Slowdown — but who cares?

For a government that has been starved of good vibes, the vote on FDI in retail must have been like spring in winter. Key policymakers keen to push ahead with more changes were, however, in for a shock, as the reactions to the proposed amendments sought in the Banking Laws Bill 2012 showed revived hostility from the Opposition benches.

If spring appears a mirage for the UPA Government, it’s certainly deep winter for the formal economy. The Manila-based Asian Development Bank has again lowered its growth estimate for the current financial year to 5.4 per cent. It’s an anaemic economy, so says the ADB; consumption and investment, not to mention industrial output, are weak. Nothing new there; the perennially slothful core sector still plays its role of pulling down the economy in real terms with resultant power shortages.

Grudgingly, policymakers have now accepted the fact of a retreat from those halcyon days of 2004-05 to 2007-08 when both UPA-1 and the formal economy with its privileged stakeholders felt there was no going back.

Who is bothered?

But whom does that retreat really upset? Unlike Greece Ireland or even England, consigned to a long winter of austerity, the economic slowdown we crib about affects almost no one, because India has two kinds of people joined perversely by a bond of indifference to the world outside; those who have, and those who did not have. The latter still do not have, just as the former do. Nothing has changed for anybody. There have been no cutbacks in employment of a kind that sends Grecians and particularly Athenians out onto the streets, simply because there has been no employment for the vast majority in the first place.

Privileged urban Indians participating in the formal economy as floor managers in malls or call centres to CEOs would hardly complain of a slowdown, even though the GDP has fallen some four percentage points from its high mark in 2008-09.

And yet the financial media, policymakers and chambers of commerce worry about the slowdown in GDP. They worry that the RBI will not cut interest rates; they worry about the RBI’s worries over inflation, its neglect of the “growth” impulse.

Key policymakers address these stakeholders in the formal economy. FDI in retail was steered through Parliament not on the basis of genuine belief in the benefits to the Indian farmer, but more because of the supposed benefits to the consumer. We are told to buy into the myth of consumer power — the privilege to get fooled all of the time into buying things you don’t need. Its eventual benefit will be reaped by global retail giants whose supply chains in their own economies are increasingly under pressure, owing to weak domestic demand.

Job rates in the US are climbing, but not steadily enough to encourage investments there; the European Central Bank has cut the forecast for the Euro Zone in 2013, expecting the economy to shrink by 0.3 per cent; three months ago it had expected the economy to grow 0.5 per cent.

China has also slowed but its focus on political stability and endemic corruption coupled with domestic restrictions may not render it particularly attractive to jaded European and American investors: So, India is the best bet.

Aiming global

The UPA victory for FDI in retail may or may not help farmers; but it will drive up real estate prices and, by that token, provide a leg-up to the ‘services’ economy that rests so much on construction, trade and allied activities. In short, the “reforms” on FDI in retail trade will appeal to the kind of constituency the UPA has increasingly turned its focus upon: urban, globalising India.

So too for financial reforms: It may not be easy to get the Banking Laws amendments through Parliament and past a truculent Opposition but the objective is evident: To get a stubborn RBI to commence the process for private bank licences. Permitting private enterprise, flush with funds to acquire more capital by tapping household savings is an easier way of establishing commitment to financial reform than struggling with universal financial empowerment.

Expect the improbable

However, this is India. It is entirely conceivable that the predictions of the most wild-eyed optimist may turn out true. That the big reforms push may witness capital movements into productive sectors; GDP may inch upwards of 5 per cent in 2014, if not earlier. But general elections will keep investors away till the outcomes are known; if the BJP wins and if Murli Manohar Joshi remembers what he has just said, the BJP may thumb down FDI, perhaps more out of sheer cussedness than conviction.

Growth yes, jobs none

Suppose 2013 surprises Finance Minister P. Chidambaram and shows up a climbing GDP. In the twenty-five years to 2026, India’s population will increase by 371 million. More than 80 per cent of this increase will be in the age group 15-59 years. To reap the dividends of youthfulness, employment will have to grow dramatically. But if the golden age of high growth is any indication, many may be stuck in the informal economy, or without jobs at all.

If India has shown anything, it is that growth may lead to high productivity but not more jobs.

In its December 2011 report on employment in the 12th Plan, the Planning Commission observed almost jobless growth in the formal sector, a huge burden of unemployed on agriculture whose contribution to GDP is falling. The PC breaks through the myth that high GDP leads to increasing employment. As it says: “Although some expansion in employment has taken place in the manufacturing and non-manufacturing sectors, however (sic) a large part of it falls under the informal sector.”

This is not surprising. Services sector now accounts for 60 per cent share in GDP; the data on employment elasticity reflects this importance with elasticities highest in segments such as trade, transport, construction — much more than in manufacturing or mining or utilities.

This is not surprising. The structural shift in the GDP from agriculture to services that now accounts for 60 per cent share in GDP, makes it the engine of growth.

The data on employment elasticity it provides also reflects the importance of services since elasticities are highest in trade, transport, construction, much more than in manufacturing or mining or utilities.

These services are largely in private hands and work best with casual labour. No wonder the informal sector is so vital to job creation.

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