PSU 2.0 to take on Chinese imports

Aunindyo Chakravarty

Senior Economic Analyst

It is now widely accepted that India is facing the mother of all demand crises. Our factories are running at way below capacity, because people don’t have enough money to buy the goods they produce. From politicians to pink-paper pundits, corporates to columnists, everyone agrees that the only way to stimulate demand is to put money in the hands of the poor, so that they buy things. The quibble is over what route to take — whether to invest in infrastructure and MGNREGA to create jobs, or to directly hand over cash to people in the form of a dole or universal basic income.

Spending by the Indian Government will fatten the bottom lines of Chinese companies.

But none of these will move the demand needle even marginally. The Modi government’s supposed infrastructure push in the latest Budget will add just Re 1 per person per day to the income of the poorest 20 per cent of Indians. One can double that amount, and still, almost all of this additional income will go to add some nutrition to the very basic food India’s poor eat.

So, is giving cash directly to the poor a better option? A simple thought experiment will give us the rudiments of an answer. In 2013, a UN report estimated that a very simple meal — dal, chawal, onions, tomatoes and vegetable oil — cost Rs 13.50 in India. If one uses that to calculate the present, inflation-adjusted, cost of three meals today, it comes to a daily expense of about Rs 50 per person.

Comparing that to the average per capita income estimates that one can derive from the World Inequality Database (WID), we can safely say that the bottom 10 per cent of Indians cannot afford even the simplest of meals. The only way they can survive is if they get free food. The next 10 per cent also need food subsidies to sustain any other essential expenditure, and those between the 20th and 40th income percentiles can afford some additional nutrition, but have almost nothing left to spend on shelter, health and education.

Any extra money that they get will be spent, first on food, and then on essentials required for subsistence. Hardly a trickle will flow into consumer goods. If there is anything left after meeting essential expenses, it will be used to buy the cheapest possible products — cellphones, batteries, clothes, shoes, clocks and watches — all produced in China. In other words, spending by the Indian Government will fatten the bottom lines of Chinese companies.

The biggest reason for this is that our companies — whether in services or manufacturing — mostly cater to the top 10 per cent of Indians. Even when they speak of expanding beyond that space, they probably look at a catchment area of another 20 per cent. The only major exceptions here are the telecom service providers who have a very wide reach. But telecom services have been affordable till now because of the pricing war between two giants, and the bulk of the earnings for these companies comes from the top 20-30 per cent of users.

The bulk of our companies have reached the limits of the consumer base they can address given the costs of their products. And no amount of government spending can raise the remaining part of India’s population to a consumption level where they can afford to buy goods and services produced by the big Indian companies.

The only way to deal with this problem is to accept, even if for the short term, that India is divided amongst the affluent and the extremely poor. Government policies need to be bifurcated to address the economic crises these two Indias are currently facing. It will have to begin with the bottom half of Indians who cannot afford to buy basic consumer goods, and even when they do, they buy cheap Chinese products which have flooded the market.

The only way to provide goods and services to the poorest people is for the government to produce them. The public sector focused on heavy industries, electricity and infrastructure, when India became independent. We need a public sector 2.0 now, which focuses on producing cheap, utilitarian, sturdy goods and no-frills services that India’s poor need to improve their standard of living. A large part of the cost of the organised private sector is design, sales and marketing and mega pay packets of top managers.

When the government produces consumer goods — hair oil, soaps, shampoo, toothpaste, batteries, cellphone-chargers, bulbs, shirts, saris, footwear — it can cut out many of the non-core costs. Even after that, the government might have to provide budgetary support and arrange for cheaper financing for PSUs that produce for the poor, so that they can compete against Chinese products.

More importantly, the move away from finish and design will allow these PSUs to run labour-intensive production processes. The focus has to be on maximising employment rather than profits. People need to be given jobs at decent wages so that they can afford to buy the goods and services they produce. It will mean running high central deficits for several years, but the virtuous cycle of income and demand that it will unleash will ultimately generate more taxes and help reduce government debt.

The production of goods and services for the poor will also have a multiplier effect on the production of goods and services for the affluent. Firstly, the government sector will buy inputs from the organised corporate sector. Secondly, there will also be new white-collar jobs in the government sector — both in PSUs and in administration. These people will not buy the cheap, sturdy and utilitarian products that the government produces. Instead, they will help expand and reproduce the market for high-quality goods and services that India Inc. produces for the top 20 per cent of Indians. Thus, the government’s active role in producing for the poor, will end up solving the demand problem for the organised corporate sector as well.

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