Howdy Economy: ‘Invest in social wages for bigger effect on consumption growth’

Although there are reports of demand depression across all core sectors, the CSO data shows that the GDP is growing. What do you feel about this?

The methodology of GDP calculation suffers from multiple faults and quarterly data is the least reliable as data on agriculture or industry or the unorganised sector are not available on a quarterly basis. Some data are collected bi-annually and some once every five years. I would not rely on the figures being paraded. Data on service sector which contributes more than 55 per cent to the GDP is collected once every five years.

Is it true that household savings are falling?

Yes, household savings used to comprise almost 85 per cent of national savings until a few years back. Now, it has come down between 55 and 60 per cent.

The government is giving tax breaks to corporates. Banks are waiving off their loans. Is this the right way to fix the economy?

It’s most definitely not when fall in consumption is the core problem. The poor, in both rural and urban India, spend a lot more of their proportionate income in consuming goods and services than the rich who tend to save more. The size of the domestic market demands on a growth of consumption and not savings. The point is to give more money in the hands of the poor so that they start consuming more.

How can this be done?

Our study of MGNREGA’s performance last year tells us that on an average people got 51 days of work at the rate of Rs 179 per day per head. To begin with, I will suggest ensuring 100 days of work to every one at Rs 360 per day per head rate which is the market wage rate. Also the scope of Right to Work needs to be expanded to include the urban poor.

Investing in public education and healthcare will also allow the poor to save more. If a rural poor can save the money of a CT Scan or some other expensive test, it is more likely that he will spend that money in buying things. Social wages have a great multiplier effect on the economy.

Do you agree that most of the windfall reaped by this government from low international crude prices and other cesses have been spent in infrastructure projects and bank recapitalisation?

No, I do not think so. This government is facing an acute revenue shortfall in terms of tax collections, etc. The shortfall of GST alone is almost Rs 1.5 lakh crore per annum. Now, add another Rs 1.5 lakh crore for the states’ entitlement. Now, the Centre has the obligation to pay the states for the first five years. I think most of the money is going in to plug revenue shortfall.