:: Jayati Ghosh

Offset meltdown effects

Jayati Ghosh

April.21 : When the global financial crisis first broke, both policymakers and commentators in India were complacently arguing that India would not be too badly hit. But as the economic slowdown became apparent even in India, such an argument could not be sustained for too long. And now that the crisis is truly upon us, and being expressed in credit crunch, job losses and other adverse tendencies, it is no longer possible to claim that the Indian economy is immune.

However, the measures that the now soon to be ex-government has taken to deal with the crisis are still far from adequate, and are unfortunately likely to make things worse. To begin with, there is an official presumption that this is simply an imported crisis. And there is an associated blindness to important lessons about the regulation of finance that are coming from the developed world. Unlike creating unsustainable bubbles and spawning major crises are there for all to see. While this may provide some immediate relief by propping up the rupee and stopping the bleeding of foreign exchange reserves, it will create the conditions for a much worse country-specific financial crisis in the near future.

Further, the fiscal measures are half-hearted and therefore likely to be ineffective. What is more, the policy response thus far is deficient because it seems to have ignored most of the people who are likely to be badly affected, in favour of a few who happen to be more well-connected. This particular economic crisis, because it has both financial and real economic aspects, is going to affect different people very differently. The financial sector is clearly hit. Stock market investors have lost huge amounts, and the credit crunch is adversely affecting both large corporates and smaller businesses.

This inevitably has knock-on effects on the real sector, adding reduced domestic demand to the problem of depressed export markets. And so real economic activity, in both tradeables and non-tradeables, is affected and this directly translates into employment losses. A survey conducted by the Labour Bureau found that in the second half of 2008, around one million jobs were lost in mining, textiles and garments, metals and metal products, automobiles, gems and jewellery, construction, transport and the IT/BPO industry.

But this is widely recognised to be an underestimate, and the extent of job loss even in these sectors is probably much higher. Another survey in a single state (Gujarat) found that by February 2009, around four lakh jobs were lost in the diamond industry, while the Confederation of Indian Textile Industries estimates that at least 1.2 million jobs were lost in the textile and garments industries by March 2009.

The most affected group of workers includes those who are employed on casual contracts, many of whom now find that their jobs no longer exist. Many of these are migrant workers, often short-term migrants, whose very existence tends to be ignored by our official statistics. The economic boom of the past decade relied heavily on such workers. This was very obviously true in the construction industry. But it was also the case in some labour-intensive services, such as cleaning, maintenance, private security, driving and related services, that catered to the requirements of the expanding corporate sector, and in effect subsidised it by providing a cheap and flexible external labour force. A lot of manufacturing, especially in sectors such as garments, leather goods, gems and jewellery and metal products where exports have been seriously hit by the world recession, have also increasingly relied on informal contract workers who could be hired and fired at will.

Many of these workers have already been laid off and many more will now indeed be fired, or lose their jobs at least temporarily. And so they will be forced either to stay in precarious conditions in urban areas, or go back to their places of origin — villages, small towns. They will change from becoming providers of remittance incomes to their households to becoming dependents of these households, even as these households face more fragile material circumstances than before. And so the negative multiplier effects will permeate geographically.

This has significant implications because many of these migrant workers, for obvious reasons, come from the most depressed and backward regions of the country where there is currently little potential for productive income generation. These are often also the regions of dry agriculture land where remittance incomes play a vital role in sheer survival. They are also — no surprise! — the regions where extremist Maoist activity is widely prevalent, because of the anger bred by persistent backwardness and rising inequalities.

Meanwhile, cultivators in India have already been through more than a decade of agrarian crisis, which persisted even through the period of rising international crop prices. They have then been on a complete roller coaster in price terms in the past year, as world trade prices of most crops doubled and then collapsed within a few months, and by the end of the year came to settle at levels below those of two years ago.

Many cash crop cultivators, who had begun their sowing operations on the basis of crop prices just a few months ago, now find that their cultivation will simply be financially unviable at prevailing input and output prices. With particular regions of the country, including some of the fragile dry land areas, increasingly dominated by such cash crop cultivation (such as cotton, groundnuts, soya beans) it is not difficult to imagine what will happen to livelihoods in such cases.

This is a major economic catastrophe that is not just waiting to happen — it is already unfolding. So a series of monetary and fiscal packages that does not even mention, let alone address, the inevitable problems of cash crop cultivation, is bizarre to say the least.

The potential for social and political upheaval caused by such economic changes should not be underestimated. The heat is already being felt by state governments who (despite the paltry provision of more borrowing facility announced most recently) are also reeling under the pressure of coping with reduced tax revenues and increase salary expenditure because of the recent Pay Commission award. This adversely affects crucial state expenditures on health, sanitation and education.

Another problem that received much attention some months ago but now seems to have been forgotten is the still-continuing crisis of food security. Despite low or falling aggregate price levels, food prices have been rising within the country, even though global food prices have been falling since mid-2008. And the Centre has greatly reduced PDS allocations of grain to the states, making it difficult to supply foodgrain at reasonable prices through the public distribution system. So food security is still at risk and is likely to deteriorate further as workers’ real incomes come down.

So the economic geography of this unfolding crisis is likely to have huge political fallout. To reduce the damage and reverse the economic deterioration, the new government will have to take strong action immediately on coming to power. Otherwise things are clearly going to get much worse in the economic sphere before they get better.