No. 68, June 2017

No. 68 (June 2017)

Widening the Gulf

I. Two Worlds

Many useful articles been written about the recent demonetisation, perhaps the most discussed economic event in India in recent times. The entire discussion has brought to the fore many aspects of India’s economy. Among them is an important theme that we have emphasized in earlier issues of Aspects: Namely, the gulf between different sectors of the economy. This gulf has economic and political implications.

This gulf can be seen in many measures, which are expressions of a single reality: the gap between the income of the ‘informal’ (‘unorganised’) and ‘formal’ (‘organised’) sectors; between rural areas and urban areas; between the sectors producing commodities (agriculture, manufacturing) and the services sector; between income-poor regions which are rich in natural resources and other regions where income is concentrated.

The gulf is also within each sector, between the activities which make up most of the employment, and the activities which have most of the income. For instance, what is termed the ‘services sector’ encompasses both the courier delivery man and the captains of the financial world; ‘urban areas’ include the most miserable squalor and the most obscene wealth; mining regions are the homes of destitute tribals as well as the fiefdoms of mining barons. Thus when we talk of any of these categories or regions we need to be clear which sections and activities we are discussing.

The perverse course of ‘development’ being pursued by the economy, far from narrowing this gulf, keeps reproducing it and expanding it, by transferring not only surpluses but even, increasingly, natural assets (which are not reproducible) from the informal sector to the formal sector. This process substantially explains the dramatic growth of inequality in recent years.

While the current policies are touted as ‘formalising’ the economy, in fact thoroughgoing formalisation (which critically involves formalising employment and its terms) is not on the cards. Instead, policy measures that, within the existing framework, increase the share of formal sector firms (corporations) in the economy actually increase the incomes of the cream of the formal economy, without increasing employment in that sector. At the same time, they depress the incomes and employment of the vast majority in the informal sector. Thus we find that:

(i) the share of the organised sector in national income (GDP) has risen from about one-third in the 1980s to well over half today; but

(ii) within that organised sector GDP, the share of workers’ wages has collapsed, causing the share of profits to rise correspondingly;

(iii) more than half the workers in the organised sector are now informal workers (contract, casual, etc); and

(iv) the unorganised sector still accounts for the overwhelming majority of jobs – i.e., a growing number of workers in this sector have to share a shrinking percentage of national income.

The entire discussion on this question betrays how (i) the very methodology of estimating GDP disregards or discards the masses of working people, and (ii) the extent to which GDP itself has been fetishized, and has replaced discussion of the actual condition of the people. This effectively diverts from the real processes of exploitation and appropriation taking place.

(i) Methodological obliteration of the vast majority of working people
Take the Central Statistics Organisation (CSO’s) Second Advance Estimates of GDP for 2016-17, particularly for the third quarter (October-December 2016). This has been much touted by the official and corporate mass media. According to these Estimates, demonetisation had a very limited impact on the economy. Earlier, in its “First Advance Estimates”, which were made without taking into account the effect of demonetisation, the CSO had put GDP growth in 2016-17 at 7.1 per cent. Now, in its “Second Advance Estimates”, after taking into account the effect of demonetisation, the CSO came up with exactly the same figure, 7.1 per cent, which would suggest that such a sweeping measure had virtually no effect on demand and productive activities. The Prime Minister and his cohorts promptly adduced this statistical miracle as proof that his critics were wrong.

We will not discuss here the details of this GDP estimate, and how it is suspect/rigged, as various authors have pointed out.1 In his speech in Parliament, Manmohan Singh had estimated that GDP growth might have suffered a loss of two percentage points as a result of demonetisation, and it appears that his guesstimate was not far of the mark, the CSO’s latest estimates notwithstanding. In relation to our topic here, however, two points are worth noting.

Firstly, that the existing method of calculating the GDP of the informal sector cannot in fact measure the impact of any such event on the that sector. The official machinery gathers direct observations regarding the non-agricultural informal sector only at longer intervals, through National Sample Surveys. For regular GDP calculations, formal sector indicators (which are more easily and promptly available) are used to indirectly estimate the informal sector output.  For example, organised sector steel and cement production are used to estimate output of the unorganised construction sector; sales tax revenue to estimate unorganised trade; and so on. As such, when any event takes place which deviates from the usual pattern of relationship between the organised and unorganised sectors, with a very different impact on the two sectors, the present methodology cannot capture the effect of that event on the informal sector. (In fact, not only is the impact of demonetisation different for the two sectors: part of the reduction in sales of the informal sector actually benefits the formal sector by expanding its share of the market. Hence attempting to measure the impact on the informal sector by using measures of activity in the formal sector would lead to an even greater overestimation of the size/growth of the informal sector.)

This methodological flaw is admitted by the official Economic Survey 2016-17 itself. On the one hand, it acknowledges that the costs of demonetisation have been “real and significant”, particularly in the informal sector:

Clearly, the cash crunch must have affected the informal economy, which depends heavily on bank notes for its transactions and has been estimated to account for nearly half of the overall economy. This may even be an underestimate if consumer payment transactions [68 percent of total transactions by value and 98 percent by volume] were in any way indicative of the extent of cash-dependence of the economy in production. (p.72)

At the same time, it actually admits that, in effect, we will never get accurate data on the extent of this impact:

Recorded GDP growth in the second half of FY2017 will understate the overall impact because the most affected parts of the economy—informal and cash-based— are either not captured in the national income accounts or to the extent they are, their measurement is based on formal sector indicators. For example, informal manufacturing is proxied by the Index of Industrial Production, which includes mostly large establishments. So, on the production or supply side, the effect on economic activity will be underestimated. (p. 19; emphasis added)

Yet it is this same informal sector that accounts for the overwhelming bulk of non-agricultural employment; and it is through their income from employment that most people get food and other necessities of life. So to underestimate the effect of an event on the informal sector is to simply disregard the condition of vast masses of people. Even after more complete data from the formal sector are incorporated into later Revised and Final Estimates, they will not take into account any direct observation of the non-agricultural informal sector for this specific period, since such data are not to be gathered.

The response of the Chief Statistician of India has been that estimates can only be made on the basis of available data, and data are available only for the formal sector, so the estimates for the informal sector have to be made on that basis. (This recalls the old joke about economists being like a drunk who hunts for his key around a streetlight. In the joke, another man joins the drunk in the hunt, and asks: “Where did you drop it?” The drunk says: “Across the street”. The other man asks: “Then why are you looking for it here?” The drunk replies: “The light is much better here.”)

The whole point of estimating national income, or GDP, is (or at least should be) to measure the prosperity of the nation – the material well-being of its people.2 Thus a methodology is useless if, by its very nature, it cannot properly capture the condition of the sectors where most people are employed. Any responsible statistical machinery would have undertaken special efforts to capture the impact of demonetisation on incomes of the vast majority affected. For example, the All India Manufacturers’ Organisation, an organisation representing small manufacturing units, carried out a survey of its members, and found that they had experienced a 50 per cent fall in revenue and 35 per cent loss in employment as a result of demonetisation. The official statistical machinery could certainly have generated more systematic data had it wanted to do so.

(ii) Fetishization of GDP
Further: If GDP growth actually fell as much as Manmohan Singh estimated, i.e., by 2 percentage points, that would still mean the economy did not contract, but actually grew at, say, 5-5.5 per cent. This amid what was, for the vast majority of working people, a dire emergency, when large numbers lost work, peasants had to sell crops at depressed prices and take loans from usurers, innumerable families of daily wage earners went hungry, and so on. How was it possible for the economy to grow amid such distress?

One answer might be that the economy, in reality, did not grow, but contracted, at least in the third quarter. Indeed, some organised sector industries did experience an outright contraction during demonetisation. Two-wheeler sales fell a steep 22 per cent in December, cement despatches fell 9 per cent, and home sales fell a reported 40 per cent.3 Outstanding bank credit to industry fell by 4.3 per cent in December 2016.4 The sales growth of fast-moving consumer goods (such as soap, sugar, tea, etc) fell from from 9.9 per cent in October to 2.7 per cent in November and 3.5 per cent in December. (In fact sales volumes growth in the two months was -1.5 per cent and 0 per cent, respectively.)5 It should be noted that in some of these cases, organised sector suffered the knock-on effects of a sharper decline in the unorganised sector – e.g., as the incomes of unorganised sector workers shrank, they bought less consumer goods from the organised sector. Consumption of vegetable oil, which has been rising steadily by 3 to 4 per cent a year, appears to have declined outright in the period of demonetisation, indicating a reduction of food intake by the poor.6 (The finance minister glibly assures us that consumption expenditure forgone in the period of demonetisation was merely deferred to a later date, but  obviously food intake cannot be ‘deferred’; it is merely lost.) On the other hand, an analysis of 1700 companies listed on the share markets showed sales in the October-December period grew by over 9 per cent, with profits expanding 20 per cent.7 Unsurprisingly, sectors in which cash transactions are lower did better. Steel output is reported to have grown by 15 per cent, power generation grew by 6 per cent, and refinery output by 6.4 per cent. Domestic air passenger traffic grew 22 per cent in November 2016, 23 per cent in December 2016, and 24 per cent in January 2017.8 Passenger car sales, the Economic Survey points out, bear little imprint of the demonetisation. Defending Modi’s demonetisation decision, the well-known NRI economist Lord Meghnad Desai, argued that “Daily casual workers suffered as and when cash dried up, but again they are marginal to the economy. It is in the nature of their work that there are days when they don’t find employment, even if cash is not short.” (emphasis added)9

On the one hand, this seems a bizarre statement: the Socio-Economic and Caste Census (SECC) of 2011 found that in the rural areas, for 91.6 million households (i.e., 51 per cent), the main source of household income was “manual casual labour”. To this we have to add the figure of urban casual labour households.

And yet Desai is merely pursuing the logic of GDP fetishization to its logical conclusion. For even the combined income of this vast mass of labourers is not very large, precisely because they live by hard labour. The same SECC cited above informs us that, for nearly 75 per cent of rural households, the income of the highest earning member was less than Rs 5,000/month in 2011. Thus even if all rural casual labour households were to lose the entire income of their main earner for a month, the sum would amount to perhaps half a percentage point of GDP.10

Such a loss would be terrible for these casual labourers, who lack savings, and must earn in order to buy food for the day; but in Desai’s warped system of values, which are indeed the dominant values today, this loss would be “marginal”.

What this tells us is that the type of ‘growth’ celebrated by the ruling classes today can even proceed, to a certain extent, amid the outright contraction of the livelihoods and consumption of the majority of people. There are, no doubt, limits to the extent to which these two trends can move in opposite directions; but the very fact that it can happen at all is remarkable. Moreover, corporate chieftains, with very few exceptions, voiced support for the decision to demonetise, even though sections of the corporate sector suffered a temporary dip in sales. 

The two worlds are linked
Indeed, demonetisation has cast a harsh light on the economic and social underpinnings of the Indian economy and its ‘growth’. During the month of December, sections of the press began to portray conditions in these dispersed, struggling sectors where most of our people labour and suffer. Their pages unfolded a vast panorama of peasants, farm labourers, potters, leather workers, powerloom workers, garment workers, knitwear workers, shopowners, all sorts of petty vendors, rag pickers, restaurant workers, artisans, construction workers, lock factory workers, cycle factory workers, beedi workers, plantation workers, fisherfolk, lorry drivers, and many, many others.

The rulers, their academics and their media have for years been painting pictures of a booming and modernising India, a land where the ‘middle class’, supposedly hundreds of million strong, fuels e-commerce, automobiles and air travel. Now we are rudely reminded that the overwhelming majority toil in the informal sector, in fields, sweatshops, construction sites, or often in micro-enterprises of just one or two workers, to earn a bare subsistence; that they lack savings and all security of livelihood and income; that any sudden calamity, such as the present one, can plunge them into such distress that they are driven to discontinue or reduce production, migrate, borrow from sharks, sell assets, and so on, merely in order to survive.

There are, then, two worlds within one country. But neither are they independent of each other, nor is the flourishing one steadily drawing the backward one into its fold. Rather, the flourishing economy actually runs on the labour of the backward sector, and perpetuates the divide. This relation holds even for sectors that seem to be far removed from such manual labour, and connected rather to the global economy. The goods and services created in all sorts of miserable sweated work keep down the costs, and therefore wages, of workers in other sectors, and thus ultimately pad the profits of the corporate sector. Dalit contract workers who clean the muck from the roads and sewers, bare-bodied and for a pittance, help keep down Government spending and thereby the taxes to be paid by the wealthy. And even the cream of corporate industry procures all sorts of goods and services directly from these backward sectors – these are the ‘value chains’ celebrated in the business press today.

Thus the sweat and blood shed below gush up through multiple channels and congeal as gold. Yet the summit of this social pyramid is somehow kept free of the stench and torment of the world below.



1. Prabhat Patnaik, “The Latest GDP Estimates”, People’s Democracy, 12/3/2017; Jayati Ghosh, “Quarterly GDP Estimates: Curiouser and Curiouser”, Quartz, 2/3/2017; V. Sridhar, “GDP Conundrum”, Frontline, 31/3/2017. (back)

2. No doubt, there are limitations to GDP as a measure of well-being, which have long been known. (back)

3. Aarati Krishnan, “Demonetisation and the GDP: Knock-out punch or mild tap?”, Hindu, 7/3/2017. (back)

4. Reserve Bank of India, “Sectoral Deployment of Bank Credit – December 2016”. The growth figures are December 23, 2016 over December 25, 2015. (back)

5. Viveat Susan Pinto, “Demonetisation impact: FMCG growth tanks in Nov-Dec”, Business Standard, 10/2/2017; Soumya Gupta, Sapna Agarwal, “Consumer goods firms on recovery path after demonetisation downturn”, Mint, 6/3/2017. (back)

6. Dilip Kumar Jha, “Veg oil import may fall first time in 6 years”, Business Standard, 25/3/17. (back)

7. Krishnan, op. cit. (back)

8. IANS, “India's domestic air passenger traffic up 25% in January: DGCA data”, Business Standard, 18/2/2017. (back)

9. Meghnad Desai, “Out of my mind: Political economics”, Indian Express, 5/3/2017. Desai informs us that “The poor queue up, find things are not available, suffer losses all the time.” (back)

10. That is, 9.16 crore rural casual labourers x Rs 5,000 = Rs 45,800 crore, or 0.5 per cent of GDP of 2011-12. (back)


NEXT: Growth that Reproduces Backwardness


All material © copyright 2017 by Research Unit for Political Economy