TRICKLING OUT - The earnings from the IT boom are unlikely to percolate down

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By Cutting Corners - Ashok Mitra
  • Published 28.03.08

The fate of man! Thomas Robert Malthus, the late eighteenth-early nineteenth century parson- turned-economist, earned his renown for the wrong book altogether. The assertion in his Essay on the Principle of Population as it Affects the Future Improvement of Society — population grows at a geometric rate while resources to sustain the people grow only at an arithmetic rate — was seemingly smart; it did not pass the test of time though. The gloomy doctrine nonetheless ensured Malthus’s place in history, while his much more interesting contribution to economic theory, buried in the Principles of Political Economy, remained without appreciation for a full century until John Maynard Keynes reinterred it in the Twenties.

It was the tail end of the feudal era, agriculture was still the principal component of national output, over-production resulting in a glut was a matter of concern for contemporary economists. Malthus chipped in with a suggestion on how to avoid gluts. ‘Conspicuous consumption’ on the part of the rich was, in his view, the answer to the prayer. Once the affluent classes begin to spend their money on engaging domestic servants, buying luxury textiles and jewellery, building mansions, fox-hunting and so on, a huge quantum of purchasing power would be generated in the economy, thereby giving a fillip to ‘effectual demand’; the rise in ‘effectual demand’ would eliminate the threat of glut.

Emerging capitalism made short shrift of such species of economic theorization; the Malthusian concept of conspicuous consumption was, as a result, despatched to cold storage. It was left to Keynes to find something salvageable in the Malthusian mode of thinking. Britain was in economic doldrums in the late Twenties and early Thirties, ‘effective demand’ for goods and services was low, pushing down employment, thereby further adversely affecting effective demand. There had to be a way out of the nightmarish situation. Keynes latched on to the Malthusian diagnosis; the need was to raise effective demand, but his prescription differed from the parson’s. Not conspicuous consumption by the rich, but public works. Financed by deficit budgets, they would, Keynes was convinced, shore up effective demand and save Britain. His advice was accepted and followed not just in Britain, but in the United States of America too.

Both Malthus and Keynes are now outré, perhaps Keynes more than the scholar cleric. Malthus’s idea of conspicuous consumption has actually made a reappearance in, of all places, India. About everybody who matters in this neighbourhood is agog over the prospect of the 9 per cent rate of growth in the country’s gross domestic product coming to stay. This rate of GDP growth is next only to China’s; the rest of the world has been left far behind. Even so, something rankles. Despite this extremely high rate of gap growth, close to one-third of the national population continue to live below the poverty line; not more than 15 per cent of the nation has been benefiting from the spurt in GDP growth. Overall employment in the economy has come to a standstill. Data for the organized sector indicate that employment in public enterprises has barely held its own in the course of the past decade; it has, in fact, declined in the domain of private activities.

This sort of development should not cause any surprise though. Liberalization calls for a systematic endeavour to cut costs in all arenas so as to make domestic goods and services internationally competitive. The most obvious means for economizing on costs is to pare down expenditure on labour through substitution of relatively more labour-using technology by relatively more capital-intensive technology; low interest rates help such substitution. There is little use, therefore, complaining of jobless growth. Joblessness is an integral aspect of the process that is yielding the dizzy rate of GDP growth.

This outcome is, however, politically inconvenient. Those shut out of jobs might behave in a quixotic manner at polling booths. The possibility poses a dilemma. But the GDP growth fetishists have found a way out of it. They have, in a manner of speaking, rediscovered Thomas Malthus and his theory of conspicuous consumption. Yes, it is true, only around 15 per cent of the nation are in the first instance benefiting from the fruits of accelerated GDP growth. There is however such a thing as indirect benefits. The direct beneficiaries of the GDP explosion will hopefully spend their larger earnings on various items of consumption, including food and other durable and non-durable consumer goods and services. The enlarged effective demand for these goods and services will necessitate extra investment for expanding the capacity to produce them, thereby ensuring more employment, which in turn will create even further demand for goods and services and therefore further employment, and so on down the line. Which is to say, income and employment will trickle down from the lucky 15 per cent to the rest of the nation.

Unfortunately, no empirical evidence is yet forthcoming to indicate that any such trickling down process is at work. Those suddenly turning rich, common sense suggests, would usually spend a substantial part of their larger earnings on stock purchase, buying real estate, and luxury consumption. Such types of spending do not per se contribute to the percolation of income downstream. Transactions in real estate as well as in the share market generally imply transfer of money from one set of relatively wealthy people to another similar set. And since the economy is now fully liberalized, expenditure on luxury consumption tends to have a high import content, so much so that it generates relatively little extra demand for domestic goods; the creation of new jobs within the economy is accordingly very modest.

Consider the case of by far the fastest expanding segment of the Indian economy — the information technology-related services — growing at the rate of 35 to 40 per cent per annum in the more recent years. The bulk of the earnings from these services originate from export. Way back in 1991-92, the first years of the so-called economic reforms, exports of IT-related services were only $ 2.1 billion; these exports soared to $ 11.6 billion in 2001-02 and further on to $ 58.4 billion in 2006-07.

Now take a look at another set of data, this time relating to the import of petroleum and petroleum products. These imports were $ 8.6 billion in 1991-92, $ 20.3 billion in 2001-02 and $ 83.3 billion in 2006-07. Over the 15-year period (1991-92 to 2006-2007), while export earnings from the IT-related services have gone up by more than $ 55 billion, the import of petroleum products has shot up by nearly $ 75 billion. Will it be unfair to suggest that the steep increase in the import of petroleum and petroleum products has a direct connection with the pattern of expenditure that arise out of the sharply-rising export earnings from IT services? The demand for petroleum and petroleum products has skyrocketed, it can well be maintained, because a substantial part of the astronomical incomes generated in the IT-related units has been deployed to buy automobiles, which are great gas-guzzlers, as well as other luxury consumer goods for the output and marketing of which petroleum products are again much in demand.

There is really no need to travel further a-field. The data cited being what they are, it would need some daring to claim any major percolation into the domestic system of the earnings from the IT-related services. Such earnings — the odds are overwhelming — have been largely dissipated on types of expenditure that create a spurt in imports.

Malthus would have been, alas, at sea negotiating the complications of an open economy.