Eight months ago, in “Some macroeconomic musings for 2019” (Business Standard
, 10 January, 2019) I speculated “it is likely that economic growth
will remain below 7 per cent, possibly closer to 6 per cent, in the coming year”. At that time I was upbraided by some fellow members of the economists tribe for being too pessimistic, since most contemporary projections (domestic and international) were indicating 7-8 per cent growth for 2019 or 2019/20. As recently as this July, the Economic Survey projected 7 per cent GDP growth for 2019-20 and the Budget numbers implied 8 per cent. And, in early August, the Reserve Bank exemplified spurious precision by forecasting 6.9 per cent! Now, after the icy shock of the official 2019-20 Q1 GDP growth estimate of 5 per cent, such projections look absurd. Even my earlier expectation of 6 per cent plus looks improbably rosy. The discourse has shifted abruptly to issues such as: Can the slowdown get worse? How long will it last? What are the prospects for the medium-term? Here are some preliminary thoughts, which I shall undoubtedly revise in the course of the coming months and quarters.
Yes, the official GDP growth estimates for the next two or three quarters could well be lower than 5 per cent for three sets of reasons. First, the global economy has softened further in recent months as major players show clear deceleration, notably, the US, China, Germany, the UK, France and Japan. International organisations (such as the IMF, World Bank and OECD) are busy revising down their growth projections for 2019 and 2020 as trade wars take their toll, the decade long American expansion runs out of steam and the threat of a hard Brexit looms large. How long the global slowdown will last and how deep it will be are questions that yield no clear answers at present. Second, on the home front, the post-June prints of high frequency indicators (HFIs), such as corporate earnings, the index of industrial production, purchasing managers’ indices, foreign trade data, tax revenues, financial credit numbers, sales of automobiles, trucks and cement and various service sector indicators, all point to a worsening situation. The extent to which these HFI trends will reflect in the official GDP estimates for the remaining quarters of 2019-20 is an open question, especially given the frailties of the 2011-12 base national income series (see “How fast is India Growing?”, Business Standard
, August 8, 2019). Third, the government’s public recognition of the deepening growth crisis has come unconscionably late and the policy responses, thus far, have been somewhat unconvincing. The rather directionless Budget and subsequent rollbacks of several proposals testify to this, as does the seemingly pointless, and possibly damaging, exercise of public sector bank consolidation.
illustration: Binay Sinha
What about beyond 2019-20? Will we see robust economic growth
in the next five years? With the abolition of the erstwhile Planning Commission five years ago, the public institutional capacity for framing medium-term growth projections and scenarios has vanished. Announcing the target of a $5 trillion economy by 2024 (implying over 8 per cent average annual growth), without accompanying serious analysis, does not shed much light.
Aside from the slowing world economy, there are many institutional and policy impediments to India recovering her high-growth performance of 2003-2011. Some of the more important ones are listed below:
• A substantially worse employment situation (than in 2011) where less than half the working-age population is actually working or seeking jobs. This is India’s lowest labour force participation rate on record and the lowest among G20 economies. It is a result of both supply side weaknesses of poor education (mostly in government schools) and skilling, and demand suppressing factors of complex and rigid labour laws and regulations which hugely discourage fresh employment in the formal sector. The new Code on Wages, with its higher minimum wages, may further reduce formal sector job creation! India’s demographic dividend is being squandered.
• A significantly overvalued exchange rate, which has contributed to export stagnation over the past seven years and discouraged import-competing domestic production, leading to high trade and current account deficits, which make India vulnerable to volatility in oil prices and capital flows. The currency overvaluation has also helped trigger a surge in protectionist customs tariff increases in the last two years and amplified an unfortunate antipathy towards regional trading arrangements, including the Regional Comprehensive Economic Partnership.
• A public sector dominated banking system, stressed by a high legacy burden of non-performing assets, which limits the capacity for fresh lending. Modest recent improvements have been outweighed by new problems in non-bank finance companies following the recent collapse of the hydra-headed Infrastructure Leasing and Financial Services Company. Debt-stressed corporate balance sheets also discourage investment.
• A decade of high fiscal deficits and public sector borrowing requirements, which have helped shore up interest rates and crowd out private investment. This pattern of fiscal laxity is likely to continue, given the narrow revenue base and burgeoning demands for populist spending programmes.
• A seriously distorted framework of agricultural marketing, including a very costly and inefficient public system of foodgrain pricing-procurement-storage-distribution. The high subsidies for food, fertiliser and irrigation water starve public investment in productive, rural infrastructure. Agriculture is also increasingly stressed by water scarcity and climate change.
• Relatively weak and inefficient infrastructure services. An example is the mostly government-owned and loss-making system of electric power distribution, weighed down by large subsidies for agriculture and other privileged consumer segments (at the cost of manufacturing and service enterprises) and endemic operational weaknesses.
• A colonial legacy of complex, heavy-handed and unresponsive government bureaucratic structures, which take a big toll on economic enterprise and activities. An increasingly centralised approach to administrative decision-making is further compounding the problems.
• Highly stressed and inadequately resourced judicial and police systems, which weaken basic law and order and significantly undermine enforcement of commercial contracts.
Against this challenging background of policy and institutional constraints it will be difficult for India to significantly accelerate economic growth
from present rates. While the future is inherently uncertain, average GDP growth over the next five years may well remain in the 5-6 per cent range. Such modest growth rates will have profound, negative implications for job-creation, inter-regional disparities, political stability, social stress, India’s international role and external and internal security. These are subjects for another day.
The writer is Honorary Professor at ICRIER and former Chief Economic Adviser to the Government of India. Views are personal