How Mr Modi's voodoo economics will twist India's destiny
Capitalism is undergoing arguably the worst crisis in its history. The huge economic inequality between a vast section of the population and a small minority is at the heart of this crisis. From employees on the shop floor to Nobel laureates, from students to pensioners, people from all walks of life are becoming deeply concerned about the unprecedented levels ofeconomic inequality that still continue to grow unabated.
For example, during 1979-2012 the average income of the top 20 per cent grew by 42.6 per cent (for top one per cent it was even more than 200 per cent), for the middle 60 per cent it grew only by 9.5 per cent, and for the bottom 20 per cent the income actually fell by 2.7 per cent.
In other words, those at the top are rapidly pulling away from the middle, while those at the bottom are falling even further behind.
Economy In Crisis, INC, in a recent report, captures this reality of today's America: "After decades of the minimum wage falling behind productivity, and CEO compensation skyrocketing during the same period, it could be that the working class has finally reached its limit."
For India, which is highly integrated with the developed economies of the West, it is important to understand the nature and genesis of the crisis. That may give us an indication of what can be expected if the government allowed to move ahead in its current direction.
Capitalism's brief love affair with welfare
Thomas Piketty in his enormously data-rich book, Capitalism in the Twenty-First Century, which has taken the academic world by storm, shows why growing inequality is a logical outcome of the law of capitalism. In a capitalist economy, capital's growth is higher than the growth of the economy, which automatically ensures growing inequality in the society. People at the bottom mostly depend upon their labour income, whereas at higher levels more income comes from capital (sale of assets, stock options, dividends, deposits, et al).
In the Second Machine Age labour's diminishing share in GDP is only set to worsen at a very high pace. With automation and artificial intelligence, even many white-collar jobs are fast disappearing and jobless growth is becoming a reality. Labour income in the US between 1980 and 2014 fell from 58.4 per cent of GDP to 52.2 per cent. If the present situation is allowed to continue, the capitalist world will be soon gripped by more intense social unrests.Capitalism was never like this some six to seven decades ago, when India got its independence.The effect of the two World Wars, which wiped out a colossal amount of capital, coupled with the impact of Russia's tremendous achievements in transforming its extremely poor agrarian economy at breathtaking speed had brought public welfare to the centre-stage of development in the western democracies.
High tax on the wealthy created more resources for the governments to rapidly improve healthcare, education and environment. Britain and the US took the lead in introducing progressive taxation. It sounds unbelievable today that in Britain the peak tax rate reached 98 per cent during 1974 to 1978! In the US, at one time it reached up to 91 per cent. In such an environment it was difficult for the wealthiest groups to accumulate capital at pre-war rates and the economic inequality couldn't return to the level that was prevailing in the 18th and 19th centuries. However, like all good things, the "golden era" of capitalism also came to an end.
As Piketty's data shows, the good time that started after the WW-II continued up to the 1970s. With the arrival of Margaret Thatcher (1979) and more significantly, Ronald Reagan (1981) at the helm of the Anglo-Saxon economy, everything was about to change. The neo-liberals have come to dominate the capitalist world.
Public welfare is no longer sexy
The economic philosophy of Reagan, popularly known as Reaganomics or voodoo economics (a term coined by his own vice president later) was based upon the simplistic belief that cutting taxes for the businesses and less government intervention would encourage spending and stimulate growth. It was claimed that the growth would eventually trickle down making everyone better off. The rugged individualism of Reagan and Thatcher or, the free-market gospel, as Noam Chomsky described it, had reversed the welfare orientation of post-war capitalism. The governments became obsessively focused on growth and the problem of economic inequality was not anymore an issue of much interest for the policymakers. The change of direction was most visible in the Anglo-Saxon economies.
Interestingly, though the marketers of voodoo economics cleverly peddled their pro-business gospel as free-market reforms, the reality was very different. In fact, Ronald Reagan presided over one of the America's most protectionist regimes! This was boastfully declared by no less a person than his own treasury secretary, James Baker. In other words, the government provided incentives to the corporate sector as well as protection from the competition for their unbridled growth.
The pro-business "theology" also energised the most dangerous segment of the crony capitalists. The powerful business groups producing highly sophisticated weaponry, who were well connected to the government, started getting projects worth billions of dollars under Reagan's exotic star wars and other military adventures. Billions of dollars of government expenditure, which could have gone for public welfare, began to flow into private coffers.
Warmongers never had it so good and there was no looking back for them. Though the Cold War was long over, the global hot spots kept on rising to keep the lucrative contracts flowing.
Unlike in the highly inegalitarian capitalist societies of the 18th and 19th centuries, in the "reformed" capitalism, top echelons of the labour and intelligentsia are also handsomely benefitting from the "free market". Many management executives (super managers), doctors, lawyers, professional politicians, academics, media personalities, et al are able to earn extremely high incomes. There are now well-documented publications showing how this "hypermeritocratic society" of high net-worth individuals is able to limit the access to top-quality education and healthcare for their progenies, relatives and fellow high net-worth individuals.
The results of the disastrous shift from welfare orientation to growth are now there in front of us. Instead of trickling down, the benefits of growth have been increasingly gushing upward. As mentioned earlier, statistics show that economic conditions in America are worsening with every passing day. An all-time record population is now on food stamps. The growing social unrest, chauvinism and warmongering are the logical outcomes of this process.
Decades of free market gospel have increased the concentration of wealth to such an extent that now even by imposing high marginal tax no substantial improvement can be achieved, as shown in a recent study. Thus, without any government intervention to impose high level of wealth and inheritance tax on the super-wealthy, any notion of equitable distribution will soon remain only as a pipedream.
A Forbes survey of 2013 on public happiness also exposed the hollow claims of neoliberals about their ability to create a happy and prosperous society through singular focus on growth. The results of the survey showed that relatively more welfare-oriented social democratic countries of the Nordic Region were able to provide much greater happiness to citizens. Norway, Denmark and Sweden with their high tax-GDP ratio were the three happiest nations in the world.
Embracing trickle down capitalism
India's development during the post-independent era cannot be understood in isolation of the transformation of the global capitalist system during that period.
The country's choice for a dirigiste system of development after independence was quite natural. On one side, the centrally planned economy of the Soviet Union had achieved spectacular results in converting the poorest nation of Europe to one of the most industrialised nations at a breakneck pace. On the other side of the political divide in the developed world, strong government interventions to provide public welfare were rapidly improving the living condition of the average citizen in the Western democracies.
The Indian leadership should be certainly given credit for the fact that despite terrible poverty and economic devastation, which the country inherited from its colonial masters, they never opted for a Stalinist-style coercive system for achieving quick results. While settling for a very modest, and later much ridiculed, Hindu growth rate of 3.5 per cent for first three decades, successive Congress governments nevertheless had sent clear signals about their pro-poor intentions by introducing measures like free and compulsory primary education, abolition of privy purse, nationalisation of banks and so on.
It has now become a fashion among many political pundits and commentators to solely blame the excessively government regulated system for our failure to transform the economy into a developed one. Some experts even view all government interventions in the past for improving public welfare as an embarrassment and a cynical shift towards the Left. The influence of the changing nature of capitalism in the West on our dismal performance is rarely considered.
Actually, the shift in India's development strategy had started much before 1991. The impact of Reagan-Thatcher combo was already noticeable in the 1980s. Indira Gandhi's garibi hatao gave way to voodoo economics of tax incentives. The peak tax rate of 93.5 per cent in 1970-71 was slashed to 50 per cent in 1985-86, which was further reduced to 30 per cent in 1997-98. In their working paper, Harvard economists Dani Rodrik and IMF's Arvind Subramanian discussed how the shift from Nehruvian socialism actually started much before the Rao-Singh reforms (some of their findings may not be beyond dispute).
It could be also certainly argued that India's shift towards Reaganesque pro-business policies started at a moment when the country probably was well poised for major welfare initiatives to improve the economic conditions of its huge impoverished population.
Voodoo economics of Modi
Looking at the "achievements" of Reaganomics, it is now quite obvious that the shift of focus in a poor and underdeveloped country towards growth and trickling down idyll laid the foundation for creating a much worse economic divide. Today, the country can "rightfully" qualify for the dubious distinction of having the biggest divide between the haves and have-nots. While a sizeable number of Indians belong to the group of world's richest individuals, the country is also home to world's largest number of most impoverished people.
Owners of capital are creating wealthfor themselves at a much faster rate than the growth of the economy. Without any progressive wealth tax the economic inequality in India is obviously set to increase even faster. The Modi government even removed wealth tax in the 2015-16 budget. The country also doesn't have any inheritance tax. We will certainly see more youngest billionaires like Mukesh Ambani's daughter in the coming years. It is strange that the top banker of India has the utopian dream of leaving everything to philanthropy than to introduce inheritance tax.
Though the growing chasm in the society was a natural outcome of the shift towards rugged individualism in last few decades, the neoliberals, and particularly Modi, were very successful in putting the blame on the Congress party for its inability to introduce more drastic pro-businesses reforms and make development happen. Massive scams and mismanagement of the UPA government were also put to good use to galvanise public action.
Modi routinely blasted the UPA government for its interference in the economy. In one of his first pre-election speeches delivered in a college in Delhi, he thunderously declared that the government has no business in business. His attack against schemes like MNREGA was somewhat reminiscent of Reagan's war against welfare spending meant for the poorest of the poor. It is not surprising that many in the US indeed looked at business-friendly Modi as an Indian version of Reagan. On August 6, 2014, Forbes published an article titled "Republican Thinks India's Narendra Modi is New Reagan".
Modi was extremely successful in marketing his business-friendly Gujarat model of development, notwithstanding the fact that trickle-down effect was nowhere to be seen in the state. Many states with lower growth performed much better on all social indicators such as education, healthcare and sanitation. Kejriwal indeed tried to draw attention of the voters during Parliament elections towards this reality. It was a different story that his Bollywood-style approach to fight the neoliberal shift failed to achieve much success.
Like Reagan, Modi is now trying to promulgate laws that will make it very difficult to reverse the neoliberal shift. He is strategically focussing on getting full majority in both houses of Parliament to make promulgation of laws, such as land acquisition bill, easy. He is also upbeat about the possibility to increase private investment in defence. It does not require a rocket science to see that if these plans are allowed to be implemented unchecked, then the spectre of war is going to be a permanent attribute of our life. Once super profits start flowing to private pockets, we can rest assured that our borders will never be allowed to remain quiet.
Like in the US, more and more nationalist sentiments will be whipped up at regular intervals using all external as well as self-created provocations; warmongering needs to be justified.
The coming days will make it clear whether the collective wisdom of our country will allow Modi to so brazenly redefine our tryst with destiny.