Economic Growth: Policy Initiatives May Not Pay Off As Much As We Want; Small Goals The Way Forward

Economic Growth: Policy Initiatives May Not Pay Off As Much As We Want; Small Goals The Way ForwardGovernment support is crucial in economic recovery.
  • For one unit of policy effort and reforms, the payoff in terms of economic growth is going to be smaller.

    But these challenges are not unique to India, and are true of all developing countries.

A friend had shared an article from I have not seen the original survey. It does not appear to be adjusted for purchasing power parity (PPP). As per the Big Mac Survey, on a raw basis, the Indian rupee is about 40 per cent to 50 per cent undervalued versus the US dollar.

Second, according to the Conference Board in the United States, the per capita gross domestic product (GDP) in PPP adjusted dollars in 2019 in India was $7,140.

So, yes, India may still have a large percentage of people who are borderline middle class but it may not be as small as the PEW survey makes it out to be.

Third, for Rs 30,000 per month, my mother has a very comfortable upper middle-class life. This amount includes either the EMI or the rent for her two bed-room apartment in Coimbatore.

Joan Robinson once said that for every statement about India, the opposite was equally true. That holds good even now. Perhaps, it always will, given the size, the population and the breadth of the country. No one can claim to be speaking for and about the entire country.

The Positive Developments

I was struck by the Quarterly RBI Consumer Confidence Survey. It just came out last week. Consumers had indeed become more pessimistic compared to the May 2020 survey but, one year out, they expect things to be better.

There is nothing surprising there. But, what is surprising is that this optimism about the outlook 12 months hence has improved over the May survey.

Similarly, I saw a news report in Business Standard on how many SMEs are cash-strapped and yet how many of them are confident of growth. The numbers are very surprising. About 57 per cent have no cash reserves but 81 per cent of them are confident of a post-Covid recovery. This survey has been conducted by GAME in Bengaluru in alliance with LEAD@Krea.

Considering the difficulties that small businesses in the United States are facing in accessing credit, the disbursement under the Credit Guarantee Scheme for MSME Credit in India has been relatively more efficient.

For the difficulties in the United States, please this tweet thread.

One of the most vexatious issues – I am just being somewhat anecdotal, admittedly – has been the dues claimed by the Department of Telecom from companies that have had some telecom (or broadband) operations, not to mention the enormously large sums asked of telecom companies themselves. But, this news story from June 2020 has gone relatively under-reported.

The Department of Telecom had waived 96 per cent of the adjusted gross revenue (AGR) dues it had demanded of other public sector enterprises. Important relief and removal of uncertainty.

The agriculture sector has seen some important empowerment of farmers. States are also pitching in. I can name Gujarat, Madhya Pradesh, Karnataka, Uttar Pradesh and now Maharashtra. See the link here for the last mentioned state.

Further, many states are looking at removing distortions in their land and labour markets.

Non-banking finance corporations (NBFC) have been able to raise money from the market. In a document (“Two months after unlock”) shared by Dr Soumya Kanti-Ghosh earlier in August, he mentions the following facts:

  • NBFC issued commercial paper (CP) of around Rs 1 lakh crore in FY21, up to July 2020.
  • More than Rs 10,000 crore additional NBFC CP subscribed to by mutual funds since April 2020.
  • Small NBFC-microfinance companies are also now participating in the CP market even with a lower rating of A3+ in short-term (long-term BBB).
  • Spread on NBFC long-term papers also softened in the last two to three months after various measures announced by the government of India and the Reserve Bank of India (RBI).

NBFC are a critical link in the chain of financing and credit in the economy. They are far from out of the woods but they are not sinking as many had feared. I doubt if commentators anticipated the above developments for NBFC in the last four months.

The Real Challenges India Faces

India will never be short of challenges. For instance, once the one-time debt restructuring – that the RBI had announced recently – is over, then what happens to the loans? Will the economy have recovered by then for these loans to become viable and service-able? Or, will bad debts shoot up? No one knows the answer for sure but the risk is that bad loans rise.

How many small businesses will be around and whether its single-person promoters would have slipped back below the poverty line and hence their families too?

Then, there are ever-present challenges: skilling the youth, finding them employment and income; managing and sustaining the environment and above all, ensuring safe drinking water availability for Indians

Apart from these three and many other challenges that I may not have mentioned, the global backdrop is also going to be a lot more difficult.

Post-2008, the world has changed materially. Organic economic growth has dried up. Developed countries have managed to create an appearance of economic growth only by issuing so much debt.

Debt, as we all know, brings consumption and growth forward, from the future. If we keep doing it, there is nothing left in the bank of ‘future growth’. That is what has happened to Japan.

But, Japanese society has been able to handle it because its people have been thrifty and Japan is a net lender to and investor in the world. Several European countries, including the UK and America are not.

So, economic growth in the West is no longer the locomotive for the developing world. That is what helped East Asia climb into the developed world category. But, such a window of opportunity has been shut now.

It is shut not only because economic growth in the developed world has dried up but also because many other facilitating factors have also either disappeared or have become weaker. Worse, they have turned unfavourable too.

There is now hostility to immigration (justified or not is not the issue); free trade is now out of fashion; the security environment has become unfavourable.

Further, climate change impact is evident now. One cannot burn coal and hydrocarbon fuels and grow as easily as the West did for two centuries.

However, I must mention here that a former die-hard climate change activist has now walked back on his climate change apocalypse. His book is titled Apocalypse No.

His article was published in Forbes and then pulled back as is becoming the norm these days. Notwithstanding his reassuring message, India does face limits on how much fossil fuel it can burn.

Its water and air pollution are for real. When growth in general has become difficult, it is not easy to convince politicians to undertake tough reforms which would face resistance. They would not see the benefits.

The global economy has run out of options to grow because it has overdrawn massively from the future. So, there is going to be growth hysteresis in the world.

Developing countries did not have the luxury of time, colonisation, waging war and also favourable climate already. Now, they face further headwinds and obstacles to growth.

In this backdrop, for one unit of policy effort and reforms, the payoff in terms of economic growth is going to be smaller. That is going to make them less hospitable and receptive to homilies and advice on reforms.

These are the challenges. But, these challenges are not unique to India. They are true of all developing countries and more so for other developing countries than India.

For example, there is pessimism about India’s export performance. It is true that India’s exports grew at an annual rate of between 20 per cent and 30 per cent between 2003 and 2008. In the last six years, export growth has all but dried up.

But, Brazil and Indonesia which also experienced an export boom between 2003 and 2008 are doing far worse than India now. See the chart in this blog post.

Yes, India has work to do to emulate Bangladesh’s and Vietnam’s export growth rates. But, that is going to be much harder in the coming years than before. That is not an excuse not to make it easier for our businesses to compete. But, there is onus on the government and equally on businesses too.

For example, this man’s attempt to start a business in Maharashtra is a sad tale that might resonate with many such aspiring businessmen and women in many states. Plenty of work remains to be done for capital formation to happen on a substantial and sustained manner leading to employment generation.

The chief secretaries of all states should engage an individual or few of them (preferably women, so that we can also ascertain gender stereotypes and prejudices in the approval processes) to pretend to want to start a business on an agricultural land and seek approvals.

They would then begin the process by trying to convert it into non-agricultural land first and then go through the approval process as this man is still trying to do in Maharashtra.

In doing so, they would find out all the bottlenecks, the steps involved and the delays, etc. Right now, even most of them do not know how many laws, approvals, no objection certificates (NOC) that have been put in place.

Once thus ascertained in about 90 days, the governments can start addressing them systematically and transparently. One by one, many other things – related and unrelated – will come into view as well. That would set the states on the path to economic transformation.

Instead, there is a tendency to help businesses in the wrong way for, that too, encourages administrative discretion and perpetuates the power imbalance between the executive and the public.

Further, India’s trust deficit is high and sometimes, it is also true that most think of gaming the system. So, in this cat-and-mouse game, the system ends up with a byzantine labyrinth of controls, checks and balances and approvals.

Recently, India has announced that colour television sets would go into the restricted list of imports rather than being freely importable. This article narrates the story of import substitution of television sets in India.

Of course, India must reduce import duties on raw materials or intermediate components and raise the duty on finished goods. In the case of many goods, India has an inverted duty structure – higher duties on raw materials and intermediate components than on finished goods.

Be that as it may, no country can manage to maintain both economic protection and social protection indefinitely. For, social protection programmes to be financed, there needs to be economic performance.

It has to be economic performance with social protection for the really deserving and with a finite time frame. Economic protection too can be extended but for a limited time frame and a clear understanding of performance and productivity improvements and enhancements during the protection period.

My concern is that we might be going back to the notion of “all foreigners are bad and all things foreign are bad; they are mean people; so let us protect our industry.” This is a road to nowhere.

Near-term protection has to be combined with accountability for medium-term productivity growth and performance on the part of commercial enterprises.

In the short-run, India still has some room to rely on fiscal stimulus to keep the economic engine humming. A paper published by the International Monetary Fund (IMF) in February 2017 as part of the ‘technical issues’ compendium released with its annual assessment of the Indian economy showed that India’s sustainable general government debt would be around 60 per cent to 65 per cent of GDP.

But, by the end of 2021, it might be closer to 80 per cent of GDP because even before coronavirus struck, IMF had assessed India’s general government debt would be around 69 per cent of GDP in 2020-21. That said, for India, there is more room to expand on debt. Here is why.

Everyone compares India’s economic size to China’s to either ridicule India or to extoll China’s achievements. This chart is widely used:

Source: IMF World Economic Outlook Database (October 2019)      
Source: IMF World Economic Outlook Database (October 2019)     

But, I have a different perspective on it. China’s GDP, scaled by non-financial sector debt, is far lower than India’s.

In other words, China’s GDP grew in size in the last 15 years mostly because China’s debt balloon became even bigger.

Sources: IMF World Economic Outlook Database (October 2019) and Bank for International Settlements data on Credit to the Non-Financial Sector (June 2020).      
Sources: IMF World Economic Outlook Database (October 2019) and Bank for International Settlements data on Credit to the Non-Financial Sector (June 2020).     

Scaled by debt, India’s GDP size is far more impressive than China’s. To be sure, China has created world-class infrastructure but there is debt behind it. More appropriate would be to emulate China’s achievements in primary education.

Uncertainty is rife. It is not that difficult at all to construct a story of pessimism and gloom for any country in the world. Even Germany. It has featured in major corporate frauds and wealth inequality is as extreme there as it is in the United States or China.

Hence, it would be naive to construct a story of unbridled optimism for any country, especially India, given the problems that existed pre-Covid and problems that have been compounded by Covid.

At the same time, as I have argued here, there is an opportunity for India. It has emerged almost wholly unintentionally and largely because the United States is facing extreme uncertainty.

The country is going through convulsive times and is tearing itself apart. The new President about to be elected in November 2024, whether it is the incumbent or his Democratic Party challenger will have his task cut out.

The economy, notwithstanding the recovery in the stock market, is facing challenges on multiple fronts. The society is in the middle of a great churn.

Therefore, international leadership vacuum has emerged, particularly with respect to standing up to China.

If India had the confidence and clarity to tackle its economic challenges at home without falling back on tried and failed methods, then it can also be a global leader of sorts. Chitra Subramaniam echoes my thoughts here.

Finally, the point to note is that just as Mark Twain said that reports of his death were vastly exaggerated, prognostications of doom and gloom for India are overdone. India was probably written off many times in the past. But, reality has a way of confounding experts.

Clearly, there is much work to do and the growth environment has become considerably more unfavourable. There is a natural temptation to retreat into a shell as the world turns hostile and world affairs uncertain.

In this environment, eking out growth rates of around 6 per cent (in inflation-adjusted terms) per annum for the next decade or two will be highly creditable.

Aspiring for anything higher, given the above scenario, would induce policy errors and make the medium to long-term growth situation all the more irretrievable.

This article first appeared on The Gold Standard, and has been republished here with permission.

V. Anantha Nageswaran has jointly authored, ‘Can India grow?’ and ‘The Rise of Finance:Causes, Consequences and Cures’


Latest Articles

    Artboard 4Created with Sketch.