Transcript: Where Is Indian Economy Failing? – Prof. Arun Kumar on Indian Business Podcast

So you don’t get data. Government gives out data every quarter. So what data comes out is very little.

Even for the business sector, only the corporate sector, the 300-400 companies that have declared their balance sheet, only their data is taken. So these 300-400 companies are representing everybody.

GANESHPRASAD SRIDHARAN: Okay?

PROF. ARUN KUMAR: Whereas you know there are about 70 million micro units, there are about 500,000 small and medium units and bulk of them are not in the stock market. There are only about 6,000-7,000 large units and of them the actively traded maybe 1,500.

So it’s this 1,500 that is representing the 6,000-7,000 big units, the 500,000 medium and small units, and 70 million micro units. So that is not proper because there is a differential between them.

And that is that the organized sector is growing, but the unorganized sector is not growing. If the unorganized sector is also growing at 6.5%-7%, there would be a lot of employment generation. But because it’s declining, therefore the employment problem is there.

The Reality Behind Growth Statistics

GANESHPRASAD SRIDHARAN: Okay, so when we say that we are the fastest growing economy and we’re growing at 6%-7%, that is only being calculated taking into account the organized sector?

PROF. ARUN KUMAR: That’s right.

GANESHPRASAD SRIDHARAN: Which is only 6% of the country?

The Flawed GDP Calculation and Missing Data

Which is workforce is 6%, but its output is 55%. So the output being 55%, you can say it’s representing 55% of the output. Right. But the remaining 45%, agriculture is another 14, 15%. That gets some data. The remaining 30%, which is the non-agriculture unorganized sector, that data is not there. So this is representing the whole, which is not proper. So it won’t represent your employment situation. So you are representing the declining sector by a rising sector.

Therefore your GDP shows a rise, but actually GDP is not rising by so much. So my argument is that on an average, in the last time since demonetization, you know, the economy is growing only in one and a half, 2%, 2.5%. It’s not going more than that. So therefore we are not yet a $3.8 trillion economy. We’re still only $2.5 trillion. What, 2.5 trillion? Because you see, the unorganized sector is declining, only the organized sector is rising. So therefore the rate of growth, instead of being 7%, is more like 2%.

Demonetization’s Hidden Impact

And especially during demonetization, you can see how wrong our data was. The demonetization showed that November, December, January, February, March, five months, the economy had come to a standstill and even agriculture had declined. The farmers could not bring their produce to the market. Vegetables are rotting in the field, flowers are rotting in the field, and so on.

So in my demonetization book, I’ve given the data that in the Azadpur Mandi in Delhi, which is the biggest mandi in North India, you know, less than half the produce was coming, the rest was in the fields or rotting and so on. And you had pictures of people throwing milk on the roads, you have pictures of tomato being thrown on the roads, and Shimla meats being thrown on the roads, etc. Because it was going for one rupee a kilo. So even agriculture had declined, but the government says agriculture did very well.

Similarly, I went in the month of March to Gwalior, and I went to the local market there and the market had not opened till 12 o’clock. And they were playing cards, the shopkeeper. So I said, why not open? They said there are no customers coming. We went to the labor chowk at one o’clock, you know, the labor chowk, it was full. So I said, you know, usually you people leave if you don’t get work by 9:30 or so. They said, we have not been getting any work, so we are willing to stay and get even a quarter of day or half day work. So they were standing there.

So in other words, the economy was down for five months. There’s negative growth and yet the government’s data shows the maximum rate of growth for that decade was 8% in the demonetization year. Whereas it was negative growth because five months there was negative, only for seven months there was positive. And this negative was very large. You even saw luxury car sales decline. You saw demand for storage increase because factories are not able to sell their produce. And the unorganized sector did not have money to pay wages, did not have money to buy raw material and therefore they had shut down.

So it was clear evidence that the economy was negative. But the official data was showing it was 8% rate of growth. So you can tell how much error there is.

Multiple Shocks to the Unorganized Sector

So demonetization damaged the unorganized sector. And next year you implemented the faulty GST that again damaged the unorganized sector. So even though you’ve kept the unorganized sector out of GST, so if you have a turnover of 50 lakh and below, then you don’t come under GST. If you’re providing services worth 40 lakhs and less, then you don’t come under it. If you are having a turnover up to 1.5 crore then you come under the composition scheme, which is a very simplified scheme.

So you largely kept the unorganized sector out of the GST. And yet GST has damaged this sector because it has benefited the organized sector at the expense of the unorganized sector. So therefore that came as the second shock to the unorganized sector.

The third shock came next year when the NBFC crisis, the non-banking finance companies crisis, because they provide loans, etc. to the small and unorganized sector. So that crisis came. So three shocks came one after the other. And then in 2020, 21 you had the pandemic and again the lockdown impacted the unorganized sector very badly. From the cities, people migrated to the rural areas, production came down and so on. So four shocks.

So this idea that we can project from previous year to the next year. But the next year is a shock here. So how can you project from the previous year that data doesn’t apply. And then the next shock came. Then the next shock came. So the data goes wrong because you’re projecting the wrong data to the year of the shock and then from the year of the shock to the next year. So you are always overestimating.

So that is where the problem is. Because if the rate of growth is healthy this year, it doesn’t mean in the demonetization year it was healthy. So you cannot project from this. And that’s why, because you’re projecting from the wrong data. Therefore you got an 8% rate of growth during demonetization, whereas actually you should be negative. And then from that 8% you’re projecting next year to the GST year when again it will show higher rate of growth, even though because of GST damage, the unorganized sector declined, the rate of growth fell. And then you again projected to the NBFC. So the whole chain becomes.

That’s why I keep saying we are growing at only one and a half or 2%. We are not growing at 6, 7% that the government claims. So that is the reason why what you pointed out, this contradiction that we have large number of billionaires, but large number of poor. Simultaneously you have 7% or 6 and a half percent growth and you have high unemployment.

The Four Types of Unemployment

And you see the unemployment is also not always visible. We did a report in 2022, October we released three years back. We showed that there are four kinds of unemployment.

One is you’re looking for work and not finding work. So that’s called unemployment.

Second is because you’re poor, you have to do something. So you will sit in the market, you drive a rickshaw, you do head load work, you pull a cart, you sell some chana at the bus stand, you’ll have a push cart and sell some chai, you know. But here the work is very little. So you’ll be in the market for 12 hours and you’ll get two hours or three hours of work. So you are underemployed.

Then the third is what is called the disguised unemployed. At a shop, you know, there are two or three people where only one is needed. So these other two are not giving the productivity, but the family members sitting there or the family members sitting in the field. And because they’re sitting there, you count them as employed. Whereas actually they’re not contributing to the GDP. So this is called disguised unemployed.

And the fourth category is you are so desperate that you’ve stopped looking for work. And there women come in in large numbers. Women, what’s called the labor force participation rate. That means in the age group of 15 to 60, they should be working, but they’re not getting work. So they’ve given up looking forward. Or the youth between the age group of 15 to 29, they are not finding work appropriate to their degree. So they’ve stopped looking for work. They’re taking an exam three times, four times, five times. You know, they’re wasting their time on watching the mobile phone all the time and they’re getting frustrated and so on. Or they’re into drugs and drinking, as some reports seem to suggest. And because they don’t have money, they’re snatching money at home. So violence has entered the home.

So there are these four different kinds of unemployment. What the government data gives is only one kind of unemployment. It doesn’t look at all these three.

The Real Employment Crisis

So therefore we showed that about 320 million Indians have some proper work, but 280 million Indians don’t have proper work. So this 320 million have to support 1.45 billion people. So each one person has to support 4.4 people. Now if this 280 million also had work, then 600 million would support 1.45 billion. So everybody would support 2.2. So the family prosperity would go up. So the moment you give employment to everybody, the family poverty will come down.

And this is a backlog of 280 million. But in addition, every year about 24 million jobs have to be given to fresh people coming into the market. Yeah, so people will do the 10th class at the age of 15, people do 12th class at the age of 17, people who do BA at the age of 20, and then 22, they do a postgraduate. So we counted these separately. That means in 2022, go back 15 years to 2007. So those born in 2007, coming to 10th class in 2022 and coming to the market, then you go two years further back in 2005, they will in 2022 finish their 12th class, do the 12th class and come to the market.

So like this, we counted when we found 27 million people are ready for the market. Okay, now we remove 25% who are women because of marriage, childbearing, they will not be able to come. So still have 24 million people. Government is saying 5 million jobs enough. Whereas we are saying 24 million jobs are needed for these people who are coming into the market, after doing the studies, etc., plus there’s a backlog of 280 million. So you need at least 60, 70 million work every year. And you’re talking about 5 million. So you can’t solve the problem of unemployment if you only cater to 5, 7 million.

The AI Threat to Employment

And now with AI coming, the situation is going to get extremely grim. Because now even IT companies, call centers, BPOs are sharing because call centers work, BPO’s work can be done by AI. A lot of the mind work like coding, that can be done by AI. So coders will get displaced. Similarly, doctors work, chartered accountants work, lawyers work, a part of it will be done. So you don’t need apprentices.

There is a relative of mine, he’s devised an app, he takes a picture of your forehead and then he puts up parameters like BMI and so on. And that will tell you your sugar, your BP and so on. So you don’t have to go to a doctor. So like this, in the coming years, you know, even the skilled work is going to be displaced.

Until now, when technical change took place, you displaced physical labor. So like harvester, combined, replaced the work of crop cutting, that was physical labor. But now you’re going to be displacing mental work and therefore there’ll be massive unemployment. Because where will these people go? What kind of new skills will they have to acquire to use AI in whatever work they’re doing?

So the problem is acute at the moment. We need 60, 70 million work every year, not 5 million as the government keeps saying. And then this will add to that pressure. So the situation is getting quite grim, you know, for youth. Where will they get jobs, how will they be able to manage? And the parents are also upset. They spend money on the children’s education and so on.

The Education Crisis

And therefore, so this divide in the economy, you know, the organized sector, those who’ve got good education, they’ll be able to get something. But the unorganized sector, where the education level is also very poor, you know, they, where will they go? You know, a lot of labor is getting displaced everywhere.

And our annual status of education report called ASER, you know, that has been coming since 2005 that was showing that from rural schools in the fifth class, 50% children could not do second class reading, writing and maths. Oh my God. Okay, so with the result that the education levels are very poor because teaching is not very good, the emphasis on education is not there, on good education.

And in our education system, we learn by rote. When you learn by rote and just do the exams, then you forget after the exam. Yeah. Whereas knowledge has to be built systematically from the base up. If your base is not good, then the next level will not be good. The next level will not be good. So therefore, you know, your research requires high quality education.

Technology Dependence and Strategic Vulnerability

And today globalization is all about technology. That’s why India has become dependent on China for so many things. High tech items and low tech items, they’re both coming from China. So you get Ganesh Murthy and you get, you know, your Diwali lights and Pichkari, also from China. And you also get APIs from China and electronic components and, you know, your automobile components and so on. And so you have $100 billion trade deficit with them, even though at one level you call them your enemy country because they have entered your territory, but you could not do without them.

Many of our factories cannot operate properly unless the Chinese engineers come. And therefore the factory operators are requesting the government to give visas because the government is not giving visas to them. They said our factories are not running properly as a result because these people are not there.

And then we are dependent on the USA for our equipment and we are dependent on Russia because some of the critical equipment like Brahmos missile and Sukhoi aircraft and the, you know, the S-400 missiles are from Russia. So we are squeezed between these two. Yeah. Okay.

So the situation, as you are asking, what is the situation, we have to understand that there is a huge diversity. Some segments are doing well, other segments are not doing well. Other segments cannot do very well because their education is very poor. And the Indian economy as a whole has become a prisoner because the technology development has been lagging. And therefore, Mr. Trump, the president Trump, he can squeeze us. He knows that we are dependent on them, right? China can squeeze us because they know that we don’t have the technology.

The Failure of Strategic Thinking

So this thing that we have not thought strategically of, how to move the economy, how to become, you know, strategically autonomous, to be able to develop our own technology. Look at the light combat aircraft. We have been developing it since 1988. And still, you know, for critical things that dependent on Americans, the GE404 engine, last two years they haven’t supplied us the GE404 engine, so we could not even produce one LCA.

And the Air Chief Marshal is saying MiG-21s are going out and we are not able to replace them. So he is complaining that, you know, without the LCA, we are under this thing. We should have 42 squadrons and we’ll be around to about 30 squadrons. So GE404 is 1980s technology. And even that we are not getting and GE414 for which we were saying that we will do a technology development program with them. The Americans are not signing that agreement. So we are stuck because our LCA Mark 2 requires the GE414, so we are not able to produce the critical aircrafts and so on.

So we are heavily dependent. And that is because we have not thought strategically. And strategic thinking means you have to think about your technology so that you can be autonomous. You don’t depend so heavily on other nations for technology, and then you can take steps to help your economy. At the moment we have become prisoners.

Trade Tariffs and Economic Vulnerability

So as soon as Trump has put extra tariff, now we are worried our exports will be now short and therefore the demand in the economy will drop. And when the demand in the economy drops, then the rate of growth will slow down and our exporters will be in trouble. And these are all labor intensive areas like textiles, like your fisheries and so on, gems and jewelry, etc. So there’s already unemployment increasing as a result of this.

That is why the GST rate cut has been done. Because the idea that if you cut GST rate on basic items, then those prices will drop. And when those prices drop, then the demand might increase. Either the demand for them will increase or the demand for other things will increase because now people will have saving. But I have argued that GST is applicable to the organized sector. So organized sector prices will come down. The unorganized sector is outside GST, so nothing will change for them.

GST’s Impact on Organized vs Unorganized Sectors

GANESHPRASAD SRIDHARAN: Can you explain this, sir? How does GST selectively benefit the organized sector and not benefit the unorganized sector?

PROF. ARUN KUMAR: So unorganized sector, as I was saying, is outside the GST net.

GANESHPRASAD SRIDHARAN: So can you explain what is the unorganized sector, in short, so that the audience…

PROF. ARUN KUMAR: Unorganized sector means that sector where the trade unions are not there. So this is largely what people call the informal sector also or the unregistered sector also. But you see, what happens is that in the formal sector now there is more and more contract labor. And contract labor comes from the unorganized sector.

Because the unorganized sector wages may be one fourth, one fifth of what the factories have to pay in the organized sector. So like for instance, if you have an official driver, you may have to pay him 70,000 to 80,000 rupees, but a driver in a taxi stand may be getting 20,000 rupees. So it’s easier for the company to hire taxis rather than to have chauffeurs there.

So the unorganized sector wages are way below the organized sector. And that’s why, because they are very small, very poor, weak, they have been kept outside GST.

GANESHPRASAD SRIDHARAN: What do you mean by outside GST?

PROF. ARUN KUMAR: Meaning they don’t come under the GST network. That means they don’t have to file the returns. They don’t have to pay a GST tax. With the organized sector, people have to pay because they are registered. And therefore on the supply that they make, they have to pay a GST. So 5%, 18%, 28%, whatever the slab they’re in, they have to pay. That 20% is now gone. So 28% things have come into 18% or gone to 40%.

GANESHPRASAD SRIDHARAN: So on the outside it looks like it’s a good thing that they don’t have to file for GST, but they don’t get input tax credit. They have to pay GST for the raw material and they don’t get input tax credit.

PROF. ARUN KUMAR: That’s right. So they don’t get input tax credit, so their cost is higher. But for the organized sector, they get the input tax credit, so their cost goes down.

The Chaiwala Example: Understanding Input Tax Credit

GANESHPRASAD SRIDHARAN: For example, let’s take Chaayos and a normal chaiwala. If Chaayos, let’s say, orders tea leaves, then for this raw material they pay GST. But this GST they can claim as input tax credit.

PROF. ARUN KUMAR: That’s right.

GANESHPRASAD SRIDHARAN: And they’ll get that GST back.

PROF. ARUN KUMAR: That’s right.

GANESHPRASAD SRIDHARAN: If there’s a chaiwala on the street and he buys tea, he has to pay GST.

PROF. ARUN KUMAR: That’s right.

GANESHPRASAD SRIDHARAN: So ironically, the cost for the chaiwala on the street is more as compared…

PROF. ARUN KUMAR: To Chaayos, may not be more, but it has not fallen. You see, there’s always a price differential because this unorganized sector chaiwala will buy from the unorganized sector. So the point is, his cost remains unchanged, but this organized sector, his cost drops. So the price differential changes. So some of the demand shifts.

GANESHPRASAD SRIDHARAN: Guys, before we move on, let me break down the input tax rate system under GST in the simplest possible manner so that you have better context. During the podcast, you see, when Chaayos, which is an organized GST registered chain, buys ingredients worth 100 rupees, it pays 10 rupees GST. So the total cost is 110 rupees.

Later, it sells a cup of chai for 200 rupees and charges 20 rupees GST from the customer, making the selling price 220 rupees. Now instead of handing over the full 20 rupees to the government, Chaayos adjusts the 10 rupees GST it already paid on the input. So it only pays 10 rupees to the government. That means its effective cost stays at 100 rupees and profit comes to 100 rupees.

On the other hand, a local chaiwala who isn’t GST registered buys the same ingredients for 100 rupees but still pays 10 rupees GST making his cost 110 rupees. But when he sells chai for 200 rupees he cannot charge GST on the sale. And he also cannot claim back the 10 rupees that he already paid in GST. So his cost remains 110 rupees which leaves him with only 90 rupees in profit.

So Arun sir says that the input tax credit allows Chaayos to recover taxes and keep margins higher, while the small chaiwala bears the full burden of GST making him less competitive in the market. This is what Arun sir is trying to say. Now obviously the scale of Chaayos and the price range of Chaayos and the cost of Chaayos will be far different as compared to the conventional chaiwala. But this example is just to help you understand how the organized players and the unorganized player operate under the GST policy.

How GST Rate Cuts Shift Demand

PROF. ARUN KUMAR: So that’s why my argument is that when now they have cut down the tax rate from 12% to 5% or 0% or from 28% to 18%, then the organized sector prices will drop. But the unorganized sector prices will not drop. So the relative price differential between the two will change.

So suppose you’re buying atta from the local mill. There was no tax in the open atta. But in the Aashirwad Atta or some company atta there was a tax. Now that price will come down. So many people may switch to that away from the unorganized sector because they…

GANESHPRASAD SRIDHARAN: Have scale plus input tax credit advantage.

PROF. ARUN KUMAR: So the price differential matters. Because if the price differential is not much, you’ll switch there. If the price differential is there, then you’ll come here. So that’s what happened after GST. That the demand shifted from the unorganized to the organized sector. Where the organized sector prices came down relative to this and therefore people shifted to that. That’s again going to happen with the GST rate cut that’s been announced from 22nd of September.

GANESHPRASAD SRIDHARAN: Do you think that was a good policy, sir?

The Need for GST Reform, Not Just Rate Cuts

PROF. ARUN KUMAR: See, what was needed was a reform of GST. What they have done is cut the GST rate.

GANESHPRASAD SRIDHARAN: Okay?

PROF. ARUN KUMAR: Cutting the GST rate is not the same as reforming the GST. So I have suggested from 2015 what kind of reform is required. I have a book on GST called “Ground Scorching Tax” in which I have given the thing. Then I have articles which I have written saying what is the reform required?

What I’m saying is that do away with the input credit system because as Arun Jaitley used to rightly say, 5% of the units pay 95% of the tax. So if you do away with the input credit system, then these 5% you will tax at the MRP that they put on their label. So whatever be the price it’s selling, you discount it. Not discounted, you are just paying on the MRP. So it’s fixed. So therefore you’ll catch that.

And the rest, the unorganized sector, the disadvantage of not getting input credit will go. Because now input credit is not available to organized sector, is not available to the unorganized sector. So that disadvantage will go. So this demand shift that was taking place from the unorganized to organized, that will go away. So something like this should have been done now also.

So while it’s true that this price decline will mean that the organized sector demand will go up, it will mean the unorganized sector will go down. And that’s where the employment is. So unemployment will increase. So demand decline may even exceed the demand increase in the organized sector. So this step may not be what is required. It may be counterproductive. Because if the unorganized sector declines very sharply as a result of this, then you will have the opposite effect that the demand is rising, overall demand may fall, unemployment may rise.

So what you required was the reform so that you only tax the final… See, GST is paid finally by the consumer. So if I have this cup, whatever be the different stages at which it’s gone and say the chartered accountant was there, the transportation was there and then the potter was there and then various other things. So maybe 20 different taxes, somewhere 5 paise, somewhere 20 paise, somewhere 40 paise. Finally I as a consumer have paid all those taxes.

So it’s a final person. If they pay the tax, I don’t need to collect it at 20 different stages. And in some cases it’s complicated. There may be hundred stages at which the tax is paid. And therefore it will simplify GST. It’ll be easier to implement GST. And because it would be on the big scale and on the final product and luxury product which I have been suggesting, then you can have one rate of tax.

At the moment you cannot have one rate of tax because the poor people should not be taxed at the same rate as the rich people are taxed. So the consumption of poor people, you have to have lower rate. So if you do away with it and collect it only on the MRP, whether from the dealer or from the factory, it will be much simpler.

And instead of the 4 billion files filing that takes place of this form, that form, that form, that form, there’d be only 30 to 40 million forms. So you can monitor it more easily. There’s a lot of corruption. So even in the parliament it was said that 2 lakh crore worth of black income is generated by evasion. So that will go away.

Then these fake companies are setting up, being set up to claim input credit. That will not be required. Then this e-way bill will not be required. You know, the transportation will be much easier. At the moment fake e-way bills are being made and then the police checking and the inspector checking, they stop and then they demand money. So all kinds of things are there. It’s very complicated system. So therefore simplify it.

A Simplified GST System Based on MRP

GANESHPRASAD SRIDHARAN: Can you explain this in a very simple example sir, as to how this system that you’re proposing would work?

PROF. ARUN KUMAR: So what would happen is you produce, say this cup is from the organized sector. There would be MRP on the label that you buy these six cups. So you buy at MRP of 100 rupees, you levy one rate of tax, say 12%. That’s it. That’s it.

So the chartered accountant who’s given service, his thing, you don’t have to tax. So all the intermediates will go out of the tax net. Your transportation will go out because that’s intermediate. So it’ll become very simple. And this complication of collecting at each stage an input tax credit coming from one stage to the next stage. And therefore there are fake companies that are giving you these fake bills for input credit that will also go away. E-way bill will also go away.

So this idea that policemen will be stopping or the inspectors will be stopping you and demanding money, that will also go away. So it becomes very simple.

GANESHPRASAD SRIDHARAN: Just to give the audience more context, how is the system currently functioning as compared to the simple system that you have seen?

The Complexity of GST and Its Impact on India’s Unorganized Sector

PROF. ARUN KUMAR: So at this point, suppose you take for instance you buy a utensil. Now where did the utensil start? It started with the mining of the iron ore. So there you have transportation, chartered accountancy, etc. At each stage there’s a tax. So that comes out and you convert it into pig iron. Now at the pig iron stage also there’ll be accountancy, there’ll be transportation, there’ll be chemicals bought, etc. At each point you are paying a tax. So therefore there are many more taxes.

Again, input credit into the next stage you convert to steel. Again all this transportation and chartered accountancy and various other things will take place. So another layer of taxes will be there for which the input credit will go. Then from steel it will go to the person who’s making your utensil. And again the same thing will happen there because that fellow will also have chartered accountant, transportation, this, that and the other.

So the final utensil that you buy has gone through 30, 40, 50 stages at which a tax was there and the input credit was given to the next stage. Then again the tax was there, input credit was given to the next stage. So it becomes very complicated. You have to keep detailed accounts to be able to claim the thing.

Now instead of all this, because I know that finally the person buying is paying the entire tax. Say suppose on this cup there’s two rupee tax. So this two rupee tax will be collected straight from the customer by the dealer. The dealer will pay the two rupee tax and collect it from the customer and nobody else in the chain will have to pay anything. So therefore this becomes simple as compared to the present system where you take a tax, then you give an input credit at the next stage, then take a tax and take input credit the next stage and therefore it makes it very complicated.

So logic behind it is that you interconnect the various intermediate stages. So if I sell something to you, then what was happening earlier was there was under invoicing and over invoicing. I would underinvoice and you would over invoice. So that will go away according to this logic. But people found ways of circumventing that by fake input credit and so on. So the problem has not disappeared. Black income generation continues and it has just simply become much more complicated.

So therefore my argument is that this GST, I have been writing my book on the GST, “The Ground Scorching Tax”. There also I have given lot of reasons why what the government claimed has not worked. Government claimed that the prices would drop, but prices didn’t drop. Government claimed that the GDP would go up by 1 or 2%. That didn’t happen because it was so complicated. Then black income generation would come down. In fact, that didn’t happen because people kept on fudging, etc.

So none of the things that were promised for GST have happened. It’s become very complex. And your unorganized sectors got hit. And therefore your overall economic growth rate has come down. So GST is not desirable for India.

Why International Models Don’t Work for India

It is said that it’s applicable to 160 countries, so we should also have it. But no other economy has 94% people working in the unorganized sector. So that problem that we have is specific to India. To say that France in 1954 started, okay. But French economy has hardly any unorganized sector. It didn’t have it then, doesn’t have it now. So what works in one country need not work in your country, because your situation is very special.

In our country there is 46% still working in agriculture. And 85% of the farms are small farms. They are less than 5 acres. So in that less than 5 acres there are large number of farms, a half acre, one acre, two acre. So they cannot compete. Their income is fifty thousand, sixty thousand rupees per annum. The last survey that was done of agriculture income in 2017-18 showed that an average farmer earns 27 rupees per farmer per day. So he has to earn through other means, because this 27 rupees is close to the poverty line. So farm incomes are very small, 40, 50, 60 thousand rupees.

Now America is saying open your agriculture market. But this fellow earning 50, 60 thousand, 1 lakh rupee per annum cannot compete against a farmer from America who gets an average of 26 lakh rupees of subsidy. He’s getting 26 lakh rupees of subsidy plus his own income. And he’s earning 50,000 rupees, right? So he cannot compete.

And then the minimum farm size in America is 250 acres. Our fellows are operating half acre, one acre, two acre on their farm. There’s 10 crore rupees worth of machinery. He has access to technology. This fellow has no access to technology. His equipment is worth not even 50,000 rupees. So there’s just no comparison.

The Farm Bills Controversy and APMC

If we open up our agriculture market, you’ll kill agriculture in India as it is. That’s why you see, on the three farm bills there was so much protest, because the farmer cannot stand the outside market. So even though government is saying “no no, I’m giving you freedom now. You don’t have to depend on the APMC market. You can sell outside,” but who do you sell to outside? It is your Ambani and Adani, these big companies. And this small farmer of 1 acre, 2 acres cannot compete with them. There’ll be monopoly in that. So they will not get the price. They’ll be squeezed.

And Bihar gave a clear example. We eliminated the APMC Monday in 2005 in Bihar. And as a result, during that year the paddy price in Bihar was half of what it was in Haryana, UP and Punjab where the APMC was working. So traders are buying in Bihar and bringing it to UP and Haryana and selling it here at twice the price.

GANESHPRASAD SRIDHARAN: But sir, because of the APMC cartel, it was anyways getting very difficult for the farmers to survive, right?

PROF. ARUN KUMAR: No. So APMC, the point was that APMC at least the minimum support price was the base price. You didn’t get it, but that was a base price on the basis of which you were getting some price. If the APMC disappears, the MSP goes and then the trader will squeeze you even more. So APMC at least set the benchmark from which the trader would squeeze you. Once that goes, then the trader would squeeze you even further.

So therefore APMC Monday, while it was not what it was supposed to be doing, was helping you to a certain extent. And that’s why I give the example of Bihar, that in Bihar the APMC Monday went and the price of paddy in Bihar was half of what it was in Haryana, UP and Punjab where the APMC was functioning. And therefore traders are buying in Bihar and selling here.

So the Bihar farmer was being squeezed. And that’s what many of these Bihar workers who come to Punjab and Haryana to work, they said, “We used to be farmers, now we become workers because we had to sell our land also.” And that’s what they were telling these Haryana and Punjab farmers, that if this disappears then you’ll also become workers. You’ll also lose your land to somebody.

The Need for Government Intervention

So the point is that in India a farmer cannot cope with a free market. Theoretically, it looks very good that you have free market, you have a choice and so on. But what does a half acre, one acre, two acre farmer have a choice? He’s borrowing money, he has to return the money. So he’s in the grip of the trader, he’s in the grip of the landlord. So there’s no choice for him.

So my point is that given the unorganized sector and given the precarious condition of agriculture and the micro sector, there is a requirement for government to intervene. Because when the government intervenes and their incomes go up, the market size will go up in India. So this 1.45 billion people, we don’t constitute a large market. We keep having problem of demand.

So today industry says that yes, our balance sheet is very good, we have surplus. But why invest if the capacity utilization is only at 70, 75%? If I can produce 100 cars but I’m selling only 70 or 75 cars, why would I raise capacity to 110 by investing more? Because then my unsold stock will go up further, my losses will go up. So therefore it is important for us to drive demand. And that will come from the 94% who at the present are getting very low incomes.

The Reality of Unorganized Sector Workers

The government set up the E-Shram portal because during the pandemic people were going back from the cities to rural areas. Supreme Court scolded the government saying you should know how many unorganized sector workers are there. So the government set up the E-Shram portal. Now the Prime Minister said in Parliament that 300 million have registered under it.

Initially the data that was given, which was removed from the website, was that 90% of them were saying that they’re getting less than 10,000 rupees per month. Now 10,000 rupees per month is close to the poverty line. So less than 10,000 means large number of people are below the poverty line in the unorganized sector.

So this is the problem that if you don’t generate demand in the economy, then the private sector growth will be slower. The organized private sector, even when its balance sheet is very good, will only invest when there’s adequate demand. Government can invest without there being adequate demand and generate some demand. But private sector will not do that.

So public sector investment going up, the budget showing a higher investment and so on is inadequate to push the private sector to increase its investment. So our growth rate will go up really only if the unorganized sector starts doing well. If the unorganized sector doesn’t do well, then the organized sector will also not do well.

GANESHPRASAD SRIDHARAN: So then if we have to lift 800 million people out of poverty and give them a healthy life, what is the solution to that? How do we do that?

The Solution: Fair Pricing for Farmers

PROF. ARUN KUMAR: So the largest number of these are in agriculture. Their income has to go up. For that they have to get a remunerative price. And that will come if the minimum support price is assured and minimum support price is based on their true cost. At the moment we don’t take the full cost. Like for a business we take whatever the investment by the businessmen, the shareholders, their equipment, their property, everything is taken into account. But in the case of agriculture, we don’t do that.

So as they say, full cost pricing should be done, not that if you’re giving your own managerial skill, that’s not counted. If you’re giving your own implements, that’s not counted, these kind of things. So it should be on the full thing, just like for a business.

GANESHPRASAD SRIDHARAN: So there’s one problem that I see with the assurance of MSP. If the government assures MSP, then no matter what the demand is in the market, the farmers will optimize for supply. So if a farmer can produce 1 ton of rice, he will produce 1.5 tons of rice. And now that the government has said that we are guaranteeing MSP, they can’t go back on their word.

So the government will have to keep on buying no matter how much supply comes to them. And the government currently does not have enough storage capacity to store these grains. Because of which we keep hearing headlines where thousands of tons of grains are wasted because of lack of storage. So isn’t the government putting itself in a precarious situation by assuring MSP because it actually messes up the equation of demand and supply, isn’t it?

Agricultural Policy and Minimum Support Price

PROF. ARUN KUMAR: No, that’s not the reality. You see, why are we producing more of wheat and paddy or more of sugar? It is because only 23 crops out of maybe 200 crops, the minimum support price is announced. And that’s also not on full cost. And we are able to implement it only on three crops: paddy, wheat, and for sugarcane there is a price that is fixed by the government which is given.

So therefore these three have become profitable compared to other crops. So more of this is being produced than of other crops. And these other crops, therefore we have to import like dals, like oil seeds, because we are not producing adequate amount. So where production of dal and oilseed would have been better, we are producing sugarcane, we are producing paddy.

So like in Punjab, we should not be producing paddy. In Maharashtra, in the arid area, semi-arid areas, we should not be producing sugarcane, we should be producing coarse grains. We should be producing other such things. So the excess is because of these three crops getting the minimum support price.

And here also it is said that only 6% of the farmers are getting the minimum support price, 94% don’t get it. The traders get the benefit of it. So what we need to do is we need to equalize the profitability of all crops. Then people will plant those crops which are suitable to that local environment.

So instead of doing paddy in Punjab they’ll do other crops which we are today importing and spending our foreign exchange. So if we equalize the profit by giving minimum support price to all crops and the profitability is all equated, then what will happen is that the cropping pattern will change. And when the cropping pattern changes you will not have excess of wheat and paddy. And the import that you are having of dal and of oil seeds will go down. And environment will be benefited.

Because today the environment is being destroyed. Because you’re pumping out lot of water in Punjab. So the water table is going down and the chemicals are going into the water table. And therefore cancer is increasing. Other diseases are increasing everywhere.

Implementing MSP for All Crops

PROF. ARUN KUMAR: So this minimum support price for all crops will mean that there’ll be a balance between the crops. It’s not that you’ll only produce more and more of paddy and more and more of wheat, which as you rightly said then there’s a stock holding problem.

So now what will happen is that you’ll procure only when the price goes below the minimum support price. So you don’t have to procure the entire crop. Because if you procured the entire crop and held it, the whole population will starve to death. So even now procurement and holding a stock is at the margin, then also it’ll be at the margin only.

So if the price drops then you will procure. If the price doesn’t drop, you’ll not procure. You’ll procure for the lean season, for the drought year. You’ll only hold that much stock. So 25 million tons of stock is needed for that. So instead of having 70, 80 million tons you only have 25 million. But you may hold stock of say 30, 40 different things.

But the storage is already created for holding 70-80 million tons of paddy and wheat. So therefore there’ll be no problem. And the subsidy that is being given on that food stock, that will go down. So instead of the 2-3 lakh crores that you are giving as subsidy to Food Corporation of India and for stock holding, that will disappear because the excess production of these crops will go down.

So instead of the thing going up, actually the excess production will go down. At the moment, excess production is in paddy and in wheat. But if other crops become equally profitable, then production will be as per the climatic zone. Because that will be less capital intensive if you do it as per the climatic zone.

So therefore it is a more rational system to have MSP for all crops and implement it. Today we’re not able to implement it on 23 crops, we are only able to implement it on three. And only 6% farmers are able to get it. The others are not able to get it. So you have to implement it. So it’s a question of political will. If we have the political will, then we can do it. If we don’t have the political will, we keep making excuses saying this problem will be there, that problem will be there. So we have to implement this.

GANESHPRASAD SRIDHARAN: Sir, I have a slight disagreement. When you show that the government can actually regulate the MSP assurance in such a way that they can regulate supply and demand.

PROF. ARUN KUMAR: No, not supply and demand. They will assure a minimum support price by intervening in the market when the price drops below the minimum support price.

GANESHPRASAD SRIDHARAN: But this intervention, if you look at the scale of this intervention, this has to be done all across the country.

PROF. ARUN KUMAR: Yes.

GANESHPRASAD SRIDHARAN: Now we are looking at a government and government companies in general have a reputation to not function properly at all. And if I look at this procedure of understanding demand, understanding supply, figuring out the right MSP, making sure that the MSP is given to the farmers, making sure that the entire ecosystem is sustainable, all of this requires cutting edge data analytics, forecasting and several other things.

Government Capacity and Agricultural Universities

PROF. ARUN KUMAR: That’s not true. See, we have agriculture universities all over the country. They will say what the price of cultivation of something in that area is and you will fix the MSP. That’s how it is done. This data is collected from the agriculture universities and so on. And you do that. So that will continue to be done.

So therefore the MSP would differ from state to state and so on depending on the cost of cultivation in that area. So that can be managed. Now the thing is that how will you procure the thing in the Mandi, but the procurement in the Mandi will be much less.

If you are assuring a proper income to the workers, because the price will automatically go above the MSP, then the amount of procurement will be very little. You see, the procurement will be only at the margin when the price drops. But because the demand has increased, the workers are able to buy more dals and more oils. Because their income is higher. So you won’t have to procure so much.

GANESHPRASAD SRIDHARAN: Sir, I don’t fully agree with you on this. But how do we increase worker wages then? Because we’re talking about 800 million people.

PROF. ARUN KUMAR: So the point is that workers’ wages will go up provided you give them work. If the work is there then the wages will go up.

GANESHPRASAD SRIDHARAN: And how do we give them work? Is the answer FDI?

Employment Generation Through Micro Sector

PROF. ARUN KUMAR: No. FDI is not the solution. FDI will come only in the organized sector. And there no jobs will be created. So how do you generate work? You have to look at where your employment today is and where it can grow. So it is in the micro sector.

Micro sector as I said is 70 million units employing about 11 and a half crores people. An average of 1.7 persons per micro unit. Now if that can be raised to 3.4 you’ll have 11 and a half crore more workers. And therefore people from agriculture will be able to come out. So agriculture will have fewer people dependent on it.

So you have to boost the micro sector and unorganized sector. Today the government is actually killing the micro sector in the unorganized sector. It’s doing the opposite of what it needs to do. It says we’ll organize the unorganized sector. Now how can you make a unit where there’s 1.7 people working? How can you make it organized? Where does that fellow have the time to do marketing and finance and technology development? He has no chance.

So you can kill the unorganized sector but you cannot make it organized. The agriculture sector where 85% farmers are below 5 acre and large number of them are 1 acre, 2 acre, half acre. They cannot become organized. They don’t have. They have an income of 50,000, 70,000, 1 lakh rupee. It doesn’t even come in the taxable bracket. They can’t become organized. You can only kill them. You can convert them into workers.

So my argument is that if the price is above the MSP then the farmers’ incomes will go up. Their demand for micro sector will go up. When the demand for micro sector from them goes up the micro sector will get a boost.

The Cooperative Model Solution

PROF. ARUN KUMAR: And how do you boost the micro sector? With government support. You have to create cooperatives. So this is the solution that we have worked out. That say in Bhadohi you have carpets. In say Tirupur you have textiles. In Aligarh you have say brass. In Khurja you have pottery. In say Ludhiana you have hosiery. You create cooperatives of these people.

Then as a cooperative, they’ll be able to get credit. They’ll be able to do marketing. Just like Amul. Just like Amul. And then technology support will have to be given by the government. That’s how the Chinese economy became industrialized. Their village industry was boosted 25-30% growth every year.

GANESHPRASAD SRIDHARAN: How did the Chinese do it? Sir, can you explain this using a story?

The Chinese Model and Cooperative Synergies

PROF. ARUN KUMAR: The Chinese boosted their village industry by the kind of thing that I’m telling you. So you have to create these synergies. Like as you rightly said, Amul did. Similarly, if you create this synergy by creating cooperatives. Now cooperatives have their own problem. I’m not saying there’s no problem with cooperatives. There are problems like sugar cooperatives in Maharashtra controlled by politicians and things like that. But if you as a country have the political will, you can tackle these problems. If as a country we don’t have the political will, we make hundred excuses. This can’t be done. That can’t be done. And so on and so forth.

But look at what are we doing today. We are killing the unorganized sector, whereas we should be raising it. Look at the budget. The budget is giving 11.3 lakh crores, 3 lakh crores to capital formation. And therefore it’s cutting back on what? Rural employment guarantee scheme, which is a big employer. On education, in real terms, you’ve cut it. That’s a big employer. Health, you’ve cut it. In real terms, that’s a big employer. Rural development, you’re reducing it. Agriculture development, you’re reducing it.

So wherever employment can be generated, you’re cutting down. And where employment is not going to be generated, you’re raising it. So for instance, they are spending more on freight corridor and big highways. Now a freight corridor, big highways—earlier would see hundreds of people working. Now with big bulldozers, big cranes and big JCBs, there are only 10 people working. So it’s not even labor intensive, this construction sector. But they are boosting it. We are boosting the IT sector. We are boosting the power sector. But they will not generate employment.

It is in the rural employment guarantee scheme, education, health—these kind of areas. So our government’s policies are also pro-organized sector. It’s benefiting because once you have big highways and big railway freight corridors, then the product of the organized sector can go up to the village easily. So therefore the unorganized sector in the village will get killed.

The Need for Bottom-Up Development

The whole move in the country is in the wrong direction. We have to follow what Gandhi said: bottom-up development. We are going in for top-down. And we know for the last 80 years the top-down has not managed to go down to the poor people. So we have to change strategy.

See, the organized sector already has very good balance sheet. It needs demand. The moment we boost the unorganized sector, demand will be boosted. The organized sector will benefit. So it’s not zero sum game, it’s a positive sum game. If you begin to generate demand at the lower level, then MSP will not be a problem. Your employment generation will not be a problem. Your organized sector will not have a problem. But we have to have the political will.

See, we are like a frog in the well. You only see, okay, today what do I need? I need this. Then I’ll be well off. So our organized sector generates lot of black incomes. Now the moment you generate black incomes, it reduces the potential of the economy for development. Because I characterize the black economy as “digging holes and filling holes.”

So you set one person to dig hole during the day and at night you set another person to fill the hole. So there is zero output next day. But two incomes are earned. So I call it activity without productivity.

Black Economy’s Impact on Growth

To give an example which I often quote: you make a road, you don’t put enough tar and aggregate, you siphon out the money. The rains come, it gets washed away. So you are repairing the same pothole road every year rather than having good roads. GDP is spiking and GDP goes up. So your axle of the cars break down, accidents take place, people die. So therefore you’re not getting the productivity from the investment that you should get.

So black economy reduces the investment productivity. It reduces the growth rate. So I’ve shown that Indian economy’s growth rate could be 5% higher between mid-70s and now if the black economy had not been there. So instead of growing at an average in the 1970s and 80s at 3.5%, you could have grown at 8.5%. And now instead of growing at the official rate of growth of 6.5%, we could have grown at 11.5%. So Indian economy would be then eight times larger.

GANESHPRASAD SRIDHARAN: Eight times larger?

PROF. ARUN KUMAR: Yeah. If you add 5% from the 1970s onward, it’s a compound rate of growth. So today we would be close to the American economy size of $26 trillion, instead of being the $3.8 trillion officially that is said. Then this crony capitalism is there. This crony capitalism means that if you are a favorite of the government, then you can acquire anything.

So like the Bombay airport, the new airport had to be sold because that fellow had an income tax raid and the ED raid and then had to sell off. So you are being caused. So that spoils the investment climate. So black economy spoils the investment climate. Cronyism spoils the investment climate. And therefore your rate of growth comes down. So therefore, we are not able to reach our potential.

Demonetization and Black Money

GANESHPRASAD SRIDHARAN: Sir, do you think the BJP government has done a good job in eradicating black money? Because ever since demonetization, this entire subject of black money has been put under the carpet. Nobody’s speaking about it. In fact, when Modiji became the prime minister, this was one of his major promises—that he will eradicate black money. And you’ve written a book on the black—

PROF. ARUN KUMAR: Several books on black economy. I have Penguin and Aleph and demonetization and so on. Point is, you see, the demonetization was done on the wrong premise. The wrong premise was that black means cash. So if we remove cash, black will go. This is the wrong premise. Because one has to understand the difference between the money in your pocket and your income.

Income is a flow, money in your pocket is a stock. And when you hold any assets, then it’s called the portfolio of assets. So your savings will be in bank, in real estate, in shares and so on. Similarly, black also will be held as a portfolio. It’ll be undervalued inventories, it’ll be in various accounts abroad and so on and so forth.

So cash is only 1% of the black wealth. So even if you were to take out the black cash estimated to be 3-4 lakh crores, but your black wealth was 300-400 lakh crores. So this is chicken feed. And even this 3-4 lakh crore you could not take out because 99.3% of the money came back to the Reserve Bank of India.

So therefore this black cash also didn’t get eliminated because you converted into new notes. In fact, you generated more black income. Because the bankers and others who change your notes charge you money.

GANESHPRASAD SRIDHARAN: Yeah.

PROF. ARUN KUMAR: So instead of reducing black income generation, it actually helped in more black income generation. And second is that your income is every year. Suppose you are a doctor. You see 50 patients, you declare income of 20 but not of the other 30. Then that’s your black income. This is called under-invoicing.

So under-invoicing continues. So even if you’d managed to take out the 3-4 lakh crores, then next year they would have generated again and they would have had that 3-4 lakh crores back. So it did not help in eliminating black cash. It did not help in stopping black income generation. Because that under-invoicing, over-invoicing has continued.

And that idea that people will use less cash, that also didn’t work. Because from 18 lakh crores of cash then, now it’s increased to 35 lakh crores.

GANESHPRASAD SRIDHARAN: It has increased.

PROF. ARUN KUMAR: It has increased. It’s almost doubled. So people are holding cash. So therefore it did not serve any purpose. They said we’ll stop counterfeit currency. But how do you stop counterfeit currency? Because that’s being printed by some other state actor. So as soon as the 2,000 rupee note came, within 10 days fake currency of 2,000 rupee notes started coming. Because state actors are there.

Then you said that financing of terrorism will end, terrorist financing. But terrorist financing is not done only through fake currency. It is done through gun running. It is done through narcotics. It is done through hawala and so many other means.

The Failed Promises of Demonetization

So the three promises that were made by Mr. Modi, none of them actually were fulfilled. Neither did you stop the black economy, nor did you stop the counterfeit currency. And counterfeit currency was 0.001% of the total currency. Now to eliminate 0.001% of the currency, you don’t do the whole currency demonetization.

If you’d done demonetization over a period of year—so like for instance in Europe when the EU was introduced, then the German mark, the French currency and all, they were demonetized. But it was done over five years. There was preparation, made coins, minted currency, printed, etc. Then you did it. So if you’d done it like that, then India also would not have had a problem.

But what it did was it did not remove the black economy but damaged the economy. Because the economy did not have cash. So therefore the work stopped. Markets were empty. The unorganized sector did not have money to pay the wages. We talked on NDTV to a beggar woman and she said, “I have four children. One was sick and I didn’t have money. So one of them died. Earlier I used to earn 2-300 rupees. Now people don’t have cash to give. So I’m not even earning 20-30. My children are going hungry.”

So even beggar people were having trouble. Unorganized sector was shutting down. So we damaged the economy without actually solving the black economy problem. So government was trying various things. But you see how the black economy is generated. Black economy is generated by a triad consisting of the corrupt businessman, the corrupt politician and the corrupt executive. This linkage is necessary for the black income to be generated. And each of them makes a share. So this triad has to be demolished.

GANESHPRASAD SRIDHARAN: Can you explain that again, sir?

The Triad of Corruption

PROF. ARUN KUMAR: The triad. The triad consists of the corrupt businessman who wants to earn extra over and above the white income. And for that he has to subvert the system by having the politician in his pocket. And subvert the system by having the support of the executive. And the executive consists of the police, the bureaucracy and the judiciary.

GANESHPRASAD SRIDHARAN: So corrupt businessmen, corrupt politician and corrupt executive.

PROF. ARUN KUMAR: Executive—executive consisting of the bureaucracy, the police and the judiciary.

GANESHPRASAD SRIDHARAN: So then how do we solve the black economy problem?

The Root Cause: Not High Taxes, But Injustice

PROF. ARUN KUMAR: Okay, so you know, in the literature, people say we have high tax rates and therefore people are evading taxes. People say we have a lot of controls and therefore people are fouling up those controls and so on. But my argument in my books is that neither of these two is the cause. Really.

We are not a very heavily taxed nation. Only about 1.1% of Indians are effective income taxpayers. 98.8% are not effective taxpayers. They pay very small amount. So our tax is very little. Our direct tax GDP ratio is only about 6.5% at the moment. It’s a very small direct tax collection. Given the disparities that we have, it should be much higher.

So in 1971, when Mrs. Gandhi was the finance minister for that year, the highest tax rate was 97.5%. But one committee estimated the black economy size then to be only 7%. We reduced the tax rates down to 30% and the black economy size has risen to 60%. Why, sir? Because tax rate is not the cause.

See, after all, when you pay a tax to the government, the government gives you services back. Government is not something that’s eating that money. Your bureaucracy, your defense, your police is supposed to give you the services. If you don’t have police, there’ll be all kinds of theft and this, that and the other. So these services are helping the society and the economy to grow. So what you have is inefficiency in all of them because of the black corner.

But the point is, we pay very little taxes. We depend more on indirect taxes than on direct taxes. And indirect taxes fall disproportionately on the poor people. So the point is that it’s not high tax rate because after all, in Sweden and Finland and others you have much higher tax rates. But people voluntarily pay the tax because they get it in return. They get through education, through health, through roads, infrastructure and so on.

So what the government does is to give you services of various kinds, which it doesn’t just eat up. So whatever tax we are paying, it comes back to us in some form or the other. So our tax rates are not very high compared to large numbers of other countries. So it’s not that because of high rates, it is because there’s a sense of injustice.

Everybody, even a money, will feel that there’s injustice in society. And a person sleeping on the pavement will feel this injustice society. So when you have this sense of injustice, then you don’t want to do what the government tells you to do, because you want to try and in some form or the other, circumvent it.

Similarly, it’s not controls that are the cause of black income generation. They’re only a source. You’ll use any mechanism like you evade tax. So that’s any mechanism to make an extra income because you don’t have faith in them. So you’ll foul up the public distribution system. Also you’ll foul up anything like education and health to make an extra. If people have commitment, they’ll do it properly. If they don’t have commitment, they will not do the work properly.

GANESHPRASAD SRIDHARAN: So feeling of injustice is the injustice, you know?

The Triad: Politicians, Businessmen, and Bureaucracy

PROF. ARUN KUMAR: So lack of social justice is what I say is the reason. And a black income generation is an illegality. So the question to ask is, how has illegality increased from 4 to 5% of GDP in 1955-56 to the 62% that I calculated for 2012-13? It means illegality is increasing.

Now for illegality to increase, you need to have a triad working. And this triad consists of the corrupt businessman who wants to make an income over and above the white income. And for that he has to foul up the politics. So he has to have the politicians in control and he has to foul up the implementers, that is the executive, which is the bureaucracy, the police and the judiciary.

So it is this triad which runs the black economy. So unless you tackle this triad, the black income generation will continue. Now, whichever government is in power, whichever political party is in power wants to generate black income for itself. Therefore they allow this. And businessmen would like such people to be there so that they can generate more black income. So businessmen finance the election of politicians.

And for the 1998 election, I interviewed 14 members of parliament. And I put that data in my book as MP1 to MP14. And each one of them told me that we know that we are getting this money from big businessmen. We are getting this from local businessmen, from politicians, from judges and from policemen. Because they are expecting that when we get to power, we’ll do favor to them. So there’s a quid pro quo.

And each one of them told me that we begin our day in Parliament or in the legislature with a lie. We have spent a lot of money, but we claim that we spent less than the election expenditure limit.

GANESHPRASAD SRIDHARAN: What does that mean, sir?

PROF. ARUN KUMAR: Say the election expenditure limit is, suppose 90 lakhs. They’re spending 90 crores, but they’re declaring only 90 lakhs. At that time, the expense limit was 15 lakh. The average they were spending was 1.28 crore, eight times more. But they were declaring only 15 lakhs only.

So they begin with a lie. And they carry this lie through their regime where they’re doing favors to the businessmen and so on and they’re promising to the poor people, they’re promising poverty removal. But that’s not happening because they’re favoring the business community.

GANESHPRASAD SRIDHARAN: So politician is the catalyst of black money.

PROF. ARUN KUMAR: Politician is a part of the black economy generation. Because the businessmen want to make extra income. So businessmen don’t want honest people to come into power. If the honest people come to power, then they won’t be able to make this extra money.

This is a frog in the well attitude. Because as I said, if the black economy was less, economy would be eight times larger. So each of the businessmen would be ten times larger. But their attitude is a bird in hand. So today, if I can make money, I’ll do it. But I’m not saying that by having a clean economy, the economy will do much better and therefore all of us will be better.

GANESHPRASAD SRIDHARAN: Then how do we solve this problem, sir?

Breaking the Triad: The Need for Accountability

PROF. ARUN KUMAR: So you have to break this triad. If you cannot break this triad, nothing will change. And to break the triad, what do you need to do? Accountability. Accountability of business. Accountability of politician. Accountability of judiciary. Accountability of police. Accountability of bureaucracy. So at every level you have to have accountability to the public.

But the public is very weak in India. We are a very feudal society. Whatever the order from top, we follow, so we don’t question. But if the public stands up and says no, you have to do things properly, the politician will be forced to do it. He’ll not do what the businessman tells him. That’s why businessmen don’t want strong, honest politicians to come to power. If strong honest people come to power, then this will not happen.

So accountability is the key. And the public is the key to demand accountability. But in India, the public being very, the whole system being very feudal, the public is not demanding accountability. So therefore we vote for the corrupt, we vote for the bahubali.

You can see, for instance in UP, this bahubali got elected and then he was made Minister of education some eight, ten years back. There’s a huge hue and cry saying how can you make a bahubali. So he’s made prison in charge. Now can you imagine what would happen to prisons if a bahubali becomes the prison in charge?

And you know, the police collects hafta and allows all illegal activity to take place. And that hafta goes right up to the top. So for instance, my wife is a famous journalist. Once at the New Delhi railway station, her bag got picked from the car. They do these tricks, and they divert your attention and they ran away. And then this was at 10 o’clock at night, she talked to her friend in the PMO’s office who was the minister in charge. And morning, six o’clock, the phone came that your bag is here. So she went and picked up the bag.

GANESHPRASAD SRIDHARAN: Okay?

PROF. ARUN KUMAR: Now how many people recover their bag? So the police knew which gang is operating in the New Delhi railway station. So when I wrote about the hafta system in Bombay and Delhi, the DCP and the IG there, they told me how it works. So who are the pickpockets? What encroachment is taking place, everything is known and hafta is collected.

So when I interviewed one of the former home secretaries, he said every additional police station in Delhi means more crime. What means more crime? Because the post of the SHO is auctioned and therefore the SHO has to collect hafta.

GANESHPRASAD SRIDHARAN: Can you explain sir, what is SHO?

PROF. ARUN KUMAR: Station House Officer. So how does this work? So it works because all beat constables are supposed to collect hafta, weekly payment from all the businesses and the illegal work going on in that area. And this is shared level by level right up to the top.

GANESHPRASAD SRIDHARAN: So it’s almost like a bank branch opening up, but it’s almost like a crime branch, which is what it is supposed to be, but it is making…moeny out of crime.

PROF. ARUN KUMAR: Yeah. So illegality is used to generate income.

GANESHPRASAD SRIDHARAN: Sir, from whatever you said, I don’t see the light at the end of the tunnel as to how are we going to become a developed economy?

The Path to Economic Reform: Democracy, Accountability, and Sustained Movements

PROF. ARUN KUMAR: So you look at Britain of 1820, 1830, you read Charles Dickens, Walter Scott and the situation was very similar. It took 100 years of movements for system to become clean.

Similarly, Galbraith writes that in 1817, 1880, 1890, Carnegie Mellon, you know, Rockefeller, Ford, they were robber barons. They would float companies and sink them and you know, therefore take away the public money. So their reputation became so bad that to whiten the image they had to set up Rockefeller Foundation, Ford Foundation and so on. Okay? It took 70, 80 years for things to clean.

So if people become active, people begin to demand, then the system changes. So you have to demand from the politicians. You cannot keep on electing the corrupt. So at the moment I say if somebody is from my caste, he’ll do my wrong work also. So I will elect him. So we vote on basis of, you know, our caste, community, this, that and the other rather than whether this person is serving the public. Okay?

So therefore the public consciousness has to come around. And this is a very funny thing. People say, why should I waste my vote? I’ll vote for the winning candidate. But the winning candidate is not doing your work. But still I’m voting. So this representation is a problem. Representation should mean that my work, which is the right word that gets done today. I’m more concerned about my wrong work, you know, that being done. Okay? So therefore the system gets corrupted. So public consciousness is very important.

The Need for Sustained Movements

PROF. ARUN KUMAR: So there have to be movements. And we’ve had movements like the JP movement in 73, 74 which suddenly raised public consciousness. Then at the time of Bofors, you know, there was a movement. So public consciousness rose. Then at the time of Harshad Mehta collapse of the stock market, the middle class consciousness rose. Then in 2010 onward, the Anna Hazare Ramdev movement.

But these have been only temporary movements. They haven’t sustained. You need sustained movements over long period of time for people’s consciousness to change. But the system is very clever. The system knows how to give that hope and then snatch it up.

And you see, this is the strength of our democracy that there are valves. So unlike in Nepal where it blew up, in Sri Lanka, it blew up, here there are these democratic valves. So the movements take place and then they will concede saying, okay, I’ll set up ombudsman, but they haven’t set up ombudsman. They say we do the right to information and then now they know how to circumvent the right to information.

Right to Information: A Crucial Tool for Accountability

PROF. ARUN KUMAR: Right to information is a powerful tool. But now all departments, they’ll say information not available or is not relevant, you know, and then we are keeping the Chief Justice and the Prime Minister outside its ambit. Actually they should all be in the part of the ambit, you know, and even if it is misused, the positive thing that comes out of it will be so much more helpful than the negativity.

But everything is done to curtail right to information, okay? You don’t appoint the information commissioners, you don’t appoint the proper authority to do it, ombudsman are not appointed, etc. Just to circumvent all this. So right to information is a very crucial tool to bring about accountability of those people at the top.

And if you notice, even earlier, 2010, 12, etc, this thing that was coming out was through right to information because right to information was being exercised. So on the 2G, on the Coalgate and various other things, information was being leaked out because otherwise for the public to get information is very difficult.

But this government has put such a clamp, it doesn’t allow journalists to meet bureaucrats. You know, that’s how the information sometimes used to come out, you know, so now the journalists cannot meet members of Parliament because that, that place where the journalists could meet in the parliament, that is closed in central hall. Access was closed after this government came because in central hall there would be a lot of to and fro. So this government has clamped down. It’s not allowing journalists to meet and you know, get the information. So right to information is crucial.

The Vyapam Scam and Whistleblower Protection

PROF. ARUN KUMAR: Think about it. How did the Vyapam scam is a terrible thing. You know, fake degrees, so your engineering degree, your doctor’s degree, they’re all fake. So this one guy who lost his mother found that the doctor had a fake degree. So he is the one who exposed Vyapam. Okay? And then 47 people associated with their Vyapam, they have got killed.

So this whistleblowers bill has been diluted. Whistleblowers are getting killed. So if you kill the whistleblowers, people will not dare to come out and report. You know, the journalists are being arrested if they have exposed something, but the local mafia is either killing them or is exposing, you know, getting them arrested and harassed, you know.

So right to information is a crucial thing, even if it is misused. I think it doesn’t matter because all information should be in the public domain, there’s hardly any information that is so secret that, you know, it should not be in the public domain. Okay? There’s hardly any. So right to information means, meaning all information should be brought in the public domain as without even anybody asking. And then right to information should be there for where the difficulties are.

So right to information, whistleblower should be, you know, strengthened. This government has weakened the right to information and the whistleblowers bill, you know. So how do you get accountability then?

Business Accountability and Shareholder Rights

PROF. ARUN KUMAR: Business accountability is very important. You know, the board of directors should be accountable to the shareholders. If any hanky panky is going on in the company, it’s the shareholders loss. Because when the black economy is generated by a company, black income is generated. It goes to the owners, it doesn’t go to the shareholders. Okay? So accountability of the board of directors should be to the shareholders. And if this hanky panky, then the board of director members should be held accountable. Got it.

GANESHPRASAD SRIDHARAN: So sir, you’re saying that now we’re in a vicious cycle where people are not holding the politicians accountable and we are a part of a broken system because of which people have no hope. The politicians to a large extent know that they just have to game the system to make more money. And as a result, the triad is functioning insanely well. But for the black economy, if this triad has to break, accountability has to come and that has to start from a movement which will then force the politicians to, which will break this triad, build a good system and hence get the politicians to hold the bureaucrats accountable. And that will then help us and businessman accountable and the businessman accountable, which will then result into a good system with the triad working for the economy and not for the black economy. Is that correct?

PROF. ARUN KUMAR: Yes.

Summary: Understanding India’s Economic Challenges

GANESHPRASAD SRIDHARAN: Thank you so much, sir. This is a lot to digest. I’m going home with a lot of information. So just to summarize everything that you just said, we spoke about the Indian economy and you broke it down into two segments, the organized sector and the unorganized sector. All the numbers, all the optimistic numbers that are coming out are the numbers that are coming out for the organized sector because that’s where the stats are being measured and not for the unorganized sector.

And you are arguing that the unorganized sector is not even growing. Maybe it’s just declining and that growth is being passed on to the organized sector, which is growing as a result. It looks like the GDP is growing and everything is growing.

But the contradictions that are emerging, they’re emerging because there’s a huge disconnect between what is happening in the organized sector versus the unorganized sector. And when we spoke about the reasoning behind why the unorganized sector of India has been struggling for the longest time, you spoke about the four shocks. The shock of demonetization, the shock of faulty GST execution.

PROF. ARUN KUMAR: Not just execution, but faulty GST itself.

The Four Economic Shocks and Their Impact

GANESHPRASAD SRIDHARAN: Not just faulty GST system, the NBFC shock and the COVID shock. Because of these four shocks, the unorganized sector of India by itself has been struggling since the past 10, 12 years. As a result of this, we have massive unemployment in the country.

Now the unemployment that is coming out in the form of stat is just the tip of the iceberg because we have several forms of unemployment. One is the unemployment that is being reflected by the stat. The other is underemployment. Then you have disguised unemployment. And then you have the people who have just given up on jobs itself. We can categorize them as hidden and hidden unemployment. If that’s right, sir.

PROF. ARUN KUMAR: Well, they are what’s called outside the labor force.

GANESHPRASAD SRIDHARAN: Outside the labor force.

PROF. ARUN KUMAR: They’re not even looking for work. They’ve given up.

The Black Economy and the Triad

GANESHPRASAD SRIDHARAN: Then we spoke about the black economy, sir. And here’s where you mentioned that the root cause of the black economy is this triad which includes a corrupt politician, a corrupt businessman and a corrupt executive. Executive could be police, judiciary, and so on and so forth. And this triad works together to benefit each other. As a result, they game the system and the money is taken out of the system. Eventually it ends up in foreign banks because of which our economy is again…

PROF. ARUN KUMAR: Not only part of it is in foreign banks, rest is invested here only, but part is actually recycled through what is called the round tripping. Okay, so it’s here only 10% goes abroad, 90% stays here.

GANESHPRASAD SRIDHARAN: Got it.

PROF. ARUN KUMAR: Okay, got it.

Fixing the Farmer Problem Through MSP

GANESHPRASAD SRIDHARAN: So then we spoke about, then we spoke about how do we fix the farmer problem. And here’s where you mentioned that the government needs to give out MSP. Where I argued that the MSP given to all farmers may ruin the economics of the government. But then you stated that the MSP if given for all crops, will actually regulate the demand and supply both in such a way that there will be a balance.

Now my perspective is that we will require a lot of data analytics to do it for 1.4 billion people. But then you argue that if we can do it for milk with Amul, we can do it with grains for the farmers.

PROF. ARUN KUMAR: Not just grains, but all crops. All do it because the pattern will change. The cropping pattern will change, our foreign exchange reserves will be better and our environment will be better.

Empowering the Micro and Small Sectors

GANESHPRASAD SRIDHARAN: Got it. So then we spoke about empowering the MSME system. Long story short, because of the GST execution, because these people do not fall under GST, a lot of the benefits are being given again to the organized sector and not the unorganized sector, which distorts the level playing field and people who are already at a disadvantage, along with all the shocks that keep coming. The economy with GST, with demonetization, it just paralyzes the growth of the unorganized sector. So if we have to build a strong country, if we have to build a strong economy, we have to empower our MSME sector, we have to empower our farmers, and we have to lift the bottom of the pyramid.

PROF. ARUN KUMAR: So not just MSME, the micro sector, the micro sector. Because medium sector is also doing all right as part of the organized sector. So the micro and the small, that helps me. So I’ve always said that MSME needs to be broken up between medium and small and micro and benefit given to micro sectors especially. Otherwise the medium sector takes away all the benefits of the MSME.

GANESHPRASAD SRIDHARAN: Got it.

PROF. ARUN KUMAR: So government keeps talking about MSME. I say no, talk about the micro and the small. Medium can take care of itself.

Healthcare and Education: Keys to Lifting the Bottom of the Pyramid

GANESHPRASAD SRIDHARAN: That’s a brilliant nuance. I don’t think anybody’s taking that into consideration. Then we spoke about, actually, I will borrow some lines from your Neon Show podcast, sir. You said that if we have to lift people from the bottom of the pyramid, it’s a very simple solution. It’s a function of two things, healthcare and education.

But today everything is privatized. And the government schools and government hospitals are not, not up to the mark at all. In fact, they’re terrible because there’s no way for a poor person to have those services so that that person can uplift himself or herself out of poverty. Today, all the money that they’re making is either going into hospitals or they’re going into schools, because otherwise there’s no disposable income left in the first place.

In fact, a lot of people get into a debt trap because they’re farmers, sending the children to private schools, spending on private healthcare, because of which the entire system is designed to keep people poor. And then we spoke about the black economy, where you spoke about the triad, corrupt businessman, corrupt politician and corrupt executive. If we have to fix that, it can only be fixed via accountability.

The Erosion of Accountability Mechanisms

GANESHPRASAD SRIDHARAN: But as far as the current government is concerned, they are preventing accountability from happening. One major example of that was RTI, and the other is the lack of whistleblower protection. So if we have to take giant steps, significant steps towards accountability, we first have to give whistleblower protection so that all the scams can come out. We have to improve our RTI system and we have to make sure that there is a movement which holds our politicians accountable.

And as you said, if the black economy did not exist today, we would be eight times our size. We would be as big as the US Economy. Does that sum up our conversation, sir?

PROF. ARUN KUMAR: Good.

GANESHPRASAD SRIDHARAN: Sir, thank you.

PROF. ARUN KUMAR: You spoke a lot. Yeah, sir, we spoke a lot.

GANESHPRASAD SRIDHARAN: And I would love to pick your mind sometime else, sir. Every time something becomes up, I will definitely bother you, sir.

PROF. ARUN KUMAR: Okay. Thank you so much, sir.

GANESHPRASAD SRIDHARAN: Thank you so much.

PROF. ARUN KUMAR: Thanks.

Related Posts

• Paulo Nogueira Batista: Decline of the IMF & Rise of the BRICS New Development Bank (Transcript)
• Ex-BlackRock Insider Reveals The Next 2008 Financial Crisis (Transcript)
• Transcript: CEA Dr V Anantha Nageswaran on Growwing India Podcast
• Transcript: Business Expert Natalie Dawson on DOAC Podcast
• How Experts Break Down Crypto Price Volatility in Educational Presentations