When the supply pushed by market and money driven economists exceeds demand, a 116-year-old classical economic theory becomes their raison d’etre for pontification—push for reforms but insist on retaining old prescriptions for the ailing Indian economy. In 1803, French economist Jean-Baptiste Say famously expounded that supply would always create its own demand; the S(supply)A(and)D(demand) principle mandates that should the requirement for a particular product shrink, the loss would be compensated with an increase in some other sector.
With piles of unsold products gathering dust in warehouses, India has proved to the world that both SAD and Say have finally lost their say and way. The managers and regulators of the Indian economy have a SAD fad. For the past 28 years, they have forced successive Central governments to excessively pamper suppliers or the so-called wealth creators in the name of reforms. While the gap between the rich and poor continues to widen, Indian manufacturers and suppliers of goods and services have always received a red carpet welcome.
The doors of every financial institution, policymakers and even regulators are kept open for them. While banks face bankruptcy, the personal net worth of our Industrial Maharajas has grown limitlessly. Even in the middle of economic slowdown, SAD satraps have unleashed their embedded policymakers, babus-turned financial experts and think tank titans to hype them at every forum. They abhor blaming their own research agencies or market predictors who gave them wrong predictions about demand projection even as their media megaphones cuss the government for their self made misery.
Shaken by massive international and domestic outcry over shrinking sales in consumer products to industrial machinery, the government pressed the panic button. Finance Minister Nirmala Sitharaman was persuaded to follow the beaten track of opting for the SAD model. She announced tax concessions for the rich and foreign investors. She also announced mergers of ailing banks to boost their robustness and offer better lending facilities. She is expected to announce many more fiscal measures to revive the economy. Strangely, a stronger India under a decisive leadership is now being charged with letting the economy go down.
SAD supporters had hailed demonetisation as one of the boldest steps taken by the Modi administration to clean the system. Three years later, they are blaming it for shrinking demand. Collectively and individually, they championed GST and hailed it as one of the most outstanding tax reforms ever undertaken. And now the same bigwigs are telling the media in hushed tones that GST has killed the informal sector. Their blame game has many arguments. If automobile manufacturers aren’t able to sell all the vehicles they produce, the fault lies with the government. If realty entrepreneurs cannot dispose of their inventory, the banks are responsible for asking them to repay the loans which were diverted to other channels. Such censure needs censoring.
If power consumption is not picking up as fast as supply generation, the government cannot be held accountable. The near-paralysis of the mining sector cannot be blamed on the mining ministry for forcing mine owners who tendered unaffordable bids. If the glittering malls in most cities are empty, why blame the government for robbing them of business? There are more shopping malls in the country than medical colleges. If telecom companies are staring at colossal losses, only the massive number of low-priced connections is responsible—on the one hand they vaunt the numbers as a measure of their successful business models, while on the other hand they expect the government to provide spectrum and other tax concessions to subsidise high cost operations.
Tragically, the Indian growth story has always been seen through the prism of markets and money makers. Senseless Sensex is touted as an economic health indicator while any fall is projected as the downfall of the state itself. While speculators and promoters lose hardly any money, it is the hard-earned money of retail investors that vanishes. Even after 28 years of market reforms, only around two per cent of the Indian population has directly or indirectly participated in the stock market. Even now, fewer than 30 million investors are active in the bourses.
Over 90 per cent of trading, involving just around 100 listed companies, is done by HNIs, FIIS or FIs. Since they stand to lose massively in a season of negative sentiment, they push the government and other agencies to pump in public money from banks, small savings and even government-owned insurance companies to lift the markets. Ironically, the excuse of plummeting inflation due to low demand is used to nudge the Reserve Bank to cut lending rates. And the banks rob the small saving account holders by reducing interest rates on savings and fixed deposits, leaving less money in their hand!
Moreover, market mavens have historically succeeded in getting the major pie of the government revenue. Over the past few decades, they have forced GOI to drastically cut subsidies to the marginal and poor classes. Rural demand is depressed because agricultural income is static. Around 50 per cent of the rural population earns just 15 per cent of the total national gross product. The manufacturing sector, which accounts for massive numbers in organised labour, contributes just 17 per cent of the GDP. It is only the Service sector led by technology giants, financial wizards and entertainment sultans which is grabbing 58 per cent of the GDP. They are the ones who have pushed the artificial SAD model during the past two decades.
Their appetite for luxury and accumulating movable and immovable assets in India and abroad has almost peaked. They have stopped haunting haute malls and mansions. With the increasing application of technology, new job creation has nosedived. A record slowdown in GDP growth of just five per cent during the first quarter is an indication of a disastrous demand decline. Modern economists would laugh at any suggestion to replace SAD with Keynes.
Familiar with the ground realities, Prime Minister Narendra Modi’s numerous welfare schemes have lifted the economic and social status of much of the rural and urban poor. But the time has come for his intervention to stimulate demand. The government must adopt policies meant to escalate the demand for cycles, two-wheelers, small cars, affordable housing, eco-tourism, better schools and robust health policies. The sustainability of India’s growth story lies in the creation of more lakhpatis than arabpatis. Let India say goodbye to Say for Modi’s prosperous New India.