May 16, 2020
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A 5-Trillion Dollar Economy Is Like A Chubby Cow Learning To Skate On Thin Ice

The government betrays total ignorance about macroeconomics levers but no one dares to say so, writes journalist and author, Puja Mehra

A 5-Trillion Dollar Economy Is Like A Chubby Cow Learning To Skate On Thin Ice
A 5-Trillion Dollar Economy Is Like A Chubby Cow Learning To Skate On Thin Ice

Slumbering elephant, caged tiger, sleeping dragon, tortoise—metaphors describing the Indian economy combine promise and frustration. “India’s is very much the tortoise story in the fable—a story starter coming good over a time,” T.N. Ninan wrote in The Turn of the Tortoise (2015). The potential was never in question. The tortoise needed time. The droopy tiger needed unshackling. Observers had hung on to the faith that India will resolve the roadblocks and speed-breakers: an underperforming state, cloying cronyism, chronic graft, populist politics, retreating forest cover and the toxic air and water.

In the years following 1947, annual growth averaged 3.5 per cent, pejoratively called the ‘Hindu rate of growth’. The 1980s saw a few initial steps of economic liberalisation, and after the balance of payments crisis of 1991 led to a spurt in economic reforms, growth picked up dramatically, rising to 6 per cent and more—1991-2011 was the best period in India’s economic history, when the ‘miracle economy’ finally broke out of the Hindu rate of growth. The headcount of people below the poverty line saw a substantial decline. This period of high potential and even higher ­optimism, in which Indian companies, ­brimming with confidence, acquired iconic global brands such as Jaguar Land Rover, was mythologised as the ‘India Growth Story’.

The golden phase had started with then PM Manmohan Singh rising to present the budget on July 24, 1991—a giant leap of faith for politicians and policymakers in charge, and for large swathes of Indian industry that rose to the challenge. This phase ended with Singh ­presiding over a phase of alleged corruption and policy paralysis. Fearing policy uncertainty, such as what the ­infamous Vodafone case of retrospective taxation ­indicated, investors began to reassess India’s economic prospects. Confidence dipped. Yet, despite this marked retreat since 2011, the ‘India Growth Story’ held on.

The UPA government and the man who helmed it had lost the economy’s trust. But belief in India’s potential remained intact. The rising star could prove that the ­policy paralysis and macroeconomic scare of 2011-13 was just a hiccup that could be put behind. Optimism peaked when Narendra Modi, a political go-getter, was sworn in as PM in 2014. The incarnation of the crowd’s aspirations was the answer to Manmohan Singh’s indecisiveness and lack of ­aggression. To the poor, he was a poor man’s son; to the rich, he was the man who had won the trust of the Tatas, Mahindras and Mittals as Gujarat CM. Intellectuals, bureaucrats and non-elites felt persuaded to abandon all judgement over his lack of qualifications to deliver what Manmohan Singh could not. Modi, it was hoped, will be able to bite the bullet on the whole set of economic reforms considered ‘politically difficult’ that successive governments had shunned for the fear of ­becoming unelectable. Then came 2019 and dashed all hope.

An extraordinary year for the economy, it started with a partial concession from the Modi government on how short of expectations the economy had performed in its first tenure. With an eye on the general elections scheduled later in the year, the interim budget offered the olive branch of fiscal giveaways and income tax sops to farmers and the middle class. The announcements may have contributed in the government’s mandate getting renewed in the Lok Sabha, but did not help the economy much.

By the time the full-year budget was presented on July 5, the mood in business circles was of ­despair and despondence. Economic indicators had plunged to multi-year and, in many cases, multi-decade lows. For the first time in years, car factories were halting production and firing ­workers. People in the cities as well as in the ­villages were cutting back on daily needs such as shampoos and biscuits. Among other milestones, 2019 will be remembered as the year in which PM Modi’s ‘Make in India’ unravelled.

India needs to increase its GDP quickly. But opportunities of solving the problems are getting slimmer.

The budget itself will make it to books of economic ­history. Presented originally as the government’s vision for the next 10 years, it was, along with the economic ­philosophy that had guided its formulation, completely rewritten through a string of amendments. Never before had a budget been upended in a matter of weeks. As the year progressed, economic indicators plunged further and further. But nobody in government seemed quite sure what had put the economy in a tailspin. The GDP growth rate, in a short span of four quarters, halved to 4.5 per cent. An uncharacteristically bewildered Reserve Bank of India (RBI), which had in February projected that the GDP would grow 7.4 per cent during the financial year, dropped that projection every few weeks—down to 5 per cent by December. If the RBI with its army of analysts can’t see the bottom of this slump, who can?

A member of the PM’s economic advisory council issued a public warning of an imminent fiscal crisis. Only to be dismissed as unduly alarmist. But the news soon followed that the Centre is, in fact, on the brink of a sovereign ­default on its constitutional commitment to state ­governments as far as compensations go for shortfalls in Goods & Services Tax (GST) revenue. That the economy is not shining was confirmed when the PM travelled all the way to a foreign land for a leaders’ summit to sign a trade deal, the Regional Comprehensive Economic Partnership (RCEP) agreement, but walked away at the eleventh hour from the deal. India negotiated till the end and then baulked at signing on the dotted line for fear of being given a run for its money by more competitive economies. Especially China’s mercantile exports and New Zealand’s dairy. Puzzled, negotiators from other countries privately asked how it was even possible that such a large country could be this scared of tiny ones as New Zealand.

The global image of the self-confessed economic powerhouse took several more blows in 2019. A government-commissioned report by the PM’s closest friend among economists, Surjit S. Bhalla, showed among other things that smaller economies like ­Bangladesh and Vietnam are now much more competitive than India in garment exports. They used to be ­significantly behind India in the pecking order. In fact, Indian exports growth has slipped significantly more relative to 60 comparable economies. During the period 2003-11, when world exports and GDP were growing well, India ranked sixth in the growth of services exports. During the slow growth period of 2012-17, India slipped to the 23rd position. In the growth of manufacturing exports, India slipped from 16th to 25th position; in merchandise, from the 10th to 38th; in agriculture, from 11th to 30th.

Not too long ago, the economy was being toasted as the world’s fastest growing. But before the confetti could ­settle, global rating agencies were once again putting India on notice— already at the lowest investment grade, India’s sovereign rating, it was announced, is under watch and could be downgraded. The cheerleading and the ­self-congratulatory narrative of world-beating GDP growth receded, giving way to the cacophony of bumbling ministers in denial. Charm, like cashmere, can wear thin.

Photograph by AP

For years, India’s economic potential had fed national pride. To say India is a large and fast-growing economy was certainly true. But it is also very poor and has very complex challenges. Selective focus on the promise is something of exaggerated self-regard.

A lot of small ­economies like Vietnam are energetic, but not as high ­profile as India because of their small size, not because they are doing less to become prosperous. If ­anything, they are doing more.

Driven by self-interest, foreign investors have so far ­rewarded India for its size and the promise of a large ­market. If the promise seems to wear off, they will pull out.

At $2.7 trillion, India’s GDP is relatively small—about the size of California’s GDP. China’s is over four times as large. To bring prosperity, the achche din, to over a billion Indians, India needs to increase its GDP, a measure for its market, quickly. It’s a race against time. India must ­become rich before the majority of Indians become old, as economists Vijay Kelkar and Ajay Shah note eloquently in their book, In Service of the Republic.

While the task is formidable, and obstacles are many, the opportunities for solving the problems are getting ­slimmer. The lack of opportunities of the vast majority of the youth is a frightening problem as it is. Worse, everything around the world is going against India: from rising right-wing populism, anti-globalisation and ­anti-trade tendencies to the growing preference for ­automation and Artificial Intelligence. Where will the ­millions earn livelihoods sustainably commensurate with the aspirations of achche din? On the farms? In factories? At start-ups? In services?

The government betrays total ­ignorance about macroeconomic ­levers, but no one dares to say so.

If incomes per head could grow at 8 per cent a year, India would achieve high-income status, at the level of Portugal, within three decades. Trouble is the economy’s clocking about half that rate. Not because of a natural calamity or an external shock. Oil prices, the old troublemaker, is not the source of the problem. The root of the problem is that the economic system is broken and no longer delivering for India’s needs. India is no longer a sleeping giant. It’s a lost cause. The ‘India Growth Story’, the way we know it, is over. The 1991-2011 model is no longer working. The growth strategies, as Kelkar and Shah have warned, will have to be reimagined altogether if the danger of the ­‘middle income trap’ is to be averted.

Rapidly growing economies have been seen to graduate to the middle-income tier, but stagnate thereafter, squeezed from below by intense competition from ­lower-cost ­competitors, even as they fail to transition to high-income levels for a variety of reasons—especially a failure to build institutional, human and technological capital.

The year 2019 brought home the realisation that there’s nothing destined about India joining the ranks of ­developed ­economies, as economist Rathin Roy reminded us, ­pointing to Brazil, South Africa, Egypt, Thailand and Turkey—countries that tried to develop too, but failed. In the history of development, there are only three big ­success stories that could complete their development transformation successfully: Japan, China and South Korea. The rest that tried got stuck at different levels, well below their potential. The risk of that happening to India is greater at the close of 2019 than it ever was.

Dark clouds loom over the economy, but, ­paradoxically, this is a result not of any policy paralysis. Decision-making is speedy—perhaps too much so—but the hand on the wheel is unsteady. The absence of a competent manager of key economic policies sticks out as a sore thumb. The government betrays a flaky approach to economic policy and complete ignorance about macroeconomic levers. But no one dares to say so openly. Except, of course, Rahul Bajaj.

If India’s aim is to become a high-income country in the next generation, it has no option, as Vijay Joshi wrote in his 2016 book India’s Long Road, but to tackle the ­obstacles that emanate from the failures of the State and the political processes that guide it. The challenge is more enormous than is recognised.

If 2019 robbed India of optimism about the future, and shattered hopes and myths, it offered important lessons too: To place faith in individuals, Manmohan Singh or Modi, will not do it. There’s been erosion of public ­confidence in institutions—in particular, the official ­statistical apparatus holding back reports that give a ­negative picture on the economy. This, in turn, is hurting the government’s credibility. Its response—the goal of growing India to a $-5 trillion economy, reminiscent more of centrally planned countries than market economies—is an escape, not a dream. For growing to that size by 2024, India will have to accelerate the annual growth rate from just above 5 per cent currently to 15 per cent. What are the bets? There’s greater probability of a chubby, inelegant cow learning to master figure skating on thin ice.

(The writer is a Delhi-based journalist and author of The Lost Decade (2008-18): How the India Growth Story Devolved into Growth Without a Story. Views are personal.)

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