The $5-trillion dream

The article ‘Towards a 5 trillion dollar economy’ by Krishnamurthy Subramanian, Chief Economic Advisor to the government, published in a leading Indian English daily, and the Economic Survey referred to therein, are to my mind nothing but a lot of pompous empty rhetoric, verbiage and bombast, displaying little understanding of the economic realities of India.

Subramanian writes “Investment, especially private investment, is the key driver that drives demand, creates capacity, increases labour productivity, introduces new technology, and creates jobs”. All very high sounding no doubt, but it misses the crucial and central point: where is the purchasing powers in the masses to buy the goods which will be sold by this new private investment? Most Indians are so poor that they spend most of their incomes buying food and other necessities for survival. How can they buy other goods?

So the problem is not how to increase production, as that can easily be done by our huge pool of technical talent and our immense natural resources, but how to raise the purchasing power of our masses? After all, the goods produced have to be sold, but how can they be sold when the people are too poor to buy? So there can be no economic growth unless the people’s purchasing power is raised. But how to do that?

I regret neither Subramanian nor the dozens of our other economists in India flaunting Ph.Ds from Harvard, Yale or the London School of Economics have any inkling about the correct answer.

In the erstwhile Soviet Union the methodology adopted (after its industrialisation commenced in 1928 under the First Five Year Plan) for raising the purchasing power of the masses was broadly this: the prices of commodities were fixed by the government, and were regularly reduced by about 5-10 per cent every two years or so. Thus the real incomes of workers steadily went up (since wages are relative to the price index), and hence even with the same nominal wage the worker could now buy more goods (since prices were lowered). This way the domestic market expanded, and simultaneously production was stepped up, and the goods manufactured or produced could now be sold.

By adopting this methodology the Soviet economy rapidly expanded after 1928, millions of jobs were created (unemployment became almost nil) and people’s living standards rose rapidly. On the other hand at that very time, Western economies entered the Great Depression after the Wall Street Slump of 1929, with thousands of factories being closed down and tens of millions of people became unemployed.

I do not say that we must adopt the same methodology as the Soviet Union. We can devise some other method of raising the people’s purchasing power. But it has to be done by state action, not laissez faire. Adam Smith's theory will not work today.

It must also be mentioned that for stability we must basically rely on our domestic market. Excessive reliance on foreign markets is precarious as it may be cut off anytime by a foreign power, or there may be a recession in the foreign country where we sell our goods. We have a huge population of 1,350 millions which serves as our domestic market, and if we can find out a way of raising their purchasing power only then can we achieve a $5-trillion economy. Till then it will remain only a dream.

The writer is former Judge, Supreme Court of India

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