Economic distress and the ways to alleviate it

The best way to help ‘price-takers’ is through the creation of a rights-based welfare state that provides a set of universal economic rights to all citizens on par with the Constitution
Leaving aside specific factors such as tomato or onion shortage, or the fall-out of the Ukraine war, inflation in India in the neoliberal era is the expression of a rising share of economic surplus in total output.
Leaving aside specific factors such as tomato or onion shortage, or the fall-out of the Ukraine war, inflation in India in the neoliberal era is the expression of a rising share of economic surplus in total output.(Express illustration | sourav roy)

If every social group’s relative share in total output was inflexible downward, then the slightest attempt by any group to raise its share would push prices sky-high. Inflation would be explosive despite there being no supply constraints. This, however, does not happen under capitalism, because the relative shares of some groups can be pushed down without arousing much resistance. These groups are called ‘price-takers’; their existence is what keeps inflation under control in a capitalist economy, though even they would not eliminate inflation if others continuously raise their shares.

An alternative way of keeping inflation restrained is through government intervention that protects price-takers by subsidising the costs of what they buy, and finances it by taxing those who raise their shares. This means keeping shares broadly unchanged after the impact of taxes and subsidies has been taken into account.

India before the liberalisation era sought to use such a fiscal instrument against inflation. Under neoliberalism, however, as subsidies are whittled down (thus raising farm input prices, for instance) and the privatisation of essential services like education and healthcare further removes the fiscal protection offered to the poor, inflation control necessarily takes the form of reducing working people to the status of price-takers. If inflation persists under neoliberalism, the reason lies partly in the fact that this process of making working people into price-takers is not completed (Modi’s three farm laws, for instance, that would have reduced kisans into price-takers were withdrawn in the face of stiff resistance), partly in the fact that the rise of the share of the affluent is a continuous process. Thus, leaving aside specific factors such as tomato or onion shortage, or the fall-out of the Ukraine war, inflation in India in the neoliberal era is the expression of a rising share of economic surplus in total output. It is a means of effecting a continuous rise in income inequality that is a characteristic of neoliberalism.

The working people consume virtually their entire income in any period, while the affluent consume only a fraction of theirs. Such a rising share of economic surplus causes a fall in the ratio of consumption to total output (borrowing for consumption by working people can never fully offset this). This lowers aggregate demand and aggravates unemployment.

A neoliberal economy, even in the absence of any deficiency of aggregate demand, is characterised anyway by growing unemployment for two other reasons: first, the crisis of petty production, especially of the agricultural sector, that arises because of the withdrawal of state support from this sector displaces many farmers from their traditional occupation and forces them to look for jobs elsewhere. Second, trade liberalisation intensifies competition in the market and hastens technological-cum-structural change that increases the rate of growth of labour productivity in the economy, and correspondingly lowers the rate of growth of employment (which is the excess of the GDP growth-rate over that of labour productivity). Employment growth, therefore, far from absorbing the displaced farmers, may not even absorb the natural increase in the workforce, causing a rise in the unemployment rate. The deficiency of aggregate demand, arising from the rising share of economic surplus in output, further compounds this growth of unemployment and aggravates economic distress. This is what we see in India today.

Since we have a largely casualised workforce, growing unemployment takes the form not necessarily of more people remaining jobless but of a given number of jobs being distributed among more people; it does not therefore get adequately captured through standard measures. Even so, data from the Centre for Monitoring the Indian Economy (CMIE) show an unemployment rate of 8.1 percent for April, which is higher than any annual rate since the CMIE’s estimates began. The fall in real wages of large sections of rural workers over the last decade, including even construction workers, a well -established phenomenon from available data, would have been unlikely in the absence of growing unemployment.

We thus have a mutually-reinforcing process of distress being visited upon the working people: inflation keeping down real wages, causing a rise in the share of surplus, which in turn causes a deficiency of aggregate demand that further aggravates unemployment. Not surprisingly, the proportion of total population of the country that is below what used to be considered the minimum calorific norms (2200 per person per day in rural India and 2100 in urban India) is higher today than in 1973-74 when such estimates were first made. The distress today is thus greater than half a century ago.

The aggravation of unemployment, it may be thought, would bring down inflation by forcing even larger numbers to become price-takers. Indeed, this is typically how inflation is sought to be controlled under capitalism. But this only visits the inflation-caused distress in a different form on the same victims. If at the given wages, prices rise by 10 percent, real wages fall by 10 percent. But the same happens if wages fall by 10 percent but prices remain unchanged. In the latter case, inflation has abated but not distress.

What is required, therefore, is an alleviation of distress, which can also create a mutually-reinforcing spiral of improvement: greater purchasing power in the hands of the working people will generate a larger demand for goods and services that will increase employment, and hence living standards still further. The existence of unused productive capacity and unemployed manpower that is a symptom of distress has thus great potential for overcoming distress too.

The best way to bring this about is through the creation of a rights-based welfare state that provides a set of justiciable, universal economic rights to all citizens on par with the fundamental civil and political rights enshrined in the Constitution. Five such rights—to food, employment, free quality education in public institutions, free quality healthcare through a National Health Service, and a non-contributory living old-age pension scheme with disability benefits—can be financed, it is estimated, by imposing just two taxes on the top 1 percent of the population. These are a 2 percent wealth tax, and a one-third inheritance tax. Such a programme, rather than one that forces people to become price-takers in the name of controlling inflation, is what is required.

(Views are personal)

Professor Emeritus, Centre for Economic Studies and Planning, Jawaharlal Nehru University

Prabhat Patnaik

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