypassing state government-run APMC mandis where government procurement takes place at the minimum support price (MSP), removing stock restrictions on farm produce by private businesses and a new framework for contract farming that undermines state governments' power - were top-down, without consultation with farmers, state governments, or experts.

More than five months after these laws were brought through ordinances, amidst the pandemic lockdown, and more than two months after they were rammed through the Parliament without due deliberations, the agitating farmers were told by Prime Minister Narendra Modi and Home Minister Amit Shah on November 29, 2020, that these were for their benefits. A day later, the Prime Minister also said these laws were enacted with right intent.

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None of it was, however, told straight to the protesting farmers, but in faraway Hyderabad and Varanasi and through a radio monologue. These assurances came after the marching farmers were treated generously with water cannons, teargas shells, baton charge, barbed wires, concrete blocks, and dug-up roads.

A farmer who turned off a water cannon was charged with attempt to murder case by the Haryana police. To help the Haryana Police, Delhi Police, CISF, RAF (riot-control police) and even the Border Security Force jawans (amidst border conflict with Chinese which is allegedly occupying a large tract of land on the Indian side of LoC in Ladakh) have been pressed into service.  

Instead of dialogue and addressing the farmers' anxieties over "reform", the ruling establishment and their troll army, led by top ministers, have unleashed campaigns to discredit them and their cause by name-calling.  

The offer to talk, which should have preceded the "reforms", have come attached with pre-conditions. First, they were asked to gather at a designated place (Burari), which the farmers called an "open jail" where police treated them like criminals (recorded statements, took down identity, vehicle details and photographed them) and then insisted on who can and can't represent them and by the time of writing, they had been asked to give in writing their objections to specific provisions in the three farm laws.

The intent is clear: the objections would go to the Parliament since that is where these laws can be amended but which had passed these laws without due deliberations in the first place.  

Many questions arise from these developments: If the farm laws are reforms and meant to benefit farmers, why are they protesting and demanding a rollback? Why did the government pass these laws behind their and state governments' backs? More importantly: Who decides, and on what basis, if a law is a reform to benefit farmers?  

The main demand of farmers is a guarantee that their produce be bought at MSP prices by private entities since the reforms bypass and dis-incentivise APMC mandis where government procurement takes place (with no mandi tax that private entities pay and direct price negotiation between farmers and private entities etc.) (For details about these laws, read "Rebooting Economy XXIX: Exposing farmers to unregulated market is more likely to harm them ")

Do farmers have a case?

Here is a graph which shows why selling to private entities is not really an option.

The graph shows the trend in government procurement of rice and wheat at MSP (primary items procured) even when they are free to sell to private entities. The blue line represents rice and wheat procured in million tons (MT) and the red line shows the percentage of total rice and wheat production that is procured.

Besides, every time the government announces MSP rates (for Rabi and Kharif), market prices of farm produce crash. It happened in 2020 and it had happened in earlier years as well, which is duly highlighted by the media too because private entities don't pay MSP prices.

How will exposing farmers to uncontrolled markets help them?

An interesting development took place during the Bihar elections in October-November 2020. Bihar farmers started demanding the revival of APMC mandis and government procurement since the state government dismantled both in 2006.

Does it mean those who designed the farm reforms are unaware?

No, they know all of it well. The intention is different and obvious.

Do labour reforms help labour?

Another protest by the 'intended' beneficiaries of reform has gone unnoticed.

Ten national labour unions organised a nationwide strike on November 26 to demand the rollback of four new labour laws brought in as reforms for their benefit. The only union left out of it is the ruling party-affiliated Bharatiya Mazdoor Sangh (BMS). It protested on October 28 on its own and threatened to hold a nationwide strike if these reforms were not rolled back.

The new labour laws amalgamate 40-odd central laws into four "codes", drastically reducing labour protection and welfare.  

What these laws provide: (i) thresholds for health and safety protections increased, from 10 and more to 20 and more in factories, which keeps more than 99.3% factory workers out, with further provisions to exclude even more (ii) threshold for protections from arbitrary hire-and-fire increased from 100 or more to 300 or more workers in establishments (iii) adds precarity by expanding the scope and adding new category of contract workers (iv) social security cover expanded to unorganised workers but the provisions are vague, not universal, and silent on 'unemployment allowance' though these laws came in during the pandemic lockdown which saw millions losing jobs overnight (v) working hours increased from 8 hours to 12 hours a day and millions of workers kept out of minimum wage eligibility, including those hired by central and state governments. (For more read "Rebooting Economy 31: Will new labour codes protect more workers or less? ", "Rebooting Economy 32: Wage code leaves millions of workers out in cold " and "Rebooting Economy 34: Temporary jobs hurt both workers and economy ")  

Are these labour reforms intended to benefit labour too?

When the government was asked during the September 2020 Parliament session about how many workers lost their jobs, livelihoods, and lives by being forced to walk hundreds of miles home for nearly two months, it said it had no data. When asked to pay compensation for deaths caused by its own mistakes, the government dismissed it, saying since it had no data the question did not arise.

In the meanwhile, the demonetisation, GST, and lockdown rendered millions without jobs and livelihood sources, unemployment rate touched new highs. Millions have pulled out from job markets simply because there are no jobs. As a result, the worker population rate (WPR) has fallen from 42% in 2004-05 to 35.3% in 2018-19 (usual status) - according to the PLFS of 2018-19 and 2017-18.

Did demonetisation help people and economy?

In October 2020, Prof. Aravind Panagariya, the former Niti Aayog chief now back to teaching in the Columbia University, wrote about "reformist credentials" of Prime Minister Narendra Modi and put him alongside predecessors Narasimha Rao and Atal Behari Vajpayee, but dismissed the architect of the 1991 liberalisation Manmohan Singh.

He listed five big-ticket reforms by Modi: Insolvency and Bankruptcy Code of 2016, labour reforms, farm reforms, medical education, and FDI liberalisation. He added two "truly mega reforms" to the list: GST of 2017 and corporate tax cut of 2019.

He did not mention two: the demonetisation of 2016 and AatmaNirbhar Bharat of 2020. He strongly supported the demonetisation and strongly opposed the AatmaNirbhar Bharat. His silence on these two is intriguing.

As for other reforms, here is how they have impacted the people and economy.

The demonetisation of November 8, 2016, has had a catastrophic impact on the people and the economy. Millions lost their jobs and livelihoods instantly since 86% of high-value currency notes were banned with less than four-hours notice. It devastated the informal economy and together with GST ended India's high growth story. Cash was rationed for which millions lined up for nearly six months and more than 100 died in these queues. (For more read "Rebooting Economy XXV: How a series of economic misadventures derailed India's growth story ")

The government never talked about any of it. Four years' later, on November 8, 2020, it claimed that the demonetisation did a lot of good to the economy: (a) "tax/GDP ratio drastically improved" (b) "made India a lesser cash-based economy" (c) "helped reduce black money, increase tax compliance".

The evidence, however, is exactly the opposite.

The following graph uses the latest data provided by the Controller General of Accounts (CGA) and RBI to map tax-to-GDP ratio and shows the first and third claims (a and c) are incorrect.

The next graph maps currency-in-circulation (CiC) from the RBI's weekly database to show that India has turned no less-cash (as claimed in b) but more cash economy.

As for reducing black money, 99.3% of the banned cash had returned to the banking system, so no such claims can be made. Further, since India has become an even more-cash based economy, by the flawed government logic, India must have added more black money.

The demonetisation did help one digital payment start-up turn into the biggest Indian unicorn in double quick time. It had used the Prime Minister's photograph on the front pages of national dailies to flaunt its clout.

But digital payments as a whole received a big jolt. Total digital payments (RTGS, credit transfers, debit transfers, card payments, and prepaid payment instruments) fell from Rs 2,258.8 lakh crore, in FY17 to Rs 1,623 lakh crore in FY20. (For more read "Rebooting Economy 48: Do tax numbers show a healthier economy? ")

GST of 2017: Second economic shock

The main objective of GST was to eliminate the cascading effect of multiple indirect taxes, thereby making the tax system more efficient and increase tax collection to help the people and economy.

It did the opposite.  

A perfectly sensible move caused incalculable harm because of its shoddy design and botched up implementation. The informal economy received another big jolt, leading to loss of jobs and business. In one year, the Tamil Nadu government said 50,000 MSMEs shut down, causing loss of more than 5 lakh jobs. Demand for inputs shifted from informal small businesses to formal big businesses to claim input credit provided under the GST, harming the informal economy further.  

Also Read: Rebooting Economy 46: Who is designing India's growth path?

More than three years down the line, the GST has not yet been fully rolled out.  

Input credits are given without verification or matching of invoices and this tax is yet to be subjected to tax audit. Who does such a situation help? Not the economy, nor the people. The tax-to-GDP ratio has fallen (shown in the graph earlier).  

Moreover, this tax reform threatens to derail "cooperative federalism" anytime because of the central government's intransigencies in paying the GST compensations to states. (For more read "Rebooting Economy XXIV: 7 critical GST flaws govt needs to address at the earliest ")

AatmaNirbhar Bharat 2020: Threat to future growth

This inward looking, failed import substitution policy of 1960s and 1970s was nailed best by none other than Panagariya, the government's loudest cheerleader. He asked the government, in an interview, not to fall into the trap of local businesses, who he said, drive policy decisions.

This new reform came via a nightly live-telecast sans economic logic, ignoring historical evidence and data. It threatens to take India back to the "Hindu" rate of growth of pre-1991 liberalisation. (For more read "Rebooting Economy 45: What is AatmaNirbhar Bharat and where will it take India? " & Rebooting Economy 47: Do India's fiscal numbers suggest a quick turn-around? )

Here is one graph that should worry Indians no end: if import is restricted, export will fail.  

Indian export relies heavily on imported inputs, called "import intensity of exports", which has gone up from 10.5% in FY94 to 32.5% in FY14 for the whole economy. For manufacturing, this dependence is far more: up from 29% in FY08 to 51% in FY14. For petroleum products, import intensity stood at 91.4% in FY14.

Other reforms: IBC, medical education, FDI liberalisation & corporate tax cut  

Four other major reforms that Panagariya flagged are: Insolvency and Bankruptcy Code (IBC) of 2016, reforms in medical education, corporate tax cuts, and FDI liberalisation.

The IBC started well (not an original idea as work began during the UPA-I) but has already lost steam. Former RBI Governor Urjit Patel resigned in 2018 and later revealed in his book, "Overdraft: Saving the Indian Save", that he was unhappy with the dilution of IBC to protect private loan defaulters. Now, it remains suspended to protect big private borrowers facing a crisis due to the lockdown-induced economic crisis.

Medical education reform Panagariya talks about is very dangerous and regressive for the people. The government started a ministry of AYUSH in 2014 to push unscientific and untested traditional medicine practices like Ayurveda, homeopathy, Unani, Siddha etc.  

Since then, it has repeatedly pushed AYUSH treatment for COVID-19 even when all the ministers, film stars and other social influencers promoting AYUSH for COVID-19 have run to allopathic treatment the moment they were tested positive for the virus.

There have been multiple attempts to push these traditional practitioners to join mainstream healthcare by allowing them to prescribe allopathic medicines (about which they have no knowledge or training) through "bridge courses" of various kinds.  

On November 20, 2020, a gazette notification allowed these AYUSH practitioners to conduct 58 types of surgeries, thereby directly endangering people's health and lives. The Indian Medical Association (IMA), the largest body of medical practitioners in India, has threatened to go to court to prevent it.

That Panagariya called such dangerous moves a reform seems quite unreal.

As for Panagariya's "truly big reform", Rs 1.45 lakh crore of the corporate tax cut in September 2019 when the Centre had no money to pay GST compensations to state governments, here is a reality check.

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The RBI in its 2019-20 annual report wrote what corporates did with the tax cut: "The corporate tax cut of September 2019 has been utilised in debt servicing, build-up of cash balances and other current assets rather than restarting the capex cycle."  

Surely, none of these activities qualify as a reform or its side-effect. Besides, enough literature exists to show corporate tax cut did not lead to higher investment or growth (not even in case of 2017 tax cuts by US President Trump).  

What economic historians call "Golden era of Capitalism", spanned between 1950s to 1970s when economic growth in developed and developing countries was highest ever and inequality lowest, had a very high rate of corporate tax - average top tax rates of 70-80% in the US and 80-97.5% in the UK. (For more read "Reality check: Corporate tax cut unlikely to increase investment or employment " & "Deconstructing Neoliberalism III: Why neoliberalism calls for a rethink "

As for FDI liberalisation, most FDI inflows, and outflows happen through tax havens (zero or almost zero tax jurisdictions) and a large part of it is suspected to be "phantom" (only to evade tax) or "round-tripping".  

Official data shows nine tax havens accounted for 82.8% of total FDI inflows in FY18, 70.5% in FY19 and 84.1% in FY20. The FDI outflows too are mostly through tax havens - 81.7% in FY18 and 82.6% in FY19. (For details read "Rebooting Economy XXVII: Fiscal mismanagement threatens India's economic recovery ")

Here is one graph that shows trends in FDI inflows. Do the numbers tell FDI liberalisations positively impacted inflows?

Banish the thought that FDI inflows have achieved any of its stated objectives: technology transfers, marketing expertise, modern managerial techniques, or export boosts. The focus of FDI liberalisation is wholly on quantity, not quality. (For details read "Decoding Slowdown: FDI inflows trend shows all's not well; growth drops to single digits ")

Here is some food for thought.  

Why Manmohan Singh chased "inclusive growth" for 10 years?

Few realise that the architect of 1991 liberalisation, the then Finance Minister Manmohan Singh, spent 10 years as the Prime Minister (2004-14) bringing laws to ensure "inclusive growth" because his liberalisation had brought in many distortions and miseries to a wide section of population.  

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Here are some of these laws and their objectives to show light on such distortions and miseries:  

  • Mahatma Gandhi Rural Employment Guarantee Act (MGNREGA) of 2005 to address years of rural distress;  
  • National Rural Health Mission (NRHM) of 2005 to "provide accessible, affordable and quality health care to the rural population, especially the vulnerable groups", along with ASHA workers to act as "interface" between the community and public health system;
  • Scheduled Tribes and Other Traditional Forest Dwellers (Recognition of Forest Rights) Act of 2006 (Forest Rights Act) to "undo the historical injustice" to forest dwelling tribals and non-tribals and restore primacy of their rights over their forests and forest land (lost to forcible land acquisitions for development);  
  • Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act (LARR) of 2013 to ensure those who lost their land to forcible land acquisition for development projects get a fair compensation and are resettled;
  • National Food Security Act (NFSA) of 2013 to provide subsidised food grains to 75% rural population and 50% urban population and,  
  • National Urban Health Mission (NUHM) of 2013 to provide for "primary health care needs of urban poor".

It would be unfair to leave out former Finance Minister P Chidambaram who joined the debate with Panagariya and told him that the "gold standard of reforms" is whether a reform adds to growth or not.

Surely, by that standard Manmohan Singh stands taller than all. Here is what the GDP growth numbers say since FY05 for which the 2011-12 series provides data.

Can an economic decision that does no good to people's wellbeing nor improve economic growth but serves some private interests be called reform?

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