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The Hindu Editorial Analysis | PDF Download

Date: 29 August 2019
  • There is no longer any room for doubt on the parlous state of the Indian economy. The automobile industry, seen as a bellwether of activity in the post-liberalization years, is in crisis, as automakers, parts manufacturers and dealers have laid off about 350,000 workers since April this year, with more job cuts likely. While this could still reflect falling demand only from higher income groups, recently, Parle Products, once the world’s largest selling biscuit brands, announced that it may have to lay off up to 10,000 workers (around a tenth of its workforce). The company blamed falling sales due to the Goods and Services Tax (GST) that led to higher prices of the cheapest small packets of biscuits at a time of extreme price sensitivity because of reduced livelihood, especially among rural consumers.
  • Home budgets under strain
  • Sales in the fast-moving consumer goods (FMCG) sector as a whole grew at only 10% in the April-June quarter of this year, less than nominal GDP growth. The slowdown in sales is across food and non-food items, with the biggest reductions in salty snacks and biscuits, spices, soaps and packaged tea. These represent the more discretionary element of consumer spending even among the poor — the items more likely to be cut down when household budgets are under strain.
  • Economists with the government who finally recognized that there is a problem have blamed the current situation on the “financial stress” inherited from the United Progressive Alliance government more than five years ago, which is apparently preventing investment because “no one trusts anyone else”. But this isolates only one factor in the current slowdown: the undoubted mess in the credit system, reflecting both the overhang of bad debts of banks (worse today than in 2014) and the erosion of non-banks after the collapse of the aggressive lender, Infrastructure Leasing & Financial Services Limited.
  • This is a factor, but this explanation completely misses the demand side of the story. It is clear beyond doubt now that the slowdown in mass consumption, combined with falling and then subdued rates of investment over several years, have led to what is undeniably a crisis of inadequate effective demand in the economy.
  • This scenario has been unfolding for a while because of a medium-term trajectory in which the fruits of growth went disproportionately to a small elite of big capital and rich individuals without translating into broader economic improvement. The increasing inequality associated with jobless growth meant that mass consumption demand did not rise as expected with rapid GDP growth.
  • Impact of demonetization
  • The hugely damaging impact of demonetization in November 2016 was further accentuated by the poor implementation of the GST barely seven months later. These badly managed policy measures served as body blows to informal economic activity, causing major declines in employment and output. At first, they did not affect formal enterprises so much as they gained at the cost of informal ones. But the resulting loss in livelihoods and wage incomes eventually had an effect on demand for formal sector output, which has worsened over time because there have been no counterbalancing moves by the government. Total employment actually declined by more than 15 million workers between 2011-12 and 2017-18, even as unemployment rates reached their highest levels in nearly half a century.
  • This operated in addition to a medium-term trend of wage suppression, something that was even celebrated by the late former Finance Minister Arun Jaitley as a means of combating inflation. Rural wages have been stagnant or declining in the recent period. Meanwhile, the continuing crisis of cultivation has obviously affected the purchasing power of the farming community. Urban wage incomes are also apparently not keeping pace with inflation, even as informal activity and “start-ups” in urban areas have faltered.
  • The government could have countered this adverse impact of declining employment and consumption demand, which in turn reduced the profit expectations of producers in formal enterprises, by providing a fiscal stimulus. It did not do so. Instead, it kept assuming or hoping that using optical measures — manipulating “Ease of Doing Business” indicators and offering further incentives to foreign capital to attract more inflows, however volatile — would somehow attract investment into the economy that would counteract all the negative impulses.
  • Private investors simply kept demanding more fiscal and regulatory concessions even as they continued to sit on investment plans as they waited for overall demand improvement. More recent complaints of the private corporate sector have been about oppressive tax collection methods of a government desperate to meet its revenue targets. But these along with the greater difficulties of accessing loans from both banks and non-banks are irritants that would have been tolerated in a buoyant economy. They have become serious issues now because of the wider stagnation.

Supply-side approach

  • In this context, the Finance Minister’s recent announcements of measures to boost the flagging economy are not a case of “too little too late”; rather, they completely miss the point. They do nothing to address the issue of inadequate demand generation or the underlying tendencies of wage suppression and low employment growth. Instead, they once again reveal a supply-side approach to the problem, which is unlikely to yield much benefit.
  • Even these measures are mostly cosmetic or affect only a small segment of the economy, not enough to cause any real change in economic direction. The capital infusion of ₹70,000 crore into public sector banks had already been announced in the Budget; frontloading this inadequate amount is not going to rev up an economy if those whom banks are willing to lend to are hesitant to invest. Giving into demands of foreign portfolio investors with regard to taxation likewise does nothing to increase domestic demand; it simply provides some solace to the stock market. The middle classes repaying home loans may see a minor benefit if banks actually do pass on lower interest rates, but this too will not provide a major boost to the economy. The decision of the government to buy more cars to shore up the automobile industry is bizarre in the extreme, because it undermines the medium-term strategy of shifting to electric vehicles as soon as possible.
  • What could the Finance Minister have done instead? If the immediate problem is lack of demand, the immediate response should be to increase it — ideally in ways that provide the desired basis for future economic growth.

Rural focus

  • Rural distress is real and deeper and greater than the much-hyped distress of angel investors and high net worth individuals; so a massive increase in rural public expenditure, including in the Mahatma Gandhi National Rural Employment Guarantee Scheme to provide public works as well as in social spending would provide immediate relief.
  • The multiplier effects of such spending would generate more employment, incomes, consumption and, therefore, investment over time — as well as more tax revenues for the government. There is also both scope and need for increases in “green” public investment for a sustainable future.
  • But to seize this crisis as an opportunity for progressive change would require more visionary economic policy making, something that this government has been sadly lacking in.
  • So does the massive transfer of the Reserve Bank of India’s surplus amounting to ₹1.76 lakh crore suggests that this is the government’s game plan? Unfortunately, because of the mess in public finances, all that this is likely to do is fill the massive gap left by inadequate tax collection, thereby letting the Finance Minister off in the current fiscal year from another embarrassing situation of budgetary discrepancies. The proposed Budget was not particularly expansionary and did not provide for more spending in the areas required. So this stopgap measure may provide more fiscal space than before, without really addressing the basic problem.

Message delivered

  • Not everything went right at the G-7 summit, but PM Modi got the ear of President Trump
  • Prime Minister Narendra Modi’s twin missions as a special invitee to the G-7 summit in France over the weekend was to address the world’s seven most advanced economies on Climate Change and Digital Transformation, but it was his meeting with U.S. President Donald Trump that wound up taking centrestage. Mr. Modi took the initiative to clear the air about Jammu and Kashmir. This was necessitated by the repeated references that Mr. Trump has made about U.S. mediation between India and Pakistan over Kashmir, as well as a briefing by a senior administration official last week, who said that Mr. Trump would “want to hear from Prime Minister Modi on how he plans to reduce regional tensions and uphold respect for human rights in Kashmir”. Both U.S. statements run counter to the Indian position that the withdrawal of special status to J&K under the Constitution is an “internal matter”, and the issue of Kashmir will be resolved bilaterally with Pakistan. In the event, Mr. Modi appeared to have driven the message home, and Mr. Trump backed away from both statements. The two leaders also appeared to have made some headway on deadlocked trade talks between India and the U.S., and have decided that their trade representatives, USTR Robert Lighthizer and Commerce Minister Piyush Goyal, will meet ahead of the Modi visit to the U.S. in September.
  • The interaction between Mr. Modi and Mr. Trump appeared to be in line with the broader themes that characterised this year’s G-7 summit, where bilateral meetings appeared a little more successful than the multilateral meeting itself. As host, French President Emmanuel Macron decided to invite Iranian Foreign Minister Javad Zarif, but the other G-7 members rejected any suggestion to include him in their conclave to discuss the future of the JCPOA nuclear deal. Mr. Trump’s push to invite Russia back into the club (it was called the G-8 until Russia was suspended in 2014), which represents more than half the world’s wealth also came a cropper as the other members did not agree to Russian President Putin’s re-entry. As one of nine special guests invited to address various sessions, Mr. Modi spoke on how India is keeping its climate change commitments, but it was a session where Mr. Trump, whose presence was vital given the U.S.’s walkout from the Paris accord, didn’t make an appearance. G-7 members also discussed the Amazon fire crisis and pledged over $20 million to Brazil, but were rebuffed after a spat broke out between Brazilian President Jair Bolsonaro and Mr. Macron. It came as no surprise that the summit ended as it did: for the first time in the grouping’s 44-year old history, there was no joint communiqué.

Murder most foul

  • India needs a comprehensive law to deal with ‘honour killing’
  • The use of murderous violence in the face of imagined threats to family or community honour is an unfortunate reality in most parts of the country. The term ‘honour killing’ is being used widely to describe the class of murders that family members commit while seeking to impose on young couples their medieval view that all marriages should be within their community. The Supreme Court, which has been intervening repeatedly to preserve the freedom of marital choice of individuals, once remarked that there is no ‘honour’ in ‘honour killing’. Various judgments have highlighted the need to come down on such crimes, as well as the social structures that keep such a communal outlook alive. The judgment of the Principal Sessions Court, Kottayam, Kerala, awarding life imprisonment to 10 men involved in the abduction and murder of Kevin Joseph, a 23-yearold Dalit Christian, in May 2018, is in line with the apex court’s views. The investigation and trial into Kevin’s murder have been notably fast. Kevin was abducted by a group led by Shyanu Chacko, the principal accused and brother of Neenu, Kevin’s fianceé, just as the young man was making arrangements to have his marriage registered. The court ruled that it was an ‘honour killing’ based on Neenu’s testimony that her family was vehemently against the marriage as Kevin was a Dalit. The police managed to drive home the guilt of the accused by digital and electronic evidence, including records showing mobile phone signal locations and CCTV footage, to confirm the time and the routes through which the accused had taken Kevin before drowning him.
  • The court rightly chose not to award the death penalty. Instead it handed down two separate life terms, one each for kidnapping with intention to threaten the victim with death, and for murder. Even though there is a Supreme Court judgment allowing trial courts to deem ‘honour killings’ as those that fall under the ‘rarest of rare cases’ category, the trial judge chose to take note of the fact that the accused were young and had no previous criminal background. It is disquieting that the ‘honor killing’ phenomenon persists in highly literate societies too. Discrimination against Dalits is not limited to Hindu communities listed as Scheduled Castes, but extends to those who have converted to other religions too. At a time when caste groups have become politically organized and caste associations attract the young and the educated, there is a need for a redoubled effort to eliminate the evils of a stratified society. In particular, administrators must give full effect to the various preventive, remedial and punitive measures recommended by the Supreme Court. The Centre may also examine the need for a comprehensive law to curb killings in the name of honour and prohibit interference in matrimonial choice of individuals.
  • In this age of fast and uncontrolled information, social media and TV media people at the ground must be the strongest in the democratic system but Why are we not able to see the required changes in our democratic systems ?
  • Do you see the minimum govt. & maximum governance slogan is realised ? Comment (500 words).
  • Ten years after U.S. Congress passed the Family Smoking Prevention and Tobacco Control Act, on August 15 this year, the Food and Drug Administration finally issued a proposed rule that pictorial warnings be carried on cigarette packages and advertisements. Once this is finalized, the FDA will be able to specify the images to be used along with the written warning. The images and text will occupy the top 50% of the front and the back panels of the packages. At present, cigarette packages in the U.S. carry only text warnings and only on one side.
  • Canada was the first to introduce pictorial warnings on cigarette packets in 2001. By October 2018, 118 countries had implemented such warnings in line with the World Health Organisation’s Framework Convention on Tobacco Control that came into force in 2005. It is an irony that a country that introduced written health warnings in 1966 and updated it in 1984 to include the Surgeon General’s warning still does not carry pictorial warnings on its cigarette packets.

Industry resistance

  • Stiff opposition from the tobacco industry on the ground that graphic images violate its First Amendment rights protecting free speech has been the main reason why the U.S has not been able to introduce them. Even the new proposed rule came into being only after the U.S. court for the District of Massachusetts issued an order in March 2019 directing the FDA to publish a rule by August 2019 and a final rule in March next year.
  • It is almost certain that tobacco companies will challenge the FDA rule before March 2020. In June 2011, the tobacco companies had successfully challenged the introduction of pictorial warnings even after the FDA published the final rule.
  • By virtue of their small size and placement, text warnings largely remain invisible and fail to convey the harmful effects of smoking. On the other hand, gory pictures are very likely to be noticed, leave a lasting impression of the varied risks of smoking. They also convey the central message immediately and easily.

The power of pictures

  • Tobacco companies are well aware of the power of pictorial warnings in reducing tobacco consumption, urging users to quit smoking and preventing young adults from taking up smoking. It is for these reasons that the industry will pull out all the stops to prevent the introduction of graphic images in the U.S, one of the biggest markets in the world (1.4 million children between the ages of 12 and 17, and 34 million adults currently smoke).
  • A 2017 study based on modelling found that pictorial warnings could reduce the prevalence of smoking in the U.S by 5% by 2020 and up to 10% by 2065. Data from countries that introduced pictorial warnings show how powerful they can be in shaping public opinion and causing a sharp drop in tobacco consumption. For instance, in Canada, there was 12% relative reduction in smoking prevalence in just six years after graphic images were made mandatory on cigarette packages. Similarly, Australia, which introduced graphic images in 2006, witnessed more than a 10% drop in prevalence between 2004 and 2008. The U.K. saw a 10% relative decline in 2009, just a year after image warnings were introduced. The biggest threat that pictorial warnings pose to tobacco companies is in reducing the appeal and consumption of tobacco. About 30% of young adults in 28 European countries and Canada reported that graphic images made them less likely to start smoking.
  • Pictorial warnings can turn the power of packaging on its head — far from brand building, packages with graphic images will become a mobile medium to spread public health messages at no cost to the government.