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More rich people but no respite from demand shortage

The newspaper report about these projections of NCAER does not however, mention whether there is an assumed growth rate of the country's gross domestic product (GDP) as the basis for the estimate. One number, of course, is evident in the projected increase in the one-million income group: for any number to double in five years, the growth rate has to be 14 per cent. So, this income-group is slated to grow at an average rate of 14 per cent per year during the five years beginning 2001. The rate in the case of 50-million-plus will almost be the same.

Surely, that is not the assumed GDP growth rate. That rate has to be lower, and going by other projections of NCAER, not more than 7 per cent anyway. Which implies that, in 2006, these two income groups together, - about 0.33 per cent of the total Indian population - will earn about 3.6 per cent of total income of all Indians at current price. That is not something terribly extraordinary, and seemingly better than what it was in 2001. In 2001, 0.16 per cent of population earned 3 per cent income. Thus, in 2006, a slightly higher share of income will go to a much larger share of population. On the whole, however, highly uneven distribution of income is known to have been a regular characteristic of growth during the reform period, particularly since the mid-nineties. And that precisely has been one of the problems facing the economy for the past several years.

Insufficient domestic demand for industrial products and many services, everyone agrees now, is the main problem. The economy has created a much higher capacity to produce than what can be translated into actual production and sold. That is why private investment is as shy as it has been. But, the next question to ask is: insufficiency of demand for which products? Products which are bought by the overwhelming majority or those bought by a small percentage of people, or a mix of both? It becomes a mix in extreme situations like the one prevailing today, when one the one hand, foodstocks are rising despite a low growth rate of foodgrain output, and on the other, passenger cars are remaining unsold even after all kinds of price and credit incentives given to car buyers. Logically it means that the poor's food intake is not increasing, while the number of car buyers from upper-middle or upper-income groups is not adequately going up.

NCAER's projection of the rising number of potential car-buyers (who also buy many other durables) does not present a very promising picture either. It projects an eight per cent growth in car production, partly on the basis of its projections of the number of income earners in different income groups. Growth rates of many other durables also are projected at a higher level because of similar change in the size of various income groups. It has a fairly bright scenario of rural demand in view also, though it says that rural demand requires a significant expansion of power supply for its accomplishment. What it does not try to find out is what will happen to the vast masses, at least half of the population, which cannot afford to buy much of industrial products including essential items like textiles for daily use, medicines, processed food, soaps and detergents, or even edible oils.

This emphasis on durables or not-so-essential goods for estimating domestic demand is the source of the most important problem, the problem of aggregate demand. The idea that a reasonably good growth rate in the output of such products can take care of the necessary growth in demand is based on the assumption that these are the product groups which can yield a good rate of profit by virtue of what is called supernormal profit via high margin over cost and that it is here that entrepreneurs are keen to invest.

Experience on the other hand, has repeatedly proved that mass consumption goods or what is called wage goods alone can form the stable basis for a minimum rate of demand growth.

That is a hard truth, and not so palatable for most industrialists or reform ideologues. Because a good home market for essentials requires not only a particular kind of product-mix, but also a corresponding structure and growth of employment at fair wages. Each product-mix has its own technology mix as well, and the latter determines the level of employment for a specific size of investment. What has been happening, especially in the organised manufacturing sector, is an ever-rising level of investment for a particular level of employment.

As its unavoidable consequence, employment generated by say one per cent growth in output, has been declining. No wonder, it is declining employment growth which has today turned out to be the most serious obstacle to investment.

Even the assumption that middle-income and upper-middle income groups will grow larger in number, which is what NCAER has been trying to impress over the last few years the problem of demand will not be sold. Simply because the number of such people can never be large enough to take care of a stable demand growth for the chosen durable goods. Some noteworthy rise in sale may take place in a year or two, or even three consecutive years, but thereafter the point of saturation will be reached. The paradox is that any change in the desired direction is severely restrained by economic policy itself.