Economy: Recovery, But for Whom?December 27, 2021
Corporate media is choke a bloc with reports that Indian economy has made a smart and full recovery from the Covid induced slowdown and there is all-round pick up in productive activities leading to creation of many job opportunities soon. The government is also trumpeting loudly its own self praise for excellent and successful management of the economy in crisis and trying to create illusion of expected increase in employment, wages and incomes shortly in future, especially in view of some important state assembly elections in early 2022. Various statistics – increased electricity generation, and coal and minerals mined, pick up in industrial production and services, number of E-Way Bills for freight transportation, higher GST collections, growth in agricultural sowing and harvest – are being cited as confirmation of the ‘green shoots’ in the economy (statistical figures are not being quoted in this small note deliberately). Record growth in profits as well as profit margins of the companies constituting major stock indexes like Nifty and Sensex are also supposed to affirm the vast uplift in economic scenario. The fact that the quantum of loans disbursed by banks and other financial institutions have also shown growth in recent months after long has also been presented as evidence of increased production and commercial activities.
However, contrary to all this, the Consumer Sentiments Survey of Reserve bank of India has found that consumers are hesitant to buy and their propensity to spend is much below pre-Covid days. This index (CSI) which used to hover around 100 earlier is now at 63 in the last survey indicating that most consumers have cut their expenses to the bare minimum necessities, even for those essential commodities they are searching where they can buy the cheapest ones available. Recent statements from companies producing fast moving consumer goods like Unilever, Marico, Dabur, Britannia, Parle, etc also corroborate the fact that sales are slow, and buyers are looking to buy smaller and cheaper packs compared to earlier.
Media reporting from ground based on talks with people and social media reports, conversations and anecdotes also confirm the extreme distress in the life of overwhelming majority of working class and lower middle-class people owing to sky high rise in prices of most essential commodities, and they are being compelled to cut their expenses even on the basic items of food. This reality of cut in expenses is also corroborated by other well-known facts being reported by those tracking Indian economy, for example, overall number of jobs have reduced by 5 crores (CMIE data) and real wages have gone down.
Both these seemingly opposing assertions – increased economic activities and reduced consumption by majority of the people – are based on many public statistics and survey results. The question then arises – why this contradiction? How to reconcile the two? To do that this we need to analyse the reasons behind these apparently unconnected phenomena going beyond the narrow, restricted and partial official reports and media news coverage.
It is quite well known that the economy was already in crisis before Corona pandemic started and there was excessively huge inventory built up of unsold commodities with most industrial and commercial capitalists (this was all much in news prior to pandemic). This inventory of produced commodities is a cost for the capitalists as interest must be paid on the working capital finance from banks and others raised for carrying it. This huge build up of unsold inventory had resulted in large unutilised capacity in most sectors of the economy as most industries were working at around 60% of the installed capacity. This caused a steep fall in the rate of profit of industrial capitalists. This was the story of the decade prior to Covid.
Small and medium industries were among the worst affected by Corona lockdown. Most remained inoperative for long, and many closed for ever. On the contrary, with their better organisation and connections in government larger industries were not impacted that much as they were able to restart operations far more quickly. These large industries were also the biggest beneficiaries of the rival small-medium industries being forced out of the market, and they were able to convert their piled inventory of finished goods into sales at a faster pace. Thus, they were able to convert a big part of their piled commodity capital back into money capital and repaid part of their outstanding bank loans reducing their interest costs. This interest is paid out of their operating profit. Hence, they were able to retain a larger share of their operating profit with themselves. Therefore, quantum of bank loans to industries didn’t grow in the covid period. It rather showed some negative growth for some time and personal consumption and small business loans overtook the industrial loans for the first time in India.
Moreover, most industries were able to reduce the number of their workers during corona period through lay offs and retrenchment. Many state governments also exempted industrial capitalists from the already weak labour law protections for workers, for example, they were allowed to stretch working day to 12 hours. Therefore, the capitalists were able to make the workers slog for longer hours and increase the rate of exploitation, that is, the rate of surplus value appropriated from workers. Besides, 90% of the employment in India is generated by small and medium industries. So, their closure for long periods resulted in massively high unemployment. This increased supply of labour also caused a fall in wages. All these together have resulted in the fast growth in the rate of profit of big corporate capitalists reversing the decade long falling trend. The same is also partly responsible for the stock markets being on the high.
Though Covid devasted the lives of overwhelming majority of the people, it has benefited approximately 8-10% of the population. Higher profitability has increased income of capitalists and their managers. Their expenditure on personal consumption went down and amount of savings went up in the lockdown. The rise in stock market has also created a sense of being wealthier. They have gone on a shopping spree post lock down especially for consumer durables and luxury goods. The industries have also been able to operate on somewhat higher level of capacity utilisation (above 70% instead of around 60%) since their earlier inventories were cleared. This build up of inventory is happening throughout the chain from factories to distributers to wholesalers to retailers, largely with bank credit. From the point of view of the accounting and economic surveys the sale happens when the goods are despatched from the factory. Thus the build up of inventory with the commercial capitalists -distributors, wholesalers, retailers – is reflected in growth in sales, even though final sales from retailers might be slower than that. This feedback loop from slowdown in sales at the retailers to the producing industrialists through the whole chain has some time lag, sometimes reaching to several months. Since the earlier inventories had cleared in the lockdown period and these inventories are currently being build up again the industries can operate at higher level of capacity utilisation in this period despite the actual sales to consumers not having picked up pace because of high unemployment and lower wages.
Hence, we have these diametrically contrary reports of lower buying by consumers and increased rate of industrial activity. However, this growth, like the earlier instances of growth as consequence of destruction of wars, pandemics, etc, is of a transitory nature. This doesn’t resolve any of the reasons for the almost ‘unending’ capitalist economic crisis in Indian economy. Therefore, this period will pass, and capitalist economic crisis will be back in a more intensive form.