OPINION: The economy’s problem is one of purchasing power, not production

The International Monetary Fund has lowered its global economic growth projection for 2020-2021 due to the sharp decline in the Indian economy, which is now estimated to grow at 4.8 per cent in 2019-2020 as against the IMF’s October projection of 6.1 per cent.

In recent months, the Indian economy has tanked, with the auto sector seeing a sharp downturn in both manufacturing and sales even as manufacturing activity overall has seen a growth-slump. The real estate sector is in the dumps. Massive lay-offs have taken place even as unemployment reaches record levels and job creation as a whole slows down.

At the same time, prices of food and fuel have soared. The future looks even more gloomy, and the politicians at the helm of affairs seem to have no inkling how to resolve this crisis. All they can do is resort to attention-diverting gimmicks: Building Ram Mandir, cow protection, Yoga Day, Swachh Bharat Abhiyan, abolishing Article 370, Citizenship Amendment Act and making Muslims out as a scapegoat for all the country’s ills (like how Nazi Germany sought to portray the Jews).

What, then, is the real way out of this economic crisis?

The way out is rapid industrialization of the country, as that alone can create the millions of jobs needed to wipe out unemployment and generate the wealth required for the welfare of the people (for education, healthcare, housing).

However, there is a basic hurdle to rapid industrialization, and that is this: While there is no difficulty in increasing production, the products will not be sold because our people are poor and hence have little purchasing power.

India today is not the India of 1947. At that time we had few industries and few engineers because the policy of our British rulers was broadly to keep us feudal and unindustrialised. After Independence, however, there was a limited degree of industrialization, and today we have thousands of bright engineers, technicians and scientists, alongside immense natural resources. With these, we can easily step up production rapidly.

The problem is not how to increase production but how the purchasing power of the Indian masses can be raised.

In India we have plenty of economists, many having Ph.D.s from Harvard, Yale or the London School of Economics, but no one has any notion how that can be done.

In 1914, Henry Ford raised the wages of his workers (in the plant manufacturing his Model T cars ) from $2.25 to $5 per day. That was of course done to stabilise his workforce, but it did raise the purchasing power of the American masses, as other American manufacturers were compelled to do the same. However, it is unlikely that Indian businessmen will do likewise.

In the Soviet Union, a wave of industrialization began in 1928 after the adoption of the First Five Year Plan. The methodology adopted by the Soviet leaders was broadly this: The government fixed the prices of all commodities and every two years or so lowered them by 5-10 per cent; sometimes wages were also increased by 5-10 per cent. Even with the same wage, the worker could now buy more goods, as prices had been reduced. This way, the purchasing power of the Russian masses was increased by state action, and thus the domestic market steadily expanded.

Simultaneously, production was also stepped up, and the increased production could be sold as people had more purchasing power. This process went on steadily after 1928, resulting in the rapid expansion of the Soviet economy and the creation of millions of jobs, wiping out unemployment.

This took place at the time of the Wall Street slump of 1929, which was followed by the Great Depression in America and most of Europe, with thousands of factories closing down and millions entering unemployment.

This is not to say that India must adopt the same techniques as the Soviet Union for raising the purchasing power of the masses. The point is that this can only be done by state action, not through private enterprise.

This, however, can only be done in another political system, not the present one which we have in India. What that system can be, which can both raise the purchasing power of the masses and grow the economy rapidly, is difficult to predict.  

Justice Markandey Katju retired from the Supreme Court in 2011.

The opinions expressed in this article are those of the author's and do not purport to reflect the opinions or views of THE WEEK.