The five-trillion-dollar question

It is not credible that the Indian economy will reach the touted $5 trillion target by 2025, even in the unlikely event the rupee appreciates dramatically. But it won’t be a national calamity and the goal may well take an additional eighteen months to achieve, if growth rates revive to 7.4%. More to the point is the need to judge the Indian economy’s performance and condition from a long-term perspective and the imperative to adopt policy changes necessary to resume a higher growth trajectory. However, it must be remembered that India is a challenging country to govern, which experiences competing demands that routinely threaten to turn into violent unrest if they are not met. Balancing competing claims for immediate gratification and the need for investment in infrastructure to augment long-term growth requires considerable political dexterity and policy acumen.

The crucial issue, pertaining to the recent past, one has to bear in mind is the parlous condition of the economy inherited by NDA II in 2014. The antecedent fiscal profligacy was clearly unsustainable and the banking crisis owing to indiscriminate lending, some of it startlingly corrupt, were not a good place to start. The only unexpected contemporaneous bonus was the fall in oil prices and it would perhaps have been wiser to use a significant portion of the resultant savings to address the grim NPA issue affecting banks.

Admittedly, it was easy to baulk at too readily salvaging banks engaged in malpractice though the dynamic economic benefits would have been worth the apparent leniency. The failure of auditors and regulators to interdict the ILFS ‘Wild West’ show was a serious fiasco, with a dire impact, though it began before 2014. India’s weak export performance should be another concern to policy makers since India’s GDP trade ratio is 43% and employment generation will become increasingly dependent on it. And although world market conditions have been deteriorating it should be noted that economic activity being relocated from China is benefiting other Asian countries rather than India. The issues that bedevil India’s exports are a fragmented industrial structure, lack of R&D, poor quality, high tariffs on imported inputs and the indirect costs entailed by inadequate infrastructure, all of which require multifaceted measures that will impact slowly.

The NDA II government can indeed claim numerous successes in economic change management whose benefits will be reaped in the future, some of them gradually. The major redistributive policies and attendant curtailing of leakages through formal identification measures are highly laudable. Many of the programmes and their superior delivery will eventually be reflected in augmented productivity as well, for example, due to the provision of improved access to healthcare and more hygienic living conditions. Many others, like ‘inclusiveness’ in banking and its digitisation, will also indirectly benefit economic performance over time. Mobile banking is also having an unrecognised positive spinoff by making literacy an urgent necessity. Piped water to all homes is now promised and the determination to ensure success of the historic programme is reflected in the appointment of one of India’s finest public servants to supervise its implementation. The accusation that the incumbent NDA II are a government of the rich is therefore truly unmerited.

Some policies like demonetisation and the roll out of GST, with the benefit of hindsight, could have been better thought out and implemented differently. Announcing demonetisation in advance and requiring all deposits to be stringently accounted for in the interim period might have been less disruptive. Unfortunately, it delivered a serious blow to the informal economy and some of the consequences appear to have had more durable after-effects. The roll out of the GST, the product of complex negotiations between the Centre and States, was not entirely satisfactory and its implementation unnecessarily vexatious for businesses and only modified in the aftermath of encountering major hurdles. These might have been mitigated by less ambition and more simplicity and its vital importance to the economy more readily understood. The unfortunate negative impacts of both demonetisation and the GST implementation, occurring in quick succession, worsened the shock to the economy that would have likely been less severe had more time elapsed between them. And the negative consequences have continued to haunt the economy.

What continues to falter, in a multiplicity of ways, is India’s regulatory environment for business and much of the devil is in the detail. It is true there have been many improvements in the ‘ease of doing business’, as India’s elevation in surveys of international ranking demonstrates. But there is still a long way to go before India is an encouraging place to operate a business and not just for the politically-connected who also exercise market power, and major foreign investors. There is the deterrence of overzealous compliance requirements, like the recent enhanced frequency of reporting cash flow status to regulators and the only latterly withdrawn threat to arrest company directors if the CSR allocation is not spent. Businesses may not be able to comply with the stipulation to allocate CSR owing to severe cash flow problems and the need for expensive credit to compensate for it because government departments and PSUs delay payment of dues unconscionably. And negotiating with PSU counter parties is not for the faint-hearted, with unfair contracts the norm and disputes beyond judicial remedy since a metaphorical loaded gun is pointed by them at the back of the head of contractors.

The Indian economy is undergoing structural transformation at many levels and that entails some immediate distress in the expectation of more durable long-term socio-economic benefits. Such a phenomenon always inflicts pain, often on the undeserving. Yet the available evidence justifies the claim that this process is indeed underway in India. Policies to impel it require the kind of political courage usually lacking in Indian political life and it is a refreshingly novel experience in contemporary India. The transformation of Indian economy initiated on a pioneering scale will be the lasting legacy of Prime Minister Narendra Modi, in addition to his decisive foreign policy engagements. The former will underpin India’s hitherto elusive advanced configuration as an economy and proposals to insulate sectors suffering falling sales in the current downturn, like motor vehicles, will be unhealthy in the context of a changing economic structure. Deep-rooted transformation inevitably implies some economic activities will decline and indeed disappear and sector-specific support to protect them will merely delay change and waste resources.

Ultimately, the goal is enhanced productivity by creating incentives, primarily by ensuring a competitive environment, appropriate infrastructure facilities and the absence of excessive regulatory interference. Policies should include swingeing disinvestment, preceded by proper accounting of languishing public assets, a lot of it in land holdings and much of it owned by states. The latter underlines how important it is to recognise that the central government is not the sole custodian of national economic performance since vital issues, like land acquisition, are in the domain of state discretion, decreed by the Indian Constitution. And the unprecedented NDA II policy devolving greater financial resources to empower states makes them more responsible for outcomes.

India’s current economic predicament is the outcome of the highly challenging situation inherited from an unusually incompetent and unethical UPA government, but subsequent government policies might have dealt with it better had they been more thoughtful in some key areas. Of course, the benefit of hindsight is a wonderful thing and the antecedent policy miss-steps are forgivable though lessons need to be learnt. What these lessons are must be interpreted through superior statistics, some of which, like extrapolation of firm data to calculate output, is not very inspiring. The recent somewhat hasty government reaction to the falling growth rate is puzzling because corporate tax breaks to spur investment, with industry operating significantly below capacity, seems counterintuitive. One would have imagined measures to spur demand, some of it through targeted labour-intensive infrastructure spending, perhaps in agriculture, might be the more obvious option. And it would have been more popular with an increasingly uneasy electorate, thirty million of which is directly and indirectly impacted positively by one percentage point of additional growth.

Views are personal.

The author has taught international political economy for more than two decades at the London School of Economics and Political Science.