The State of Indian Economy: A Hard Look

Dr Arvind Mayaram

The Indian economy is facing two challenges − continuing slowdown that started about two years ago, and the impact of Covid-19 and the lockdowns. With all the four cylinders of the economy’s engine − investment, exports, private consumption, and government expenditure − seriously impaired, the GDP growth this year is likely to fall into the recessionary space, for the first time in 40 years. It will also face serious contraction. IMF estimates the contraction to be 4.8 percent, while other economists predict it will be in the region of 5−7 percent. Despite announcing a very small fiscal stimulus, government of India’s deficit is likely to be 8−10 percent of the GDP in the current fiscal.

With the migrant labourers back in their villages and the Covid-19 scare continuing, the economy would be seriously impacted for the next two years before we can see a real turn around. So, it is important to understand the prognosis and the options and impulses that assure us of an eventual turnaround.

In these times of instant gratification, speaking of economic history seems anachronistic. But it is important to understand where India’s growth story really started. Pulling back from the brink of economic meltdown, India undertook major reforms and liberalized its economy after decades of “socialism” and creeping state control in all fields of economic activities in 1991. It was not that no changes were made during the earlier years, but those were at best attempts at creeping reforms, often taking two steps forwards and one back. Now, 30 years later, there’s much we can be proud of and some actions which could have been avoided. While unshackling the economy and providing a more level playing field to the private sector paid dividends, social security schemes like the MGNREGA enacted in 2005 were game changers in tackling poverty and establishing equity for the rural poor to an extent.

In fact, what we have been witnessing is an outstanding economic success and then a sudden nose dive into crippling economic slowdown which continues now without an end in sight. India had gone from being a poor, slow−growing country to the fastest−growing major economy in the world. The World Economic Outlook for 2016 had announced that the United States and India were the two pillars of strength of the world economy. But the sudden negative shock of demonetization put brakes to the economic growth. Unfortunately, the economy began to slow down since then and growth has gone into the negative zone this year.

India has failed to enter the list of the top 25 nations in the AT Kearney’s Global FDI Confidence Index 2000 despite claims of improving its ranking in Ease of Doing Business listing by the World Bank. Once a shining example of vibrant democracy and dynamic economic growth amongst developing countries and emerging market economies, and a powerful voice in the G20 on the basis of its economic strength and potential, it is now struggling to keep economic growth barely ticking. In The Economist magazine’s weekly chart of 43 major economies in the world, for a long time, India was among the top 3 fastest growing economies. It has now dropped to the 23rd rank for 2020. With our economy caught in a downward spiral, most credit rating agencies, including Fitch, S&P, Moody’s, IMF, and the World Bank have downgraded India’s growth rate projections.

Unfortunately, there is no evidence of a well thought out long term strategy for accelerating economic growth and creating a vibrant investment environment which would provide more jobs and decent livelihoods for a very young population aspiring to break out of hand−to−mouth existence. The economic packages announced by the government have been addressing the supply side issues, focussing mainly on liquidity, but haven’t touched upon the most pressing problem − that pertaining to demand.

The earlier package of Rs 1.93 lakh crore announced in late March was made up of Rs 1.70 lakh crore to distribute free foodgrains and direct transfer of cash via Jan Dhan accounts to farmers, women, and the elderly; distribution of free gas cylinders; and the so called 85 percent of train fare subsidies of migrant labourers returning home. In the most recent announcement, the government has extended the free foodgrains distribution till November, purportedly costing the exchequer a sum of Rs 90,000 crore. Cumulatively, the packages of about Rs 21 lakh crore announced are called the Atmanirbhar package.

Although the government has declared this as a bold move, according to the Chief India Economist at Barclays, the “fiscal impact on the budget will be only Rs 1.5 lakh crore (0.75 percent of GDP)”. At a time when demand is dead, the Atmanirbhar package pushes a huge liquidity into the system in anticipation of a lot of takers for loans to start and restart businesses. What the policy makers seem to miss out is that when businesses are struggling to repay their existing debt, are not able to dissipate inventories lying in their godowns, and can see no real return of consumption for at least two years, why would they take fresh debt burden on their books?

How much of demand this Atmanirbhar package is able to stimulate and how far it would help in mitigating the hardships and pain of the people remains to be seen. But the reactions have been rather scathing. Analysts at the global research firm AB Bernstein felt that “the need to announce measures that add up to this top down number made the entire package aimless”, and that overall, they see it as a “lost opportunity”.

A massive number of people have lost their means of livelihood. By various estimates, anywhere between 82 percent and 94 percent of the workforce in India is employed in the unorganised sector and this has been hugely hit. The organized sector has` also witnessed huge retrenchments and salary cuts across the board and, if the sales of automobiles and consumer durables are anything to go by, even by the most conservative estimates, there is a loss of around 80 percent of the demand in the economy. Some of the pent up demand due to the lockdown would manifest in an uptick in consumption, but this is likely to flatten out quickly.

What we need is a positive shock to the economy. The fastest way to push the economy towards a quick recovery is to put cash in the hands of the poor and support industries and businesses, especially the MSMEs, with salary subsidies to ensure they continue to employ workers. This support could be extended for a year to provide enough impetus to the people to start consuming. As demand picks up, the liquidity measures announced by the government and the RBI would also gain traction. As a result, the economy would rebound quickly.

The government must also take this opportunity to reimagine the way businesses must be encouraged and nurtured. The Rajasthan model ushered in through the Rajasthan MSME (Facilitation of Establishment and Operation) Act, 2019 should be emulated. The new Rajasthan law has done away with the requirement of prior approvals under any state law to start businesses in the MSME category for a period of three years. The next step is to reduce the number of approvals required under any central or state law for setting up any type of business (except in the orange and red category requiring environmental clearances).

As Rathin Roy, one of our leading economists, has said, India’s first wave of reforms resulted in close to 150 million people entering what we can term as the truly consumption class. But unless we are able to usher in the next level of structural reforms, the Indian economy is in the danger of getting into the middle income trap very soon. The next 10 years must be used to bring the next set for 500 million−700 million people into the consumption class. For this, India will need major reforms to deepen liberalization, build high−quality institutions, and create a more stable, inclusive, and less fractious polity.

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