Essay Series: #3: Slowdown: A Marxian Analysis
I
The recent economic slowdown faced by India seems like a typical under-consumption crisis to borrow from Marxian terminology, yet the government is adamant on providing the rich industrialists with tax-cuts hoping that ‘trickle-down’ economics would work its wonder, while one couldn’t help but wonder about a more subtle motivation behind these corporate tax cuts as an example of the age old collusion between large corporate houses and a right-wing government.
The slowdown initially grabbed the attention of media when there was a conspicuous slump in the automobile sector affecting the middle class and the upper middle class as well as automobile manufacturers. The plight of the working class has been worse and severely more acute in this crisis as not only their income is affected but also their prospects of employment as Industrial houses and automobile manufacturers have taken recourse to, shall we say, innovative measures to suppress wages by cutting down working hours and sometimes by not completely announcing a worker layoff lest that would lead to greater social tension and unrest due to the dialectical effects of the expansion of a Marxian Reserve Army of Labour . After reports from a slump in the automobile sector, there were further reports of slumps in the cheapest of commodities available like biscuit manufacturing industries and innerwear manufacturers .
Currently, seen from the lens of a simple Keynesian demand problem, the crisis does make economic sense and it should be likely that the solutions for the emergence of the economy from this crisis should also be taken from simple textbook Keynesian demand management but as mentioned above the government refuses to back down from its corporate tax cuts. Now even the World Bank President, has come out in the support of this possibly unsound policy .
In the next section, we will discuss how this slowdown unfolded and what the actual ground realities are.
II
First of all, one must understand that there is a difference between a downturn and a slowdown. A downturn means that in a particular phase, the actual growth rate has momentarily fallen below a stable average rate of growth. In contrast, a slowdown represents, additionally, that the average itself has fallen in comparison to the previous periods. Therefore one can confidently claim that the current situation is a slowdown since the growth rate has been declining for the last five quarters. One of the harshest effects of the slowdown can be seen in the Investment Slowdown as it has fallen to half in the NDA-1 government (13.6%) from the UPA-II Government (26.7%). Even Agricultural growth fell from 4% under the UPA government to 3%. According to the latest available data, agricultural growth rate slipped to 2% for April-July 2019 compared to 5.1% of the same period during last year. Such a drastic decline in agricultural output growth rate corresponds to an equally drastic growth rate of rural incomes due to rapid rural wage suppression. This decline in disposable income of the rural population leads to a fall in the consumption expenditure of the rural population further leading to recessionary tendencies in the rural as well as urban economies. The crisis in agriculture has worsened since 2014. There were several factors building up during the past few years which have contributed to this agricultural crisis. Some factors were contingent while other factors were systemic. Effects of contingent factors like deficient rainfall were exacerbated by deeper systemic issues like gradually declining allocation for agriculture in the Union Budget. Farm output prices remained depressed for most times in the last few years. The index of terms of trade for farmers declined after 2010 and so did agricultural export growth. This particular case of rural crisis can be further generalized into a broader scale of suppressed wages for the overall economy further deepening the under-consumption crisis. There has been a notable decline in the wages of the best paid workers. Issues like unequal distribution of Income have also fed into worsening of the crisis. The wealth concentration in the urban areas has increased and the wages of the rural segment have secularly fallen, further increasing the rural-urban wage gap. As Amartya Sen develops the argument in his ‘Capabilities Approach’ to Poverty, that relative income deprivation can very well translate into Absolute Capabilities Deprivation. Therefore this is another factor contributing to the deprivation faced by the rural as well as the urban poor.
In terms of creating adequate liquidity in the economy, there has been a major disruption in the transmission mechanism. Despite a fall in the repo rate, the prime lending rate has not fallen to the same extent, as a result of which the gap (spread) between the two has widened significantly in the recent period.
The measures that the government has been undertaking can be criticized on several grounds. One of the major criticisms is the insufficiency of corporate tax cuts and interest rate cuts as adequate measures of reviving national income growth. Even if the deduction in interest rates translates into increasing corporate investment (which it most often does not ), then under-consumption tendencies of falling consumption expenditure and/or increasing imports (if imports constitute the majority of corporate investments) will sufficiently offset the impact of increased corporate investment. Interest rate cuts and Tax rate cuts are far from being sufficient if policies do not target the core issue of deficient consumption demand.
Another important point to understand is that the industries are currently operating far below maximum utilisation and thus it makes little sense to assume that a falling tax burden would lead to them expanding utilisation. What makes more economic sense for the factories is to build up on their cash inventories, further restricting production and constricting demand by reducing work hours, labour layoffs thus resulting in falling wages.
We shall now turn our attention to certain specific cases:-
On the ground, the crisis shows no sign of improvement since it is further worsening a debt trap cycle for the poor workers. In the Tamil Nadu Auto-Hub of Ambattur, workers have been fired without any notice and security and have had to borrow funds in order to sustain themselves. With borrowed money, it seems obvious on the surface that workers cannot expand their consumption expenditure. This has in fact resulted in a declining consumption expenditure making the crisis worse.
Similar layoffs have been noticed in the Biscuit Manufacturer – Parle G’s case. Parle G has constricted production and dismissed workers. Therefore it is unlikely to assume that a tax cut will lead to Parle-G expanding production.
The severity of this under-consumption crisis can be understood by the fact that Indian consumers have had to constrict even their discretionary spending so much that there has been a slowdown even in the innerwear sector. This finding clearly indicates an acutely shrinking disposable income.
In the next section we will look into some possible policies to counter the slowdown.
III
As has been clear by the arguments posited above, the identification and the categorization of a crisis is of foremost importance before prescribing remedial policies. Enough has been said already about the nature of the crisis. The present slowdown facing the Indian economy is Keynesian Demand-side slowdown, a classic case of Marxian under-consumption crisis which has been an inevitable crisis under capitalism since its inception. Therefore prescribing supply-side measures like tax cuts to boost corporate investment and declining interest rates, miss the point by far.
A solid policy to counter falling consumption expenditures of the consumers has to be enacted. Textbook Keynesian economics posits that due to higher marginal propensities to consume of the people from the lower income strata, a demand side measure is most effective when the poor have either been granted a source of employment generating stable income (under the cases of full or near-full employment) or by subsidizing mass consumption. It is possible that both of these measures will be opposed by the ‘captains of the industries’ or the big capitalists since enacting the former would make the Reserve Army of Labour lose its disciplining and punishing character while enacting the latter would be against the capitalist ethic of ‘earning bread through sweat’ in order to not take away the ‘negative rights’ of the capitalist. But in the present slowdown these two appear to be the most promising policies to counter the problems. Since Private Industrialists would be wary of contributing to the achievement of full employment in the situation of a crisis, this task must be undertaken by the Government. The State has to intervene in order to take back the economy to a path of near-full employment even if it’s inflationary. Even this measure has both contingently immediate and deeper structural instruments. While the structural instruments can be dealt in great detail, the most obvious immediate measure staring us in the eye is the increment in the budget allocation of MGNREGA. Currently, The MGNREGA budget allocation is 0.2% of the GDP. Even tripling this amount to 0.6%, which it was during the previous UPA government would lead to substantial output effects.
Another step that can be taken by the government is the option of deficit financing by ‘printing more money’. Again this measure would be opposed by the ‘captains of the industry’ for fear of inflationary tensions in the economy. It is easy to understand that increasing demand side inflation would irk only the rentier and financier interests, which have shaped the current discourse of neo-classical economics while also influencing the government heavily. The current slowdown calls for an exogenous government expenditure even though that violates the FRBM Act. Conventional neoclassical economics would claim that this would result in a crowding out of Private investment but Data speaks otherwise. Das (2010 ) suggests that there is no clear relationship between Fiscal Expenditure and interest rates since as Keynes and Michael Kalecki correctly argued that interest rates are determined in the money market controlled by monetary authorities.
In conclusion, the nature of the current government makes it difficult to fathom that any of the above measures would be adopted (unless an election would be round the corner, making it opportune for the government to become ‘populist’). Demand side measures and not supply side trickle-down economics seem like a better solution to the current slowdown.
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The recent economic slowdown faced by India seems like a typical under-consumption crisis to borrow from Marxian terminology, yet the government is adamant on providing the rich industrialists with tax-cuts hoping that ‘trickle-down’ economics would work its wonder, while one couldn’t help but wonder about a more subtle motivation behind these corporate tax cuts as an example of the age old collusion between large corporate houses and a right-wing government.
The slowdown initially grabbed the attention of media when there was a conspicuous slump in the automobile sector affecting the middle class and the upper middle class as well as automobile manufacturers. The plight of the working class has been worse and severely more acute in this crisis as not only their income is affected but also their prospects of employment as Industrial houses and automobile manufacturers have taken recourse to, shall we say, innovative measures to suppress wages by cutting down working hours and sometimes by not completely announcing a worker layoff lest that would lead to greater social tension and unrest due to the dialectical effects of the expansion of a Marxian Reserve Army of Labour . After reports from a slump in the automobile sector, there were further reports of slumps in the cheapest of commodities available like biscuit manufacturing industries and innerwear manufacturers .
Currently, seen from the lens of a simple Keynesian demand problem, the crisis does make economic sense and it should be likely that the solutions for the emergence of the economy from this crisis should also be taken from simple textbook Keynesian demand management but as mentioned above the government refuses to back down from its corporate tax cuts. Now even the World Bank President, has come out in the support of this possibly unsound policy .
In the next section, we will discuss how this slowdown unfolded and what the actual ground realities are.
II
First of all, one must understand that there is a difference between a downturn and a slowdown. A downturn means that in a particular phase, the actual growth rate has momentarily fallen below a stable average rate of growth. In contrast, a slowdown represents, additionally, that the average itself has fallen in comparison to the previous periods. Therefore one can confidently claim that the current situation is a slowdown since the growth rate has been declining for the last five quarters. One of the harshest effects of the slowdown can be seen in the Investment Slowdown as it has fallen to half in the NDA-1 government (13.6%) from the UPA-II Government (26.7%). Even Agricultural growth fell from 4% under the UPA government to 3%. According to the latest available data, agricultural growth rate slipped to 2% for April-July 2019 compared to 5.1% of the same period during last year. Such a drastic decline in agricultural output growth rate corresponds to an equally drastic growth rate of rural incomes due to rapid rural wage suppression. This decline in disposable income of the rural population leads to a fall in the consumption expenditure of the rural population further leading to recessionary tendencies in the rural as well as urban economies. The crisis in agriculture has worsened since 2014. There were several factors building up during the past few years which have contributed to this agricultural crisis. Some factors were contingent while other factors were systemic. Effects of contingent factors like deficient rainfall were exacerbated by deeper systemic issues like gradually declining allocation for agriculture in the Union Budget. Farm output prices remained depressed for most times in the last few years. The index of terms of trade for farmers declined after 2010 and so did agricultural export growth. This particular case of rural crisis can be further generalized into a broader scale of suppressed wages for the overall economy further deepening the under-consumption crisis. There has been a notable decline in the wages of the best paid workers. Issues like unequal distribution of Income have also fed into worsening of the crisis. The wealth concentration in the urban areas has increased and the wages of the rural segment have secularly fallen, further increasing the rural-urban wage gap. As Amartya Sen develops the argument in his ‘Capabilities Approach’ to Poverty, that relative income deprivation can very well translate into Absolute Capabilities Deprivation. Therefore this is another factor contributing to the deprivation faced by the rural as well as the urban poor.
In terms of creating adequate liquidity in the economy, there has been a major disruption in the transmission mechanism. Despite a fall in the repo rate, the prime lending rate has not fallen to the same extent, as a result of which the gap (spread) between the two has widened significantly in the recent period.
The measures that the government has been undertaking can be criticized on several grounds. One of the major criticisms is the insufficiency of corporate tax cuts and interest rate cuts as adequate measures of reviving national income growth. Even if the deduction in interest rates translates into increasing corporate investment (which it most often does not ), then under-consumption tendencies of falling consumption expenditure and/or increasing imports (if imports constitute the majority of corporate investments) will sufficiently offset the impact of increased corporate investment. Interest rate cuts and Tax rate cuts are far from being sufficient if policies do not target the core issue of deficient consumption demand.
Another important point to understand is that the industries are currently operating far below maximum utilisation and thus it makes little sense to assume that a falling tax burden would lead to them expanding utilisation. What makes more economic sense for the factories is to build up on their cash inventories, further restricting production and constricting demand by reducing work hours, labour layoffs thus resulting in falling wages.
We shall now turn our attention to certain specific cases:-
On the ground, the crisis shows no sign of improvement since it is further worsening a debt trap cycle for the poor workers. In the Tamil Nadu Auto-Hub of Ambattur, workers have been fired without any notice and security and have had to borrow funds in order to sustain themselves. With borrowed money, it seems obvious on the surface that workers cannot expand their consumption expenditure. This has in fact resulted in a declining consumption expenditure making the crisis worse.
Similar layoffs have been noticed in the Biscuit Manufacturer – Parle G’s case. Parle G has constricted production and dismissed workers. Therefore it is unlikely to assume that a tax cut will lead to Parle-G expanding production.
The severity of this under-consumption crisis can be understood by the fact that Indian consumers have had to constrict even their discretionary spending so much that there has been a slowdown even in the innerwear sector. This finding clearly indicates an acutely shrinking disposable income.
In the next section we will look into some possible policies to counter the slowdown.
III
As has been clear by the arguments posited above, the identification and the categorization of a crisis is of foremost importance before prescribing remedial policies. Enough has been said already about the nature of the crisis. The present slowdown facing the Indian economy is Keynesian Demand-side slowdown, a classic case of Marxian under-consumption crisis which has been an inevitable crisis under capitalism since its inception. Therefore prescribing supply-side measures like tax cuts to boost corporate investment and declining interest rates, miss the point by far.
A solid policy to counter falling consumption expenditures of the consumers has to be enacted. Textbook Keynesian economics posits that due to higher marginal propensities to consume of the people from the lower income strata, a demand side measure is most effective when the poor have either been granted a source of employment generating stable income (under the cases of full or near-full employment) or by subsidizing mass consumption. It is possible that both of these measures will be opposed by the ‘captains of the industries’ or the big capitalists since enacting the former would make the Reserve Army of Labour lose its disciplining and punishing character while enacting the latter would be against the capitalist ethic of ‘earning bread through sweat’ in order to not take away the ‘negative rights’ of the capitalist. But in the present slowdown these two appear to be the most promising policies to counter the problems. Since Private Industrialists would be wary of contributing to the achievement of full employment in the situation of a crisis, this task must be undertaken by the Government. The State has to intervene in order to take back the economy to a path of near-full employment even if it’s inflationary. Even this measure has both contingently immediate and deeper structural instruments. While the structural instruments can be dealt in great detail, the most obvious immediate measure staring us in the eye is the increment in the budget allocation of MGNREGA. Currently, The MGNREGA budget allocation is 0.2% of the GDP. Even tripling this amount to 0.6%, which it was during the previous UPA government would lead to substantial output effects.
Another step that can be taken by the government is the option of deficit financing by ‘printing more money’. Again this measure would be opposed by the ‘captains of the industry’ for fear of inflationary tensions in the economy. It is easy to understand that increasing demand side inflation would irk only the rentier and financier interests, which have shaped the current discourse of neo-classical economics while also influencing the government heavily. The current slowdown calls for an exogenous government expenditure even though that violates the FRBM Act. Conventional neoclassical economics would claim that this would result in a crowding out of Private investment but Data speaks otherwise. Das (2010 ) suggests that there is no clear relationship between Fiscal Expenditure and interest rates since as Keynes and Michael Kalecki correctly argued that interest rates are determined in the money market controlled by monetary authorities.
In conclusion, the nature of the current government makes it difficult to fathom that any of the above measures would be adopted (unless an election would be round the corner, making it opportune for the government to become ‘populist’). Demand side measures and not supply side trickle-down economics seem like a better solution to the current slowdown.
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