Home >Opinion >Columns >Opinion | Rural India’s bane: from policy paralysis to policy vacuum

The last few weeks have seen several steps from the finance minister to revive the Indian economy. These range from sectoral interventions for automobiles and housing to increased credit access. The government also announced the merger of several public sector banks. The corporate tax rate has also been slashed. For companies that choose to forgo all exemptions, this has been lowered from 30% to 22%, which together with surcharge and cess would amount to an effective rate of 25.2%. For new companies, the rate has been kept at 15%. Understandably, stock markets are cheering, which may give the impression that the economy is back on track.

So many steps within two months of the budget points to a late government realization that not all is well in the economy. This dramatic shift from the triumphalism seen in the budget makes it clear that the government was caught napping while the economy slowed. Most analysts pointed out the structural weaknesses of the economy, but these were ignored in the euphoria of the election victory in May. What is worrying is that despite the recognition that the slowdown is far more serious than thought, the government has no clue of what caused it or what needs to be done.

It is now established that the slowdown is a result of a collapse in demand caused by a decline in incomes. Most macro indicators, including wage and income growth estimates, have suggested this for quite some time. Even private sector data has pointed towards a demand crisis. This was precipitated by a collapse of the rural economy, which has seen the worst distress in recent years with both incomes and consumption declining. But the numerous announcements made by the finance minister did not feature even a single step aimed at boosting the rural economy. It did not get even a customary mention, as if the rural economy had no role in the economic slowdown, or, even if it did, it was not significant enough to help in a revival.

The indifference towards the rural economy is not due to ignorance. Rather, it is part of a larger political economy framework that successive governments have followed after the 1991 economic reforms. As it remains important for political mobilization, governments only tend to remember it just before elections to patronize voters through loan waivers, cash transfers or increased subsidies. There has hardly been an attempt to examine and correct imbalances in input and output prices, market structures, access to credit and other measures of support from the government, most of which are stuck in the same policy and economic structures that prevailed in the 1980s. However, the nature of agriculture and the rural non-farm economy has changed dramatically in the last three decades. While these have shown dynamism, increased monetization and integration with the broader economy has complicated matters.

The dominance of the “reform"-led political economy has meant that any effort to boost growth is aimed at appeasing corporate India and the middle class. As a result, the only metric of gauging the “reform" friendliness of a government is the impact it has on corporate profits, as the episode of the latest stimulus shows. It is ironic that even at a time when the slowdown has been caused by declining incomes and consumption in rural areas, the response is to aid companies rather than address the rural crisis. None of these steps will have any impact on aggregate demand. These are also likely to contribute to fiscal stress. However, the need of the hour is to revive demand through increased government spending. In the absence of a sustained rise in demand, the benefits of the tax break will only be temporary. Without strong demand, the tax giveaway is unlikely to lead to an increase in investment.

This also raises an important question on the policy framework of the government. It is difficult to believe that the government is not aware of the reasons of the slowdown or its extent. However, it continues to operate in a policy framework that shows a sparse understanding of the troubles of the economy. Unlike the previous United Progressive Alliance government, which was characterized by policy paralysis in its second term, this government seems to be operating in something of a policy vacuum. It appears to have the same prescription for every ailment. Like a momentary stimulant, this may give the illusion of a recovery, but it only delays treatment of the disease. That’s something the Indian economy cannot afford at this juncture.

Himanshu is associate professor at Jawaharlal Nehru University and visiting fellow at the Centre de Sciences Humaines, New Delhi

Subscribe to newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Click here to read the Mint ePaperLivemint.com is now on Telegram. Join Livemint channel in your Telegram and stay updated

My Reads Logout