Return of protectionism

Prime minister Narendra Modi has applauded India’s latest budget delivered by his finance minister Arun Jaitley, but the parallel chorus is fading out by the day. It was Utrjit Patel, RBI governor last week, this time it’s Modi’s former advisors, Arvind Panagariya, who was also deputy chairman of the Niti Aayog until August 2017.

The RBI's monetary policy committee listed out reasons why inflation could stay well above the RBI target of 4% throughout the next financial year. RBI expects a rise in food and vegetable prices, crude oil prices and cost of health and personal care. Three other factors that will likely fuel inflation emanate from Jaitley’s budget. 

• Proposal to raise minimum support price (MSP) for farm products
• Hike in custom duties for various products including industrial inputs
• Wider-than-expected fiscal deficit

All this assuming that the south-west monsoon will be normal this year. The future of investments is  as bleak as it was before. For Modi government, these  nonchalant jabs from the RBI governor it is yet another sign that its populist budget may not help push the growth pedal. 

Substantial liberalisation under PV Narasimha Rao and Atal Bihari Vajpayee, India became the first democracy to achieve 8% plus growth for nine years beginning in 2003-04. The top industrial tariff rate fell from 355% in 1990-91 to 10% in 2007-08 and imports and as proportion of the GDP expanded to 30% and exports to 24% by 2011-12. Sadly, a new generation of bureaucrats seems to have now replaced its more enlightened predecessor. It is on course to erect the wall of protection all over again. 

Those who cannot remember the past,
are condemned to repeat it ... George Santayana 

Much is said about liberalisation and globalisation which benefited only one half of the world population while leaving other half in distress. What is visible is the constant economic growth that had eradicated extreme poverty and at the same time helped rich to become extreme rich, albeit unjustly. The casualty is environment, over extraction of non replenishable natural resources and workers with stagnant wages in developed nations. Today, US has accumulated trade debt of $20 trillion, up from $1 trillion during 1980's and has no clue or any forward looking plans to repay that debt and trade gap of $100 trillion is likely in next few decades and is saddled with huge industrial work force with stagnated wages. On other hand, China armed with huge trade plus faces deterioration of social values, degradation of landscape & environment and over exploited 150 million labour force with no human rights for over 30 years. Economics are complex and any change usually has unintended consequences. Over dependence on either exports or imports, for prosperity, is detrimental to any nation. The prudence lies in living within means and/or maintaining manageable trade gap at all times. Economic growth is never a true indicator of progress, development and wellness of any nation.

Modi at Davos and Budget

WILL THE REAL MODI PLEASE STAND UP?

• Depending upon the audience Modi takes different avatars.
• In Davos last month, Modi defended globalization and warned against protectionism but his last week's budget did not suggest pro business statesman, but a protectionist strongman familiar in poor countries.
• The last budget before 2019 elections squelches any hope that Modi would push long pending market friendly reforms.
• But the budget confirms his re-election plans i.e. grand pro-poor gestures avoiding any pro-rich plans. 
• Modicare plan for 50 crore poor people, even though with initial allocation of a pittance of Rs.2,000 crores, devastated Bombay Stock Exchange wiping out investor health by more than Rs.5 lakh crores on a single day.
• Faced with failure of 'Make in India' to boost employment, government hiked import tariffs to coerce companies to build mobile phones, auto parts, toys etc in India.
• These protectionist policies, which failed in the past, will only ensure Indians pay high prices for shoddy goods and firms getting more interested in manipulating duties than satisfying customers.
• FM Arun Jaitley's initial promise for lowering corporate taxes by 2021 appears unrealistic with economy growing at mere 6.5%.
• In the last 4 years, Modi failed to privatize a single public sector enterprise even though Air India privatisation is in process.
• ONGC buying out HPCL is only Government exiting business falls short of privatization. 
• No Indian politician can bolster his 'pro-poor' credentials without also sticking to the rich.
• According to the law passed in 2003, central government is committed to limit the fiscal deficit to 3% of GDP by 2009 whereas budget 2018 indicates fiscal deficit at 3.3%.
• Some analysts argue that budget could have been even worse.
• It is too soon to say whether government will stick to its budget estimates or open its populism gates even wider as elections approach. 
• But one thing is certain: Davos version of Modi bears little resemblance to his domestic avatar.

Modi doesn't do what he talks and doesn't talk what he does

Politics without principle, progress without compassion, wealth without work, 
learning without silence, religion without fearlessness and worship without awareness 
will destroy human race ...  Anthony de Mello

For every politician winning election, at any price, is foremost. Anything else secondary. Therefore Modi will do anything including destruction of economy or arousing communal passions or declaring war on Pakistan or anything for winning 2019 general elections. But one thing is certain. He will give nothing really to the poor. He rather believes in fascist Mussolini type spectacular announcements  followed up by relentless media campaign and propaganda. Lacking humility, honesty, integrity and morality, he is dangerous for Indians and its democratic polity.

Unorganised sector has large hidden potential for job creation

• Unorganised sector's large hidden potential for job creation is the best hope for India.
• Every politician and economist talks about 'development' and 'job creation' all the times but nothing much has happened during past 5 years.
• Unemployment rate is stable mainly due to falling labour participation rates among children and women. Also because of hidden unemployment due to unemployed getting engaged as casual workers or absorption in family enterprises and underemployment of many workers.
• Despite youth bulge in population there is no youth bulge in workforce and hence there is no demographic dividend.
• We have large number of poorly educated workers.
• Employment conditions will improve with an increase in the share of organised sector.
• Earnings per worker improved by 2.3% in organised sector and 4.2% in unorganised sector between 1999-2000 and 2011-12 but gender equality in the work declined.
• Recent trends show unemployment increase from 3.8% (2011-12) to 5% (2015-16) due 5 million 'employment loss'.

How large is the job gap? How soon can India reach a point where there is no hidden unemployment and all who want work can find it at a fair wage and decent work conditions?

• Current surplus labour at 117 million (52 million who can be withdrawn without loss of production, anther 52 million who are not at present in labour force but are able and willing to work and 13 million who are reported unemployed)
• Annual additions would be about 6-8 million.  
• Can we absorb about 16 million a year in decent work and reach full employment by 2030?
• China's model of export driven job creation looks less attractive due to global slow down, growing protectionism and growth of robotics and automation.
• Growth in manufacturing with matching skill development, infrastructure construction, urban development, housing, information technology, investment in energy will produce many jobs but far less than availability.
• The organised sector can't deliver jobs on the scale required. Job creation requires skill development for productivity enhancement.
• Powerful trade unions are able to take care of very limited proportion of workers.
• Labour reforms are required to ensure fair wages, competition and decent work conditions.
• Wages of production workers declined from 15.4% of GVA (2000-01) to 8.5% (2011-12) in unorganised sector.
• Vast majority of workers in unorganised sector lack security and suffer wage differentiation by caste, community, gender, geography for identical tasks.
• Some reforms for protection and wage determination of workers in unorganised sector are necessary. Labour policy must address inequity and exploitation issues. 
• For India to meet its job creation obligations, unorganised sector, with growth, reform and modernisation, is big hope with tremendous hidden potential. 

Read the source article

Unorganised sector, as its name suggests, doesn't follow many rules & processes and are outside income tax department lens. But its ability to provide vast number jobs fuels economic growth and contributes a lot in the form of indirect taxes. The recent demonetisation & GST proclaims formalisation of informal sector but in reality it has destroyed unorganised sector and that is evident from loss of 5 million livelihoods and GDP growth drooping from 9.1% to 5.7% and government(s) going penniless. But as they grow over time they themselves will migrate into formal sector with increased revenues, profits and benefits of formal sector. It makes sense for government(s) to allow this sector to function without fear or reverence, who will eventually become good tax payers too.

Agriculture sector with land reforms, land aggregation & cooperative farming, farm mechanisation, efficient & assured irrigation, rain water harvesting & ground water table increasing, remunerative pricing, crop insurance, efficient markets, quality inputs, warehousing & cold storages, food processing units etc will enhance rural development and reduce rural urban migration etc.