Abstract
Hampered by declining economic growth, India needs to take bold and practical economic measures to overcome the adverse impact of the coronavirus pandemic, compounded by past economic blunders such as the demonetisation and the haphazard implementation of the GST regime. Mohan Guruswamy analyses that the seeds of the current economic slide were sown by the UPA II regime by its populist measures that were wasteful, unproductive, and reduced capital expenditure. Non action by the NDA governments on these issues has made it worse. He argues that India must not shy away from recourse to deficit financing to overcome the current unprecedented challenges faced by the economy on account of the Covid-19 disruption. India needs to increase its stimulus package from a mere 0.3% of the GDP to at least 10% to boost economic revival and growth. India’s reserves of $490 billion ($530 billion as of recent figures) is available to be tapped for economic revival. The measures must focus on addressing the severe impact on weaker sections of the society such as the poor, lower middle-class, and the farmers.
The Covid2019 shock hit all world economies and has caused a serious contraction in all of them. Ironically, in the advanced economies like the USA, UK, Japan, and others, it exposed their intrinsic strengths with highly evolved social security systems by and large being able to absorb the labor displacement and the ability to quickly put together a fiscal fight back plan. Even China has been able to quickly recover its pole position as the worlds leading exporter and industrial production center. In India, Covid2019 exposed our co-morbidities, and has further opened the traditional faultlines, with the large unorganized labor cohort bearing the brunt of the costs. At last count the CMIE estimates over 130 million daily wagers in the urban centers being rendered jobless and homeless.[i] India’s economy which has been in distress for most of the last decade in now seriously stricken.
When India’s economic history is written in some future date, and when a serious examination is done of when India lost its way to its ‘tryst with destiny’, the decade of 2010-20 will be highlighted.
When India’s economic history is written in some future date, and when a serious examination is done of when India lost its way to its ‘tryst with destiny’, the decade of 2010-20 will be highlighted. The facts speak for themselves. India’s real GDP growth was at its peak in March 2010 when it scaled 13.3%. The nominal GDP at that point was over 16.1%. The nominal GDP in September 2019 was at 6.3%, it’s lowest in the decade. Since then the downward trend is evident and we are now scraping the bottom at about a real GDP growth rate of 4.5%, this too with the push of an arguably inflationary methodology. Our previous CEA, Arvind Subramaniam, estimated that India’s GDP growth is overestimated by at least 2.5%. BJP MP and economist Subramaniam Swamy was even more pessimistic. He estimated it to be 1.5%.
The decline in the promise is amply evident by the change in the make up of the economy during this decade. In 2010 Agriculture contributed 17.5% of GDP, while Industry contributed 30.2% and Services 45.4%. In 2019 that has become 15.6%, 26.5% and 48.5% respectively. The share of industry has been sliding. This is the typical profile of a post-industrial economy. The irony of India becoming post-industrial without having industrialized must not be missed.
Decline in Capital Investment
The most significant cause for the decline of growth is the decline in capital investment. It was 39.8% of GDP in 2010 and is now a good 10% lower. Clearly without an increase of capital investment, one cannot hope for more industrialization and hence higher growth. What we have seen in this decade is the huge increase in Services, which now mostly means increase in Public Administration and informal services like pakora sellers.
In 2010 it seemed we were well on track. But now we are struggling to get past $3 trillion, and the $5 trillion rendezvous that Modi promised by 2024 will have to wait longer.
At the turn of the century, as China’s GDP began its great leap forward (from about $1.2 trillion in 2010 to $14.2 trillion in 2019), was also a heady moment for India whose GDP of $470 billion began a break from the sub 5% level of most of the 1990’s to the rates we became familiar with in the recent past (to hit a peak stride of 10.7% in 2010). At that point in time, if growth rates kept creeping up, we could have conceivably gone past $30 trillion by 2050. But for that the growth rate should consistently be above 7%. It seemed so feasible then. In 2010 it seemed we were well on track. But now we are struggling to get past $3 trillion, and the $5 trillion rendezvous that Modi promised by 2024 will have to wait longer.
To be fair to Modi and the NDA, the decline began early in the second term of the UPA when capital expenditure growth had begun tapering off. Dr. Manmohan Singh is too canny an economist to have missed that. But UPA II also coincided with the increasing assertion of populist tendencies encouraged by the Congress President and her extra-Constitutional National Advisory Council. The decline in the share of capital expenditure was accompanied by a huge expansion in subsidies, most of them unmerited. Instead of an increase in expenditure on education and healthcare, we saw a huge expansion in subsidies to the middle and upper classes like on LPG and motor fuels. Even fertilizer subsidies, which mainly flow to middle and large farmers with irrigated farmlands, saw a great upward leap. Clearly the money for this came from the reduction in capital expenditure. Modi’s fault in the years since 2014 is that he did nothing to reverse the trend, and only inflicted more hardship by his foolish demonetization and ill-conceived GST rollout.
The realities are indeed stark. The savings/GDP ratio has been in a declining trend since 2011 and Modi has been unable to reverse it. Consequently, the tax/GDP ratio and the investment/GDP ratio have also been declining. The rate of economic growth has been suspect and all objective indicators point to it being padded up. The drivers of economic growth such as capital expenditure is dismal. Projects funded by banks have declined by over half since 2014 to less than Rs.600 billion in 2018-19. Projects funded by the market have dropped to rock bottom. Subsequently the manufacturing/GDP ratio is now at 15%. Corporate profits/GDP ratio is now at a 15-year-old low at about 2.7%. You cannot have adequate job creation if these are dipping. Declining rural labor wage indices testify to this.
Between October 2007 and October 2013 rural wages in the agricultural and non-agricultural sectors grew at 17% and 15%, respectively. Since November 2014, however, agricultural and non-agricultural sector wages grew at only 5.6% and 6.5%, respectively. In 2019 average rural wage growth has further fallen to 3.1%.[ii]
Bharat and India Divide
It is very clear now that the urban lane has been moving well in India. Indeed, so well that an Oxfam study revealed that that as much as 73% of the growth during the last five years accrued to just 1% of the population.[iii] This does not mean it is just the tycoons of Bombay and Delhi who are cornering the gains. Government now employs close to 25 million persons, and these have now become a high-income enclave. The number of persons in the private and organized sector is about another ten million. In all this high-income enclave numbers not more than 175-200 million (using the thumb rule of five per family). Much of the consumption we tend to laud is restricted to just these.
The simple fact that the share of Agriculture is now about 15.6% of GDP and falling, while still being the source of sustenance for almost 60% of the population reveals the stark reality. A vast section of India is being left behind even as India races to become a major global economy.
Agriculture is still the mainstay of employment. Way back in 1880 the Indian Famine Commission “had observed that India had too many people cultivating too little land”. This about encapsulates the current situation also. While as a percentage the farmers and farmworkers have reduced as a part of the work force, in absolute terms they have almost tripled since 1947. This has led to a permanent depression in comparative wages but has also led to a decline in per farmer production due to fragmentation of holdings. The average farm size is now less than an acre and it keeps further fragmenting every generation.[iv] The beggaring of the farming community is inevitable. The only solution to this is the massive re-direction of the workforce into less skilled vocations such as construction.
The simple fact that the share of Agriculture is now about 15.6% of GDP and falling, while still being the source of sustenance for almost 60% of the population reveals the stark reality. A vast section of India is being left behind even as India races to become a major global economy.
As the decade ends, the Bharat and India divide have never been more vivid. Our social scientists are still unable to fix a handle to this because the class, cultural and ethnic divides still eludes a neat theoretical construct. Yet there can be little disagreement that there are two broad parts to this gigantic country and one part is being left behind. The distance between the two only increased from 2010 to 2020. This is indeed the lost decade. Recovering from this will take long and will be painful. If we take too long, we might have used up a good bit of the ‘demographic dividend’ and the demographic window of opportunity. The ageing of India will be upon us by 2050[v].
Covid-19 Impact – Increasing Economic Disparities
In the recent months the onslaught of the Covid2019 induced lockdown has been quite relentless. From 2004-2014 India’s GDP grew at an average of 7.8%. At its peak it went past 10% in 2010-11 Then it started slowing down. The new government was unable to return to the old growth rates because it did not care to learn from the experiences of the previous regime, which began to spend more on giveaways, misguidedly thinking it was welfare economics, and took the accelerator off capital expenditure. Even though capital expenditure is driven in India by government spending, this government spending is very different from subsidies and giveaways. Subsidies generally tend to be misdirected with the already well-off garnering most of it. Minimum Support Prices (MSP) are a huge annual subsidy[vi]and 90% of it accrues to the states of Punjab, Haryana, and the coastal region of Andhra Pradesh. Fertilizer subsidies tend to accumulate to the advantage of large and medium farmers or to about a quarter of all land holdings. Ditto for free power. The only welfare expenditure to benefit farmers is investment in irrigation, rural infrastructure, and social welfare like education and health. Unfortunately, this has been on the decline. This has exacerbated disparities, both local and regional. With capital expenditures declining, job creation suffered and the inevitable slowdown of GDP growth happened. As we started diving, the government inflicted the so-called Demonetization adding to our woes. Just as things began to look up, the Covid2019 pandemic overtook us.
Now the only dispute on national income is how much will be the contraction. The Finance Ministry hopes there won’t be any. The IMF has officially said it will be 4.5%. The rating agencies predict a contraction of 6.8%, while many more are suggesting something closer to 10%. How do we deal with is now? The government of India has tended to be “conservative” in its outlook and has made no serious suggestion on economic stimulus. What it calls a stimulus is actually not a stimulus. The problem is more philosophical.
The divide between the Keynesians and the Chicago school is as intense and often antagonistic as the Sunni-Shia, Catholic-Protestant or Thenkalai-Vadakalai Iyengar divides.
Keynesian economics is a theory that says the government should increase demand to boost growth. Keynesians believe consumer demand is the primary driving force in an economy. As a result, the theory supports expansionary fiscal policy. The Chicago School is a neoclassical economic school of thought that originated at the University of Chicago in the 1930s. The main tenets of the Chicago School are that free markets best allocate resources in an economy and that minimal or zero government intervention is best for economic prosperity. They abhor fiscal deficits.
Inadequate Stimulus Package
The instruments used to beat countries like India into submission are ratings agencies such as Moody’s, which just downgraded India. We shouldn’t lose too much sleep over it. India is a hardly a borrower abroad and is more of a lender holding $490 billion as reserves.
The only reason why the actual stimulus package is only Rs.63K crs is the obsession with fiscal deficits by Chicago economists such as Raghuram Rajan and his former student the hapless Krishnamurthy Subramaniam, the present CEA. They are true disciples of the Washington Consensus to judge countries like India by the fiscal deficit size. The instruments used to beat countries like India into submission are ratings agencies such as Moody’s, which just downgraded India. We shouldn’t lose too much sleep over it. India is a hardly a borrower abroad and is more of a lender holding $490 billion as reserves.
That is why the CEA when asked about a big stimulus said: “There are no free lunches!” That’s exactly what Milton Friedman said. But they quite happily ignore the biggest deficit financed economy in the world is the USA. Raghuram Rajan told Rahul Gandhi on his videoconference that a stimulus of Rs.65K crores would suffice in the present situation[vii]. The Nobel Laureate Abhijit Bhattacharya and former CEA Arvind Subramaniam suggest a stimulus package like the USA or Japan[viii]. The USA has just announced a stimulus of over $3.5 trillion or over 15% of GDP. Modi’s stimulus is a mere 0.3% of GDP.
What is ‘Fiscal Deficit?’ A fiscal deficit occurs when a government’s total expenditures exceed the revenue that it generates, excluding money from borrowings. Deficit differs from debt, which is an accumulation of yearly deficits.
Many serious economists regard fiscal deficits as a positive economic event. For instance, the great John Maynard Keynes believed that deficits help countries climb out of economic recession. On the other hand, fiscal conservatives feel that governments should avoid deficits in favor of balanced budgets.
India’s debt/GDP ratio is by contrast a modest 62% and yet it intends to pump in a mere 0.3% of GDP as stimulus.
The fastest growing economies in the world, and now its biggest – USA, China, Japan and most of Western Europe – have the highest debt/GDP ratios. Japan’s debt/GDP is over 253% before the latest stimulus of 20% of GDP. China’s debt is now over 180% of its GDP. The USAs debt/GDP is close to 105% yet it is raising $3 trillion as debt to get it out of the Covid2019 quagmire. India’s debt/GDP ratio is by contrast a modest 62% and yet it intends to pump in a mere 0.3% of GDP as stimulus.
Pump priming the economy by borrowing per se is not bad. It is not putting the debt to good use that is bad. Nations prosper when they use debt for worthwhile capital expenditure with assured returns and social cost benefits. But we in India have borrowed to give it away as subsidies and to hide the high cost of government. To give an analogy, if a family has to make a choice of borrowing money to fund the children’s education or to support the man’s drinking habit, the rational choice is obvious. The children’s education will have a long-term payback, while the booze gives instant gratification. But unfortunately, our governments have always been making the wrong choices.
If borrowed money is used productively and creates growth and prosperity, it must be welcomed. What we want to hear from the government is not about fiscal deficit targets, but economic growth, value addition, employment, and investment targets. Our governments have hopelessly been missing all these targets.
Modi’s Options – Need for Bold Decisions
So, what can Modi do now to get us out of this quagmire? If the regime abhors a stimulus financed by deficit financing there are other options that can be exercised. But he is hamstrung with a weak economic management team with novices as the two key players, the Finance Minister and RBI governor.
India has over $490 billion nesting abroad earning ridiculously low interest. Even if a tenth of this is monetized for injection into the national economy, it will mean more than Rs.3.5 lakh crores. At last count the RBI had about Rs.9.6 lakh crores as reserves. This is money to be used in a financial emergency. We are now in an emergency like we have never encountered or foresaw before. Even a third of this or about Rs.3.2 lakh crores is about five times the present plan.
There is money in the trees, and all it needs is a good shake up to pick the fruits. The pain of the lockdown must not be borne by the poor alone. The government can easily target 5% of GDP or about Rs.10L crores for the recovery fund as an immediately achievable goal.
There are other sources of funds also, but tapping these will entail political courage and sacrifices. Our cumulative government wages and pension bill amounts to about 11.4% of GDP. After exempting the military and paramilitary, which is mostly under active deployment, we can target 1% of GDP by just by cancelling annual leave and LTC, and rolling back a few DA increases.
The government can also sequester a fixed percentage from bank deposits, say 5% of deposits between Rs.10-100 lakhs and 15-20% from bigger deposits for tax-free interest-bearing bonds in exchange. The ten big private companies alone have cash reserves of over Rs.10 lakh crores[ix].
There is money in the trees, and all it needs is a good shake up to pick the fruits. The pain of the lockdown must not be borne by the poor alone. The government can easily target 5% of GDP or about Rs.10L crores for the recovery fund as an immediately achievable goal.
This money can be used to immediately begin a Universal Basic Income scheme, by transferring a sum of Rs.5000 pm into the Jan Dhan accounts for the duration of the financial emergency; fund GST concessions to move the auto and engineering sectors in particular; begin emergency rural reconstruction projects to generate millions of new jobs and get our core infrastructure sectors like steel, cement and transportation moving again.
Getting money to move India again is not a huge problem. What comes in between are the philosophical blinkers. Call it Chicago economics or the Gujarati mindset.
Notes
[i] https://www.businesstoday.in/sectors/jobs/india-unemployment-rate-hits-26-amid-lockdown-14-crore-lose-employment-cmie/story/401707.html
[ii] https://www.financialexpress.com/economy/farm-wages-growth-fell-to-a-four-quarter-low-in-q3-fy-20/1789235/
[iii] https://economictimes.indiatimes.com/news/economy/indicators/wealth-of-indias-richest-1-more-than-4-times-of-total-for-70-poorest-oxfam/articleshow/73416122.cms?from=mdr#:~:text=Wealth%20of%20India’s%20richest%201%25%20more%20than%204%2Dtimes%20of,total%20for%2070%25%20poorest%3A%20Oxfam&text=The%20Oxfam%20report%20further%20said,particularly%20poor%20women%20and%20girls.
[iv] https://www.prsindia.org/policy/discussion-papers/state-agriculture-india
140 million hectares of land is used as agricultural area, as of 2012-13. Over the years, this area has been fragmented into smaller pieces of land. As seen in Table 3, the number of marginal land holdings (less than one hectare) increased from 36 million in 1971 to 93 million in 2011. Marginal and small land holdings face several issues, such as problems with using mechanization and irrigation techniques.
[v] https://economictimes.indiatimes.com/news/politics-and-nation/demographic-time-bomb-young-india-ageing-much-faster-than-expected/articleshow/65382889.cms
[vi] https://www.thehindubusinessline.com/opinion/all-you-wanted-to-know-about-minimum-support-price/article7342789.ece
[vii] https://www.hindustantimes.com/india-news/in-video-conversation-with-rahul-rajan-suggests-65k-crore-aid-for-poor/story-CtrtvW6HErR16L9m1t9wHP.html
[viii] https://economictimes.indiatimes.com/news/economy/policy/rahul-gandhi-in-conversation-with-abhijit-banerjee-india-needs-a-bigger-stimulus-package-like-us-japan-to-revive-economy/videoshow/75549770.cms
[ix] https://www.screener.in/screens/2551/Cash-Rich-Companies/
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