Getting the growth back?

Prime Minister Narendra Modi has all along likened the campaign against coronavirus to a war.  He could be dead right, but in a respect farthest from his intention.  Eleven weeks after the lockdown, the Indian economy is war-ravaged without our ever having been in any combat.  We did not need last fortnight’s official gross domestic product (GDP) estimate for the January-March quarter of 2020 to tell us this; it was evident to anyone with even the slightest sensitivity to economic reality. 

Rajiv Bajaj gloated sarcastically when he told Rahul Gandhi last week that the government had flattened the wrong curve, that of the GDP and not virus infections, but he was wrong: The India GDP curve had begun flattening a couple of years ago.  The lockdown just accelerated it.  It would be a major miracle if the economy does not contract this year.  Even the Reserve Bank of India  Governor Shaktikanta Das, a loyal cheerleader for the government and the economy not only this year but during demonetisation as well, had to say that the growth this year is likely to slip into the negative territory. 

At the same time, Covid infections seem to be growing unabated.  India now has the fifth highest number of cases in the world.  Despite efforts to downplay the bad news, officials admit that the peak may still be far away.  The relevant question now is, what next?  A well-conceived and managed scheme leading to a desirable future would comprise three sequential stages: Recovery, restructuring and resurgence. 

While India is hardly the only country to suffer a pandemic recession, its recovery is likely to be much more problematic than many of the others’ for two reasons.  First, the government recovery initiative is both poor in conception and inadequate in quantum.  The consensus now is that the hodgepodge of measures forming the so-called Rs 20 trillion stimulus is neither a true stimulus nor represents added government expenditure of anything more than about Rs 2 trillion (“The stimulus that wasn’t,” Business Standard, May 19).  Not much money has been put into the people’s pockets to prime the consumption pump, a precondition for recovery.

Second, the massive exodus of migrant labour during the lockdown is a very serious handicap.  Pharmaceuticals manufacturers in Himachal Pradesh, farmers in Punjab and Haryana, chemical firms in Gujarat, all of which suffered little slowdown in production, have all been resuming activities in a halting manner, dependent as they are in a major way on out-of-state workers.  Other activities elsewhere using non-local labour to various extents would also face similar problems.  The hopes for a quick, V-shaped bounce-back were slim in the first place, because the economy was already slowing down prior to the lockdown; they have now nearly receded into oblivion.

Most of the rest of the India stimulus package comprises measures and reforms meant for the restructuring phase.  While they are welcome in intent, their timing is quite evidently premature.  For example, a large number of micro, small and medium enterprises would hesitate to avail of guaranteed credit, since they face the double whammy of a collapsed demand and non-availability of workforce at affordable wages.  The government has done what academic economists are sometimes guilty of: Assuming away the difficult parts, in this case the recovery in the first place.

Ever since the world started viewing China’s role in the spread of the coronavirus with some suspicion, a number Indian pundits and policy-makers have considered this as a heaven-sent opportunity to attract multinational enterprises experiencing discomfort with our eastern neighbour.  Some fanciful scenarios have been in the air and many have interpreted the atmanirbhar package as a prelude to welcoming itinerant capital to India.  A few state governments have hastily amended labour laws to give the impression of an investment-friendly climate.

Again, much of this is premature, to say the least.  In the first place, despite the severe hand-wringing of leaders, like the American President Donald Trump, captains of industry have been either non-committal or far more circumspect in their reaction to post-Covid China. The expected industrial exodus from China may well be a chimera.  We might actually see only a small trickle of firms leaving China, and that too possibly for reasons not related to the uncertainties caused by the pandemic. 

To expect that even these would find India an alternative location is to push further our wishful thinking.  To consider India a desirable option for setting up a manufacturing shop, it must offer at least a few comparable advantages, the most important of which would be the quality, productivity and reliability of labour and infrastructure.  On all of these, India today lags far behind China.  The lockdown has also exposed many more of our shortcomings as a destination for foreign direct investment, notwithstanding our rather inflated claims of ease of doing business.  On present reckoning, both Thailand and Vietnam, and even Sri Lanka might be thought of as being placed more advantageously than India. 

We need to introspect seriously about what we lack and what we must do to get out of the slump (to be discussed in a companion piece shortly).  Until then, Mr Modi’s assurance of getting our growth back at the annual session of the Confederation of Indian Industry last week sounds more like talking up the economy.  

The writer is an economist

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel