Siddhartha Ahluwalia 0:00

So, India is set to become the fourth largest economy, inching towards roughly $5 trillion. What is the real number today?

Arun Kumar 0:06

If the economy is growing at 6.5-7%, then of course, we are going to be the fourth largest, right? The errors in the government’s data is also in the IMF’s data.

Because we are growing only at about 2%, not at 6.5-7%, we are about 42% less than the official. So, instead of being about $3.8 trillion, we are probably only about $2.5 trillion. So in other words, we are still the ninth largest economy.

Why is India crossing Britain and then crossing Japan and so on? Because we are a huge population. So what we needed to do, like China did, to expand rapidly in R&D, they spent today 3% of GDP on R&D, we spent 0.65%. So that’s why they become the manufacturing hub. So our tax-GDP ratio is very low.

Siddhartha Ahluwalia 0:48

But taxes are high in India.

Arun Kumar 0:50

That is a misnomer.

You see…

Siddhartha Ahluwalia 0:57

Hi, this is Siddhartha Ahluwalia, your host at Neon Show, and also managing partner of Neon Fund, a fund that invests in the best of enterprise AI companies built from India for the globe. Today, I have India’s one of the top economists with me, Professor Arun Kumar. Welcome for the second time on the Neon Show, sir.

So glad to have you back again. First time we discussed a variety of topics from black economy to GDP, you know, the concerns in the GDP, right, and the formal sector versus informal sector. The podcast was really popular.

It got half a million views, like more than 5 lakh views on Neon Show, a one and a half hour conversation. And this is a sequel to that episode going into more details. So let’s start with GDP per capita, you know, and there are two ways to look at GDP per capita right now in Indian economy.

One hand, the government projections driven by Finance Ministry, IMF and World Bank, India says to be the fastest, among the fastest growing nations globally, with consistent 6 to 7.8% GDP growth every year, you know. But on the other hand, what is happening is the real per capita consumption is only growing 3 to 3.5%. So where is this gap like, why is the consumption not growing with the GDP, right? And also want to understand from you, when GDP of India grows by 1%, so this is for people watching the podcast.

How does that actually translate into people’s life, does it lead to better jobs, higher income and affordable housing?

Arun Kumar 2:33

So thank you Siddhartha for having me again. I’m glad that the first one, even though it was long, you know, you had so many views. So that shows how much curiosity there is amongst people to know what the reality is.

So as we discussed in the earlier program, our GDP is not growing at the rate at which the government is saying, because that’s the rate at which the organized sector is growing. That’s not the rate at which the unorganized sector is growing. And as we had discussed, the unorganized sector has been hit hard because of demonetization, the structurally faulty GST, the NBFC crisis, and then the pandemic.

So in fact, actually the unorganized sector is declining. So our rate of growth is not 6-7%, as the government would like us to believe. But since demonetization, the average may be 2% or 1.5% or something thereabouts. But because the data that we take is largely from the organized sector, so we keep getting this data. Now that explains a lot of things. Because you see, if unorganized sector was growing, then people’s income at the lower run, they would be growing.

And then that consumption demand would also be there. If they are declining, then naturally they are the ones, because unorganized sector 94% of the total employment. So if their incomes are declining, then naturally consumption would be affected.

And the rich consume only a small part of their income. The poor consume almost the entire income. So if the income distribution is shifting in favor of the organized sector and the better off segments, then the consumption rise would be slow.

So that is the reason why, you know, the data that you mentioned. So that’s the official data. But actually, what is happening is that because of the problems that the poor people are facing, the government is forced to give free ration 5 kilos to every individual in the lower category.

So about 800 million people are getting that. So their consumption is being maintained by the fact that the government is giving them. It’s not because they are earning more and therefore they’re able to consume more.

If they were earning more and were able to consume more, then the government would not have had to give this 800 million people 5 kilos of ration every month. Now within this also, the really poor apparently don’t get covered because they’re not in any formal system. They’re not able to register and so on.

So many of the really poor, they’re not getting that. Now when we look at the consumption data that comes from the government, there are two components that are missing. One is the really rich.

They don’t get captured properly because they’re very small, 1 or 2% of the Indians are rich. And then the bottom 20% who are the really poor, the government enumeration and the government surveys, etc., are not able to fully capture that. So the data is not only faulty in terms of GDP, but also faulty in terms of consumption data.

But it stands to reason that if the unorganized sector is declining and the organized sector is the one that’s rising, then the consumption will be growing slower than the GDP growth. So that would explain it. Second is that you see in India, we have a very large black economy.

The black economy is concentrated in the hands of the well-off segment, the top 3%, right? They’re not going to increase their consumption much. Whatever consumption they were doing, they’d be consuming.

So that also doesn’t boost consumption very much. And the people at the bottom, they suffer because they have to pay a bribe, they have to do other things. So their income becomes less than what apparently is their income.

So there are several of these factors because of which we find disparities increase because the organized sector, unorganized sector, that split leads to greater disparity. The black economy also adds to that disparity. So that’s why India has huge disparities, okay?

And our GDP, you know, doesn’t reflect much of this because the official data is not catching that.

Siddhartha Ahluwalia 6:43

So my next question is, right now, recently in all the economic surveys, India is set to become the fourth largest economy if you observe in the last few months, right? So probably inching towards roughly $5 trillion. What is the real number today?

Arun Kumar 7:01

So you see, as I was saying, if the economy is growing at 6.5-7%, then of course, we are going to be the fourth largest, right? We would cross Japan by the end of this year. So it’s a misnomer to say that we’ve already crossed according to IMF projection based on the official data.

And IMF only takes the official data. IMF doesn’t make correction for the unorganized sector’s decline. So the errors in the government’s data is also in the IMF’s data.

But be that as it may, if you take the IMF data, there also we are only going to be ahead of Japan by 0.014%. So it’s a very tiny increase that we’ll have. Now there are so many uncertainties. Suppose the inflation rate kicks up more in India than in Japan, then it won’t happen.

Suppose the rupee gets devalued more than the yen, then it won’t happen, right? So there are many reasons why it may not happen by the end of this year. Second is that because we are growing only at about 2%, not at 6.5-7%, we are about 42% less than the official. So instead of being about $3.8 trillion, we are probably only about 2.5 trillion. So in other words, we are still the ninth largest economy. We are not the fourth, or we will not be the fourth largest economy.

We are not yet the fifth largest economy. So these corrections have to be applied. Second is that in per capita income terms, we are still about the 140th in the world.

Whereas Japan is 33rd. So what we need to see is that why is India crossing Britain and then crossing Japan and so on? Because we are a huge population.

Our population is 12 times greater than that of Japan, right? So because of this large population, even though our per capita income is small, we are able to cross. So crossing the GDP, Japan’s GDP, and becoming the fourth largest doesn’t mean that the poor are doing very well.

It’s simply the large numbers. Secondly, the disparities in Japan are much less than in India. Japan doesn’t have that many billionaires, okay?

So its income is equally distributed, you know, not equally, but better distributed. India, the distribution is very skewed in favor of the rich. So we have the third largest number of billionaires.

Even though in per capita terms, we are at 140th place, so having the third largest number of billionaires means that the income is being skewed in their favor. The joke is, for instance, that if there is a stadium and Elon Musk and Jeff Bezos enter it, then the average income of the stadium would go up to $1 million. Whereas otherwise the average income of US is $80,000.

So having two super billionaires doesn’t mean everybody’s income is high. So in India, because of these high disparities, the poor people are poorer than what this per capita income really is. So the disparities are very high.

And that’s what the problem is, that we are not yet the fifth largest, we are not going to be the fourth largest, we are still the ninth largest, because our GDP is overestimated, because we are estimating it based on the organized sector data.

Siddhartha Ahluwalia 10:27

As you talked about poverty, but according to statistics, extreme poverty has fallen sharply from 27% in 2011 to 5.3% in 2022-23, a huge achievement, at least according to statistics from India. But the real wage growth tells a different story, like salaried workers have seen the real wage decline by about 1% per year over the past decade, while rural women wages have also fallen by 2.3% annually. So I’m not able to make sense of these two divides.

Arun Kumar 11:03

See India is a very diverse country. So we have to disaggregate everything. What we do is we try and aggregate a lot of things.

So first thing is that those who are salaried, they’re actually from the organized sector. Unorganized sector don’t really have a salary as such, they work for daily wages and things like that. So when we talk about salaried workers, their incomes are not rising, and the chief economic advisor said that while profits are rising, the wages are not rising in the industry.

So that also showed that disparity is rising. But when we come down to the unorganized sector, then it’s a somewhat different picture. And there, what this data that you’re quoting about poverty, that data is about this not poverty line data.

See poverty line data is different from this new thing that we have of multidimensional poverty line. So multidimensional poverty line is not the same as poverty. There, what we have are 12 parameters.

Broadly, you have education, you have health, and you have the welfare. Now what India did was we included two more parameters than what the UN had suggested. So instead of 10, we have 12.

For instance, what was introduced was number of people who have access to banking. Now we know the large number of accounts have zero balance or very little. So including that improves your standing.

But it doesn’t mean that on the ground is there any real change. Similarly, this data that is there for 2019 to 21 compared to 2015-16, we all know that in 2019-21, because of the pandemic in 2021, the economy declined. The students weren’t able to go to school.

Large number of people died outside the health centers and the hospitals. They couldn’t get oxygen, etc. So how can it be that you are doing better than you were doing in 2015-16?

So there’s something wrong with that data. I don’t buy that data. That multidimensional poverty, actually, very few people were poor, as you said, from 21% to 5% and so on.

Yeah.

Siddhartha Ahluwalia 13:31

27 to 5%.

Arun Kumar 13:32

27 to 5%.

So that data, something is wrong. You shouldn’t be comparing 2015-16 to 2019-21. And 2019-21 has this 2020-21, which is a pandemic year where the largest fall in the GDP took place.

So welfare would have gone down. We saw the distress. We saw the fall in education.

You know, the students couldn’t go to school. They weren’t learning. Your health was a problem.

So how can it be that it fell? So there’s something very drastically wrong with that. Second is, you have to define a poverty line.

You can’t depend on this multidimensional. Poverty earlier was based on the consumption that you’re making, right? So consumption keeps changing.

So how do you define poverty? Poverty is defined in terms of the social minimum necessary consumption. So at a given stage of society, what is the minimum necessary consumption that you should have?

So what was it in 1960 will be different from what it is in 1990. And what it is in 1990 will be different from what it is in 2012. And what is in 2012 will be different than 2025, right?

It can’t be that you use the poverty line of 1960 and 2025, right? That’s completely different. Because today, for a person to be not poor, you have to have proper education for children, proper health.

You need to have proper nutrition. And then you have to have other expenditures. Whereas what’s happened is, say, take for example, health.

Massive expenditure on health has increased because of environmental degradation. Now, so first the family has to fulfill the health need. And then they can spend on other things.

So actually, the poverty line is much higher today. It’s a moving target. It’s not as if you can fix it in 1990 and then compare it in 2025, right?

So this poverty line has to be raised. And today, for a poor person to have a mobile phone doesn’t mean that he’s not poor. Because mobile phone has become a necessity, you know, for communication.

You know, if they have migrated to another city, they need to be in touch with the family and so on, right? Things like that. So the poverty line is changing.

And that’s why if you go by the World Bank poverty line, which is $3 per person per day, then you know, that will translate to something like 30,000 rupees per month for a family. Whereas in the ISHRAM portal, bulk of the unorganized sector who are registered there, they’re saying that they’re earning less than 10,000 rupees a month.

Siddhartha Ahluwalia 16:09

And how much percentage of the population that would be in India?

Arun Kumar 16:12

So 90% of those who are registered, they’re saying that they’re earning less than 10,000 rupees per month, right? So unorganized sector, 94%. So you can say that 80% are below the poverty line of that.

And then what people do is they say, no, no, no, we have to measure it in purchasing power parity terms, not in nominal dollars. Now, purchasing power parity, so you make it one third. But even if you make it one third, still, these people, 80% are close to the poverty line if they’re not.

Then I have an objection. Why for poverty, we should not use purchasing power parity? The reason is very simple.

Why is it that a hamburger in the US is much more expensive than in India? It is because labor in India is much cheaper than there. Because we pay the wages, you know, there the minimum wage is seven and a half dollars.

But in many states, it’s $16, right? Now what one person earns there in one day, eight hours, a person will earn here in a month or two months, right? So why is it our hamburger is cheaper?

Because we pay very little to the worker and the worker doesn’t consume the hamburger. So there’s a double jeopardy. First because we pay very little, so we are better off in purchasing power parity.

But that applies only to the well-off segments. That doesn’t apply to the poor, where the poor is not consuming those things, right? So if we have a maidservant, a maidservant doesn’t have a maid at home.

So for the middle class and the upper middle class who have maidservants and so on, their rupee is more valuable than the dollar in terms of purchasing power parity as compared to nominal, right? But for the poor people, it’s a double jeopardy because they are getting little wage and they’re not consuming those things. So therefore, for poverty purposes, we should take the nominal dollar because everything that the poor people are consuming, you know, they consume very little like food items and energy and so on.

Those are international prices. Those are by nominal terms. So for them, the purchasing power parity should not apply.

So therefore, this is a trick that is played to show lower poverty. Actually poverty is quite acute in India. You know, their consumption of food is still a problem, especially nutritious food like proteins and oils and so on.

So therefore, you know, all this data, I have a problem with, which is that we who are well off, you know, we feel happy that, you know, we have raised people’s level and we feel that the poor should be grateful for that. Whereas we have not really been able to give them good education, health, you know, sanitation, good environment, you know, proper food, nutritious food, we are not able to give to them. And because of these statistics, we feel happy that, you know, we have done something good for them and that we feel that the poor should be grateful that they’ve got it.

Now that I think is a very self-serving kind of a thing. So we have to get out of this trap and recognize that, you know, for education, for instance, the annual status of education report which comes, it shows that 40% children in the age group of 14 to 18, they’re not able to read second-class textbook, they’re not able to do second-class maths, etc. So what kind of a good job can they get?

And especially now with AI coming, there’ll be even further this thing, there’s a lot of displacement that’s taking place and these will be the first to be displaced. So in other words, you know, various indicators, whether it be education, health, etc., they show that poverty is still acute.

Siddhartha Ahluwalia 19:56

But the start is that middle class also is growing under financial stress because house ownership has become unaffordable, house price to income ratio is at 11 nationally, far above the global benchmark of 5. And household debt in India has jumped from 32% to 37.6% of GDP since 2020, while household savings have decreased from 7.2% to 5.1%. So, what is happening with the middle class, like why are middle-class families now being forced into debt to afford basic things like a home, education, healthcare and retirement?

Arun Kumar 20:41

So you know, it all depends which segment you’re calling middle class. If you are in the organized sector, then you’re doing better off. But within the organized sector also, workers’ wages are not rising, the real wages.

So therefore, they come under stress. And most of the savings are done by the well-off segments. Most of the savings are not done by the poor.

If you’re not able to fulfill your consumption requirement, that means you’re not saving. You’re possibly dis-saving or you’re saving very little. So your lower middle class, your middle class has very little savings to fall back on.

And therefore, there’s distress amongst them. So as I said, you know, 2-3% would be well-off in the upper middle class, etc. Then maybe 5-6% would be middle class, and then another 10% would be lower middle class and so on.

So it’s this 10% lower middle class and the 5-6% middle class, they are the ones who are facing stress. Of course, the poor are facing stress, but these people are also facing stress because of this rise in inequality, the problem of unemployment. You know, the problem of unemployment impacts the middle class and the lower middle class acutely, because their children are not getting proper jobs.

So this rising unemployment is another factor which would burden the middle class. So for instance, they send their children to coaching in Kota, to Mukherjee Nagar or to Prayagraj and so on, right? And that involves a lot of expense.

Then if they want to get their children into engineering or into medicine, then there are capitation fees. So all this puts burden on the middle classes, and they go into debt, because if you have to pay a 1 crore capitation fee, you have to pay, say, 20-30 lakhs for engineering seat, etc. So how do you generate that?

So that causes stress. So this black economy, you know, is causing stress to them, because whatever work they have to do, they have to pay a bribe. So their formal income that they’re getting is not reflective of their standard of living.

So this black economy undermines the 97%. 3% earn a lot of black incomes, okay, because they’re in the position to be able to extract it. But the 97% are suffering and the 97% includes the poor, the lower middle class and the middle class.

So that is the stress to which our middle class is exposed. So they have to take more loans, they use the credit cards, and then they get into debt and so on and so forth.

Siddhartha Ahluwalia 23:23

And I want to understand from you, like you defined poverty as somebody who earns less than $3 a day in India?

Arun Kumar 23:30

By World Bank, international line.

Siddhartha Ahluwalia 23:33

So what would be the definition of the various classes based on the earning in India?

Arun Kumar 23:37

Now, that’s why I was saying that, you know, the well-off would be maybe, the really rich would be 1%, then the upper middle class would be maybe 2-3%, then the middle class would be 5-6%, then the lower middle class maybe 10%, and the rest would be poor, as per this definition of $3 per person per day.

Siddhartha Ahluwalia 23:59

But let’s say a middle class family in India earns 5-6 lakh rupees annually, where would they be placed in this bracket?

Arun Kumar 24:05

So this 5-6 lakh is below the taxable limit. So they would be the lower middle class. I think the middle class would be some like maybe 12-25 lakh.

Siddhartha Ahluwalia 24:17

And how do you define the upper class in India or the upper middle class?

Arun Kumar 24:21

Above 25 lakhs would be those who would be in the upper middle class. And the well-off would be, you know, a tiny fraction, maybe those are earning more than a crore or something.

They would be maybe 0.5% of the people.

Siddhartha Ahluwalia 24:39

So is this also in the last 10 years, social mobility in India, like the poorer are going to lower middle class, the lower middle class are going to upper middle class, and upper middle class are going to the wealthy that you described?

Arun Kumar 24:51

So you have to, again, look at the changing composition, you see, because the requirements are increasing. Even a poor family is forced to spend on health more because the environment is…

Siddhartha Ahluwalia 25:06

In spite of Ayushman Bharat and everything else?

Arun Kumar 25:08

Yes, because the environment is deteriorating. So they get dirty water, they get dirty air. So health problems, you know, like, for instance, there was a study of AIIMS, I think in 2002 or 2003, which showed that earlier children didn’t get asthma.

And by then, you know, when they did the study, 10% children were getting asthma. So right through their life, they were forced to take medication. So similarly, you know, intestinal disease is very high because we are not able to give clean water, drinking water.

So 70 to 80% diseases may be related to that. Then obesity is catching on, you know, diabetes is catching on because of the, you know, lifestyle issues. So all these things put together, basically, your health expenses are increasing dramatically.

Your education expenses, because people want to send their children to private institutions. So at least they can learn something more because the government institutions reputation is very bad. So there are some good government schools, but by and large, the standards are very poor.

Siddhartha Ahluwalia 26:12

So the other picture about India today is that macroeconomically, India is very stable, like the inflation is averaging around 5 to 6%, well within what government wants to control between 2 to 6%. And the other thing is, India has forex reserves of 650 billion dollars, which is among the highest in the world. The rupee is though depreciating, but the depreciation is also quite controlled today.

So public debt is around 81% of the GDP, but it’s mostly domestically financed. So according to you, how is India macroeconomically stable, unstable and where it’s going?

Arun Kumar 26:53

So you know, the picture that you get is from the organized sector, right? So as I said, you know, if you look at the poor people, they’re facing stress in terms of their education, children’s education, health, etc. Those don’t get captured in our data.

So that’s why it looks like as far as the macro is concerned, for the organized sector, the inflation rate is within control. Similarly, GDP seems to be going well because the organized sector is doing well. If you take the unorganized sector, then the GDP is not the fastest growing GDP.

And the IMF, World Bank, ADB data only takes the government data, doesn’t actually separately calculate it. So therefore, to say that, you know, we are doing well in terms of GDP, we are growing well, our inflation rate is under control, and that our debt, you know, is under control. Actually, debt is much higher today than it was five years back.

And it’s rising, especially the state’s debt is rising, because the state’s fiscal situation is deteriorating. So you know, China has a much higher debt to GDP ratio, USA has a much higher debt to GDP ratio. But those are different kind of economy.

There they don’t face the stress that we face of the unorganized sector. So therefore, we cannot compare ourselves saying that our debt to GDP ratio is only 75-80%, whereas US is more than 120%, and China is more than 200%, etc. We cannot make those comparisons.

We have to see what is our situation, because our tax to GDP ratio is quite low. It’s still only about 17 and a half, 18%. Now, if out of that a big chunk is going for interest payment and debt repayment, then what is left for development is very small.

Whereas, you know, tax to GDP ratio in the developed countries would be 25%, 30%, 35%, you know, much higher than us. So they have more leeway to pay interest and continue to do it. So we cannot make these direct comparisons.

Next, you said that the debt, India’s foreign exchange reserves are at a high, but that is built on capital flows. That is not built on our trade and current account surpluses. So that means it’s built on debt.

Capital flows represent debt, you know, NRIs are sending money, foreign institutional investors are sending money, but that money can go out. This is unlike China. China has huge reserves of about three and a half trillion dollars.

Those are earned basically on the trade surplus and current account surplus. That’s not entirely because of capital flows. So it’s not that tomorrow that money can go out.

So they’re in a comfortable position. And therefore, they finance things in Africa, they finance things under the One Belt One Road initiative, you know, and so on and so forth, right? So India’s position of $650 billion, our debt probably is of the order of about $700 plus billion.

So, we are vulnerable to, if the rupee starts depreciating, then there’ll be a capital flight out. NRIs will start withdrawing money, foreign institutional investors will start withdrawing money, etc. And then the rupee will fall more.

So, we are more vulnerable than, say, China is, or Japan is, or the US, right? But yes, maybe we are more stable than Bangladesh or, say, Sri Lanka.

But who do we compare ourselves with?

We have to compare ourselves with the big economies and the bigger thing. So, in that sense, we have to start earning more through our trade account and current account for our foreign exchange situation to be comfortable.

Siddhartha Ahluwalia 30:43

Got it.

And how are we doing on that?

Arun Kumar 30:46

See, for that, we have to increase, you know, our trade. Now, whenever we have gone in for free trade agreements, you know, say, like with South Korea, with the Southeast Asian countries, Australia, we’ve lost out.

Because they have been able to increase, use that free trade agreement to send their exports. We are not able to do that. So, our trade deficit is increasing.

We have been negotiating with the EU for the last 23 years. We are not able to complete the negotiations. With Britain, we started negotiating in 2021.

Now, we have come to some partial agreement. We are negotiating with the US. And the problem is that we have certain sectors which we need to defend because there’s poverty.

So, like our agriculture, we cannot open up. Because 85% of the farmers are below 5 acres. They’re really tiny.

They cannot withstand international comparison. So, large number of farms are 1 acre, 2 acre, half acre farms, right? In the US, the minimum farm size would be 250 acres.

Here, a farmer may have maybe 50,000, 1 lakh rupee of capital invested in the fields. There, they’ll have 10 crore plus they have all the mechanization. On a half acre, 1 acre farm, a whole family will work, 3-4 people.

There in a 250 acre farm, only 2-3 workers will work, right? So, there’s no comparison. So, we can’t open up our agriculture sector without really causing distress to a large number of people.

And 46% of the workers are still in agriculture. In the USA, maybe 1% of the workers are in agriculture. So, you can subsidize agriculture there, but you can’t subsidize it in a big way in India.

So, our stage of development, our level of technology is very different from say what the advanced countries are. And that’s why we’re not able to do that. So, what we needed to do, like China did, to expand rapidly in R&D.

They spent today 3% of GDP on R&D, we spent 0.6%, 0.65%. They are five times bigger. So, they’re spending 22 times more on R&D than India is doing. So, that’s why they become the manufacturing hub.

They’re advanced in all kinds of technology, including say the AI. So, they came up with DeepSea, whereas it looked like only the Americans were there at the top. Suddenly, they challenged even AI.

So, in space, they’ve set up a space station, they’ve been to the far side of the moon, they’ve done all kinds of technology.

Siddhartha Ahluwalia 33:22

They have their electric vehicle setups like BYD, which are selling more units than Tesla.

Arun Kumar 33:28

Yes, absolutely. And solar cells and all kinds of technology. That’s why I’m saying, it’s not in one or two technologies, but all across.

They’re able to, and therefore, they’ve become the manufacturing hub. So, if India is to compete globally, there is no alternative but to spend on R&D, but to have better higher education than what we have. Today, higher education is decimated.

Now, that is something we have to campaign on. Some of the Chinese universities are in the top 20, whereas our universities are in the top 200. Now, I don’t like these international comparisons, because again, things are very different across different countries.

But nonetheless, for them to come up so rapidly in terms of improving the standards of education, etc., they’ve spent a lot of money on public education, on universities, on R&D. We need to do that.

Siddhartha Ahluwalia 34:24

And why are we not doing that? When we realize the problem is we are not spending on R&D, only 0.6% of our budget, of our GDP is going into R&D.

Arun Kumar 34:33

See, we are a very feudal society, still.

Siddhartha Ahluwalia 34:37

What do you mean by that?

Arun Kumar 34:39

Well, feudal society, everything is hierarchical.

So, what the top says has to be followed. So, therefore, if you see, we have not put emphasis on school education, because that’s where the base of the education of children is formed. And that’s why the ACER reports, they show that 40% in the age group of 14 to 18 are not able to do second class reading, writing and maths.

But that’s the worst. But above that also another 50-55% have very poor education. So, only maybe 4-5% of the Indian students really have a proper education, which will make them internationally competitive.

So, we are not spending enough on education because of this feudal attitude that the poor should not get good education.

Siddhartha Ahluwalia 35:33

And why can’t we follow UK’s model like tax higher, but make public, like make healthcare and education public expenses and not private expenses?

Arun Kumar 35:44

See, again, it’s feudal, because you see the businessmen and the well-off don’t want to pay tax. Not only do they not want to pay more tax, they indulge in large black economy. So, they indulge in lot of tax evasion.

You see, so that national consensus has to be there. See, today there is a sense of social justice not being there. So, everybody feels, even Mr. Ambani feels there’s lack of social justice and the fellow who’s sleeping under the flyover on the pavement, even he feels there’s lack of social justice. So, this social injustice prevents us from forming policies that are good for the country. We need to have a consensus that those who are better off will contribute so that those who are poorer will be able to do better. But if the leadership is not able to derive this consensus, if not able to make people arrive at this consensus, then everybody will do their own thing.

Everybody will be marginalized, you know. So, that is why in India, we need to build a consensus, a political consensus that the way to go and this is what happened during the British rule when the Congress Party set up its own framework for developing post-independence, you know, that everybody. So, you know, in 1947, when we got independence, the National Movement understood that why is there poverty?

Why is there illiteracy? Why is there ill health? Because these have to be given by the system.

A poor person cannot set up a school for himself or herself, cannot set up a dispensary for himself or herself, right? Cannot give a job to herself or himself, right? So, even the capitalists agreed that we need to have a public sector, right?

So, that was called the Bombay Plan. So, strong public sector was an essential requirement for rapid development of India. That consensus started breaking down in the 50s itself, okay, where the businessmen using crony capitalism started cornering licenses and, you know, evading taxes and things like that.

So, the breakdown of consensus was very quick. And in our political parties, that consensus has not been arrived at, that we all need to go together for strong education, higher education, R&D, strong health, etc. That consensus needs to be built.

Siddhartha Ahluwalia 38:16

And this is very alarming because the narrative that is there was that India was a socialist nation from 1947 to 1991. That’s why we could not progress during those 40-year period.

Arun Kumar 38:30

That was a narrative deliberately created, you see. Because if you see, you look at the situation, we were a mixed economy. We borrowed from Soviet Union, the central planned economy, and from the West, the market economy.

So, in India, even at its peak, the public sector is not contributing more than 27% of the GDP. 73% was all private sector. So, India has been a capitalist country all through, but with a welfare component, you know.

After the Second World War, capitalism realized that you need a welfare component, you know. So, Britain, various France, various other countries, they went for welfarism, public sector, strong public sector, so strong health in Britain, railways, and various other such things. So, you need in a poor country even more of that.

You know, the poor are too poor to be able to give themselves education, so you need to have public education. They cannot set up dispensaries, so you need to have this. So, therefore, the national movement understood that a poor person cannot take care of his or her problems.

We have to collectively do it through the government, and that’s why a public sector was needed, right? And that still remains because the poor person is unable to generate job for self, for himself, unable to generate good education for herself, for himself, etc. So, the public sector still is required.

So, therefore, it’s not that we were a socialist nation. The failure was that because of the large black economy, our public policies failed. So, if suppose you’re spending money for school to the rural area, and the official dumb and the politicians, they eat it up, then it won’t reach, then education will fail.

Similarly, health, if you are to set up a dispensary, and the money is eaten up on the way by the politician and the businessman, okay, then the health will not. So, we have had policy failure because of black economy. So, we blame public sector for it, right?

And this suits the private sector. Because if the public sector is successful, then we’ll have more and more public sector and less and less of private sector. So, for private sector, it is very important to see that public sector fails.

But then they’re axing their own feet. Because without good public sector, look at our towns. The kind of miserable conditions in which 90% of people in Delhi or Bombay live, the way you see these trains, the metro, the suburban train in Bombay, people are hanging.

And so many people died recently because the two trains are crossing each other and they touched each other. Similarly, look at the various accidents that happened just yesterday in Andhra Pradesh, this accident that happened where the factory blew up, the crowd management is very poor. And that’s because of the black economy.

You see, your systems don’t work, even though theoretically you design everything, but they don’t work in practice.

Siddhartha Ahluwalia 41:35

And my other question to you is, you know, we also discussed about states because ultimately, you know, state is responsible for health, education, welfare, and everyday infrastructure. But their finances at the core level are deeply strained. Many states now carry debt levels which are exceeding 35% of their GSDP.

And almost a quarter of their revenue just goes to pay out the interest. Right.

What is happening with the states, right? And is this sustainable?

Arun Kumar 42:09

So, you see, because of the black economy, governance is very poor. Governance means that you should be able to have a policy which you should be able to deliver on. We are not able to deliver.

We make great policies, but we are not able to deliver. Especially we are not able to deliver to the poor people. So, governance being very poor, we don’t collect enough taxes.

So, our tax GDP ratio is very low.

Siddhartha Ahluwalia 42:35

But taxes are high in India.

Arun Kumar 42:37

That is a misnomer.

You see, only as the prime minister said, 15 million people are effective taxpayers. That means 1.1% of Indians are effective taxpayers, direct taxes. Everybody else pays indirect taxes.

So, our tax GDP ratio is one of the lowest in the world at 17%. Our direct tax GDP ratio is also one of the lowest in the world at about 6.5%. So, we are not a high tax nation. We are actually a very low tax nation.

Because this is without taking the black economy into account. If the black economy is taken into account, then we may be paying only 2-3% of our GDP as direct taxes, right? And only about 7-8% as indirect taxes.

So, the black economy lowers this real tax GDP ratio, which also means A, you have waste. Because of the black economy, there’s a lot of waste. On the other hand, your tax resources are less.

So, there’s a double problem that the black economy causes. Inadequate resources and how they’re spent, they’re not achieving the result. So, as Mr. Chidambaram said in his 2005 budget, that expenditures don’t mean outcomes. So, we allocate funds in the budget, but the outcomes are not there. So, effectiveness of policy is less. Therefore, you have to spend more.

So, why are the states in debt or why are they increasing? Because we have not delivered to the poor people. So, now we have to give freebies.

We have to give welfare functions. So, say education, health, etc. are welfare features.

But on top of that, we have to give free bus rides, we have to give free laptop, we have to give other things, food items, and so on and so forth, right? Now, when there’s poverty, you have to do all that, right? You can’t say we will not take care of the poor, etc.

But if we had proper development, then that would have taken care of poverty. So, the states, their resource base is low, centre collects most of the taxes, and it’s collecting it in such a way that the state’s share is low.

Siddhartha Ahluwalia 44:49

But the GST that centre is collecting, let’s say, on any good, there’s 18% tax, right? 9% is going to centre, 9% going to state. So, it’s an equal division.

Arun Kumar 45:02

No, no.

But you see, GST is only one of the taxes. You have custom duty, you have income tax, you have corporation tax, you have wealth tax, and so on and so forth, right? So, the centre collects bulk of the taxes.

And of that, 41% is supposed to go to the states, as per the finance commission, and so on, right? But the way the centre collects the cess and the other things, only 30% is going to the, or 35% is going to the states, right? So, therefore, there’s a shortage of resources.

Second is black income generation means that what tax you could collect, you’re not collecting that. So, again, that, and then, because the public now doesn’t believe in policies. Public says, you’ve been promising poverty removal, you’ve been promising various things, and you haven’t delivered.

So, what are you going to give us today? So, therefore, the competition culture has come to freebies. That in every election, I have to give something.

This election, I’ll give free bus rides. In this election, I’ll give, say, maybe a mixi or a sari or something or the other. So, the state’s budgets are getting overstretched.

Because political parties are coming on those promises. Because public is not believing the politicians. That, you know, that in the long-term thing, 75 years they waited, they have not been able to benefit much.

And therefore, they say, what are you going to give me today? So, this is a double trap. Because our policies have failed, the black economy has led to problems.

Okay. So, credibility of politicians is low, credibility is being low, they have to offer. So, states have this double trap.

Siddhartha Ahluwalia 46:41

For example, Karnataka, because of the IT sector in Bangalore and Mysore, should be one of the richest states. But right now the…

Arun Kumar 46:51

No, it is one of the richest states, no doubt. But the point is that they have had to promise so many things that the budget is not able to give. Same in Maharashtra.

Maharashtra, before the election recently, they promised many things they are not able to deliver. Right. In Delhi, before the election, so many things were promised which they are not able to deliver immediately.

Right. In Punjab, the budget is in a crisis because they have been promising so many things that their debt has become very high. In Himachal, the salaries of the bureaucracy had to be delayed because there was not enough funds.

So, all states, whether it be the ruling party or the opposition, they are facing this problem because the credibility of politicians is very low, whether it be the ruling party or be the opposition, you know, they haven’t delivered in 75 years, okay, to the poor people. So, the poor people are demanding something today. So, this is the twin problem.

A, we are not, because of black commie, we are not raising enough resources. And B, we are having to promise all these different things. Now, welfare, fine.

Education, health, etc. We have to do that. But in addition, you have to do something more today.

And that is what is stressing the budget.

Siddhartha Ahluwalia 48:02

But one point is remaining to be covered, that why are people increasing in farming in India?

Arun Kumar 48:10

Yeah.

You see, when you don’t get work, then what do you do? You go into whatever you can do. So, therefore, people who got displaced, especially after the pandemic, they went back to the villages and they didn’t have work otherwise.

So, they went into farming. It doesn’t mean that they have work there. It’s simply because it’s disguised unemployment.

They go there and they do whatever little they can do, but they’re not contributing to the productivity. Similarly, those who are self-employed, their numbers have also gone up. Because if you’re not getting work outside, you have to do something.

So, you do it. Similarly, women who are not getting work, they’re doing free labor somewhere or the other, right? So, it’s not that they’re sitting idle.

The women are not sitting idle. The fact that they’re not getting work doesn’t mean that they’re not doing work at home or other such things. So, free labor has increased here in the Indian context.

Self-employment has increased. Agriculture, you know, labor is there. So, actually, earlier the trend was for labor force to decrease in agriculture because of the mechanization and so on and people are going.

So, we need to create a lot of non-farm employment, right?

Siddhartha Ahluwalia 49:19

How do we do that?

Arun Kumar 49:21

So, where will you do that?

Not in the organized sector. Organized sector is so automated, right? And so mechanized and getting more so.

And with AI, it’s even going to get much worse, right? So, we had 6% in the organized sector in 1990 and 6% today. That means, in spite of massive investment in the organized sector, no additional percentage has gone into that area.

So, we have to create work in the unorganized sector, especially the micro sector. So, as I think I mentioned last time also that we have 6,000 large units, 600,000 small and medium units, and 60 million micro units, 6 crore micro units. So, these 60 million micro units employ 97.5% of the MSME employment. And we are killing the micro sector only, okay? So, we have to boost the micro sector, okay? So, the average employment there is 1.7. Now, if we are able to say even double it to 3.4, immediately some like 110 million jobs will be created. So, we need to boost this micro sector by saying, where are the problems? The problems are three. They don’t have technology, marketing, and finance.

So, what we need to do is boost them in these three dimensions. How do we do that? They can’t do it individually because the average employment in a micro unit is 1.7. So, how can you do marketing and technology development and all that, right? So, if we create cooperatives of these people, so say like in Ichalkaranji, you have say textiles or in Tiruppur, you have textiles or in say Bhadohi, you have carpets or in…

Siddhartha Ahluwalia 51:08

Like the milk industry, Amul.

Arun Kumar 51:09

Amul was there, already you have a cooperative there.

But you know, say Khurja has pottery, say somewhere you have glass bangles and in Aligarh, you have brass and so on and so forth. So, you create their cooperatives. So, as a cooperative, they can do marketing.

Just like Amul, they can get finance, okay? And technology development, government will have to come and provide that technology development to them. So, if you do that, they’ll become more vibrant.

And then labor from agriculture will come into the micro sector because, you know, the employment there will increase. So, instead of trying to convert unorganized into organized, which is not going to happen, a unit, micro unit employing 1.7 will not become organized. It’s just not possible that they can do banking and EPFO and various other things.

So, you just help them in these items. So, what are called cluster developments, okay? Then, you know, you’ll find that the micro sector will be boosted and a lot of employment generation will take place.

And then in the budget, you have to allocate much more to education and health. You have to allocate more to the rural employment guarantee scheme till the rural employment becomes robust. You have to create an urban employment guarantee scheme because a lot of educated youth is not finding work in the urban areas.

So, you have to create, which is a bit more difficult to do than the rural employment guarantee scheme, but you can do that by creating urban infrastructure, okay? So, you have to be innovative in terms of boosting this employment generating schemes rather than the capital intensive schemes.

Siddhartha Ahluwalia 52:49

And can you give examples of what are the solutions that is needed to fix at least the next 20 years in India? Like one is you already gave, like there needs to be a consensus, you know, that will help.

Arun Kumar 53:00

So, consensus should be on employment generation. That’s the key because the more employment you have, the more the GDP and the more the per capita income, okay? Especially at the lower levels.

So, your consensus has to be on boosting the micro sector and giving more incomes in agriculture. Now, once these people at the lower level have more income, demand for the organized sector will also grow. And the organized sector already has enough capital and has enough balance sheet, you know, finances to be able to develop.

It requires demand. So, both organized sector and unorganized sector will grow. If you begin to focus more on the unorganized sector, on agriculture and the micro sector, education, health, you know.

So, focus should be on this and the organized sector will also grow. So, it has a bottom-up approach rather than the top-down approach. Unfortunately, our approach has been top-down, trickle-down that let the top grow, it will go down.

Now, that suited the well-off segments in society, that suited industry because they got resources, okay? Now, that was a self-serving approach and that is what has created a lot of problems. That is underlying the black economy, that’s underlying the disaffection in the lower level, the lack of social justice in the lower levels.

Siddhartha Ahluwalia 54:17

Thank you so much, sir. Well, I think this has been a conversation which is a good sequel to a last conversation. It covers some parts of it but it also covers parts which we couldn’t cover in the last time.

Also, this part covers some solution but it is good to discuss and highlight these problems because if we are not aware of the problem as the audience in our discussion, then how would we go for a solution?

Arun Kumar 54:43

Yeah, I agree. Without being conscious of what the problems are, you can’t solve them. So, you have to first analyze and find out what the problems are, then come to solutions, right?

So, anything that we have to do for India to make it great, we have to first find out what are our problems and then address those problems rather than say, only this can be done. If you feel that only this can be done, then we’ll remain where we are, we’ll not be able to progress well, the split will be there, the discord will be there in the nation. We need a peaceful consensus.

So, the discord goes, the feeling of social justice comes.

Siddhartha Ahluwalia 55:18

Thank you so much, sir. It has been a great discussion towards that.