‘India’s Vision to Become 3rd Largest Economy Not a Cause for Celebration’: Ex-RBI Governor Subbarao

‘We are a large economy because we are 1.40 billion people. And people are a factor of production. So, we are a large economy because we have people. But we are still a poor country,’ said the former RBI governor.

New Delhi: There’s no reason for celebrating the vision to become the third largest economy in the world by 2029, as India may still be a poor country, former Reserve Bank Governor D. Subbarao has said.

Subbarao cited Saudi Arabia, saying that becoming a rich country does not necessarily mean becoming a developed nation.

“In my view, that is possible (India becoming the third-largest economy), but it’s not a celebration. Why? We are a large economy because we are 1.40 billion people. And people are a factor of production. So we are a large economy because we have people. But we are still a poor country,” Subbarao said, according to news agency PTI.

India is the fifth largest economy with a GDP of $3.7 trillion (estimate FY24), according to the finance ministry.

With a per capita income of $2,600, India is in the 139th position in the league of Nations in terms of per capita income. And the poorest among BRICS and G-20 nations, he said.

So, the agenda for moving forward is quite clear. Accelerate the growth rate and ensure that the benefits are going to be shared, he added.

While the prime minister articulated a vision for India to achieve developed status by 2047, Subbarao underscored the necessity of four critical elements – rule of law, strong state, accountability, and independent institutions – to realise this aspiration.

ADB Revises India’s Growth Forecast for FY2023 Downward From 6.4% to 6.3%

“Slowing exports could foment headwinds for the economy, and erratic rainfall patterns are likely to undermine agricultural output,” ADB said.

New Delhi: The Asian Development Bank (ADB) on Wednesday (September 20) revised India’s growth forecast downward to 6.3% from 6.4% projected earlier. The ADB said this was being done because an inadequate and erratic monsoon had impacted agricultural production.

“Slowing exports could foment headwinds for the economy, and erratic rainfall patterns are likely to undermine agricultural output,” Economic Times quoted ADB as saying. However, the Bank retained its earlier growth forecast for next year, projecting that the Indian economy will grow 6.7%

“Inflation has moderated broadly, but the forecast for FY2023 (2023-24) is raised owing to a spike in food prices, and the forecast for FY2024 (2024-25) is marginally lowered as core inflation moderates,” the ADB report said about inflation.

ADB also lowered the economic growth forecast for developing Asia to 4.7% this year, down from the 4.8% expansion the bank had forecast in April.

India’s Economy 16.5 Years Behind China’s: Bernstein Research Report

India is behind China by 21 years in patent, 20 years in FDI, 19 years in forex reserves, and 17 years in exports. On nominal GDP and per capita income, India is 15 years behind. In consumption expenditure, it is 13 years behind.

New Delhi: India is a median 16.5 years behind China on broad business and economic parameters, according to latest research by brokerage firm Bernstein, Business Standard reported.

Bernstein measured the India-China gap by looking at various yardsticks that included patents, foreign direct investment (FDI), forex reserves, nominal gross domestic product (GDP) and exports.

When it comes to patents, the report found India is behind China by 21 years. In terms of FDI, India is 20 years behind China, 19 years in forex reserves, and 17 years in exports.

On nominal GDP and per capita income, India is 15 years behind. In consumption expenditure, it is 13 years behind. On gross fixed capital formation, it is 16 years behind.

Therefore, it has much catching up to do, the newspaper cited the report as saying.

Bernstein’s analysis is based on data from the Reserve Bank of India (RBI), the China’s National Bureau of Statistics, the Ministry of Statistics and Programme Implementation, the World Bank and the World Intellectual Property Organization.

Also read: Tech, Infra, Scale: The Challenges Hindering India’s Transition From the ‘Made in China’ Tag

India’s GDP growth

China being ahead of India in these parameters is understandable given that, a decade ago, India’s GDP was only the 11th largest in the world, the newspaper reported.

But in recent years, India became the fifth largest economy.

Last year, India’s GDP of $3.53 trillion pushed ahead of the UK’s $3.38 trillion, to become the fifth largest economy. These calculations were based on the numbers estimated by the International Monetary Fund.

However, the New Indian Express analysed the nominal GDP numbers, saying that “the trouble with GDP numbers is that they undergo a series of revisions and the final data comes only with a lag of two to three years. In other words, first estimates of national output are ballpark figures and are subjected to revisions, both upwards and downwards.”

It’s also important to note that nominal GDP of a country is expressed in terms of current year prices of goods and services, whereas real GDP is the inflation-adjusted GDP of a country. 

Another piece in Deccan Herald, published in July, analysed the GDP growth, saying, “All high-income countries get into low GDP growth orbit thanks to having attained economic prosperity and falling population, whereas developing countries record higher GDP growth. Unsurprisingly, India, a poor developing country, despite not so impressive growth of about 7%, in current dollars during 2013-2022, moved past these four countries to become the fifth largest.”

However, India is far behind in terms of per capita income, the newspaper noted.

Can India reduce the gap with China?

India aims to hit $10 trillion by 2030, a target which experts say is very achievable. Business Standard said that India can leverage the slowing down of Chinese growth.

“Annual GDP growth was only 3% in 2022, compared to 8.4% in 2021, according to the World Bank. India is growing faster, at 7%, in 2022 and the expectation is that it will continue to grow at that level or higher,” said the business daily.

“The geopolitical tensions between the US and China have provided India with some new leverage – many global companies manufacturing in China are hedging their bets and India has managed to persuade the likes of Apple to shift manufacturing capacity to the country and also export a large part of its production,” it said.

According to Business Standard, India also has a growing young workforce with labour costs lower than China. But China’s productivity per labour is far higher.

In terms of manufacturing, India is heavily dependent on China for its raw material needs. And “China has become the manufacturing hub of the world because it is able to produce things at scale. And having produced things at scale it is able to sell them for cheap. By selling them for cheap, it is able to dominate,” Arun Kumar, retired professor of economics at the Jawaharlal Nehru University, had told The Wire in June.

Moreover, despite having a growing workforce, India doesn’t have enough quality jobs.

So, the population growth could become a liability for India if it doesn’t create enough jobs.

The Electoral Battle for 2024 Merits a Deeper Reflection on the State of India’s Economy

The BJP government at the Centre has often harped on the ‘positive optimism’ and ‘strength’ for those betting big on India’s rising growth potential. A closer look at the Indian economy’s own macro numbers, however, paints a different picture. 

Two of the largest emerging markets aren’t firing on all engines in their respective growth stories. Amidst a weakening Chinese economy, India’s own economic position, as a large emerging market economy with a demographically positive employment base, offers greater optimism than some of the other emerging markets and the more industrially advanced nations.

The BJP government at the Centre, in the nine years since it was elected, has often harped on this signalling message to project ‘positive optimism’ and ‘strength’ for those betting big on India’s rising growth potential as against other nations. Efforts by foreign investors and firms to decouple from China did offer an opportunity to invest in the growing potential of the Indian market. However, not all has been well with India’s economy. 

As we get closer into the 2024 Lok Sabha election cycle, it’s quite plausible to hear a lot more rhetorical activism, hype over reality, fiction over fact, around what the Narendra Modi government did right – in making India a ‘shining’ star amidst a universe of struggling, recession-affected, debt-ballooned economies. 

A closer look at the Indian economy’s own macro numbers, however, paints a different picture. 

There is more cause for trouble and skepticism than optimism. Yes, India’s potential is massive, but on evidence, we don’t see much optimism or hope in the current government’s handling of the economy and the direction of policy-craft for the economy’s medium-to-long term vision.

Source: Trading Economics

India’s GDP growth rate, in the past decade, hasn’t really picked up but has rather seen a declining trend since the post-demonetisation shock effect of 2016. The COVID-19 pandemic-induced nationwide lockdown caused a deep vertical fall in India’s already slowing growth rate, and the recovery ever since then has observed a ‘K-Shaped’ pattern, with an unequal trajectory, whereby, some income groups (with access to more factor resources) have made more wealth/money than those positioned at the mid-and lower bottom of the pyramid.

Source: Trading Economics

Gross Fixed Capital Formation (GFCF), an indicator that is critical for reflecting the productive capacity and (private) investment scenario for an economy, has been on a volatile-declining trend trajectory for India post-2021. A higher volatility in GFCF also reflects a weak investment demand and lower capacity utilisation for firms. While services have done reasonably well in the post-pandemic recovery scenario, industrial production and manufacturing growth remain woefully inadequate, in creating ‘good’ jobs and a better growth environment.

Source: Trading Economics

A positive data point from a bank and financial growth point of view is the gradual rise observed in the overall bank loan credit growth, which amidst the non-performing assets (NPA) crisis, was seen declining from 2018 onwards. The increase in loan growth or supply of loanable funds may be aiding the volatile rise of GFCF numbers, but a lot remains unclear on the ‘realised growth potential’ as much of these numbers hasn’t actively contributed to a sustainably higher growth trajectory.

Source: Trading Economics

At the same time, a rise in loanable funds will be a consequence of the nature of monetary policy anchored by the RBI and the fiscal policy of the Union government. So far, amidst rising inflation, higher interest rates (that affect borrowing-lending patterns) will negatively affect the ability of banks to provide cheaper credit to the private sector (assuming there is demand for such credit). 

Source: Trading Economics

If we look at the numbers more closely, India’s core inflation rate has remained higher than the bank loan growth from late 2019 onwards till mid-2022, and since then, loan growth has jumped higher than the inflation rate. Over the last few weeks though, a higher inflation rate is threatening the banks’ abilities to continue providing more credit under the RBI’s status quo (in interest rate). On food inflation, price patterns have remained extremely volatile (reflected by a higher variance from the mean) and made the basic household consumption basket more expensive for the average income-earning citizen. This isn’t a recent phenomenon.

Source: Trading Economics

Now let us break down the core inflation trends. The Consumer Price Index (CPI) has continuously gone up since 2014 under the Modi government amidst stagnating and falling incomes for the middle and lower-income/consumption classes (see here). While the rural economy tatters and drags itself in almost a recession-style slowdown, price rise has made the situation for low-income earners worse. It is also severely hurting the ability of India’s urban middle-income earners to save, which is essential for creating liquid deposits with banks (who ultimately use deposit capital for designing their credit instruments and credit creation power).

The Wholesale Price Index (WPI), on the other hand, is sharply declining after 2022, which signals a deflationary spiral accentuated by a demand-side problem affecting the manufacturing/industrial sector. Private firms are finding less reason to be ‘optimistic’ (contrary to the prime minister and finance minister’s optimistic rhetoric on ‘India shining’) and aren’t investing big capital towards new production capacity, when the foreseeable demand for consumer and capital goods isn’t picking up-as expected. 

Most private investment is otherwise being anchored by select big-capital business groups (like the conglomerates led by Gautam Adani to Mukesh Ambani) that have a monopolist advantage (from existing wealth endowments) for the purpose of acquisition of ‘new asset frontiers’ – for business expansion – and not for the objective of ‘investing in new capacity building for growth expansion’. It reflects the regressive state of alliance seen between big capital and the Indian state (signalling the rise of high cronyism and oligarchic capitalism).

Source: Trading Economics

On trade, exports have risen but at the cost of imports. The current account to GDP levels worsened to what they were prior to 2014 (before the BJP came to power). This reflects a failure in India’s industrial and trade policy to pivot towards areas where it was competitive and had a comparative advantage. This author has repeatedly argued for the potential for India’s rapidly growing service sector to not only contribute more to exports but also to jobs and overall growth.

Opposition MPs protesting rising commodity prices outside Parliament on Tuesday, July 19. Photo: Facebook/rahulgandhi

Three key challenges for the post-2024 election scenario

Getting into the pre-election cycle, if one had to identify three principal challenges for the next government – whoever that may be – in terms of prioritising economic governance and social cohesion (as a precursor for a healthy economy), it would relate to the following three: 1) boosting the macro-employment rate for all; 2) raising private investment across sectors in a sustainable way, especially in labour intensive, job-creating areas; 3) tackling the high variance in core and food inflation, while managing the rising government debt for a fiscal consolidation plan that may actually work.

Source: Trading Economics

India’s tryst with a jobless growth era has only been prolonged in all of the Modi government’s elected terms. Growth in good-paying jobs (in the organised sector) hasn’t happened at the expected rate or pace, nor has been part of the priority for the government to address this in its fiscal-and budgetary allocations. 

On the contrary, a rising government capex has come at the cost of lowering allocations for job security-based welfare programmes like MGNREGA. States have limited resources and tools to channelise resources towards worker-intensive growth plans or create jobs through their own fiscal interventions. 

A lot of change has to come – driven by the Union government, which under Modi-Sitharaman has failed to even acknowledge that ‘job creation’ (and high unemployment) has been a challenge. A job-focused social security plan is also one of the most immediate needs of the hour.

The issue of raising private investment across sectors in a sustainable way has been raised and discussed earlier. This essay written earlier provides a detailed context-dependent, analytical summary of where the private sector has failed to align itself with the ‘optimistic’ nudges of the government’s fiscal push. In short, a higher capex-based spending outlay hasn’t really crowded in private investment. Thousands of crores spent on the Production-Linked Incentive (PLI) scheme hasn’t yielded positive growth – or job dividends too (see here for a detailed explanation by Raghuram Rajan).

Source: Trading Economics

The issue of debt concern needs closer attention. At a time when the Union government spending is proliferating (as a percentage of the GDP), and the government continues to squeeze the fiscal autonomy and borrowing capacity of the states (particularly those with an opposition government in power), the overall external debt borrowings and the government debt to GDP numbers are a cause of concern. It not only raises questions on the ‘effectiveness’ of a pre-designed fiscal consolidation plan but also on the viability of the BJP government’s spending or outlayed preferences. 

One may continue to see the Union government spend more on PLI at the cost of spending less on welfare programmes, nutrition schemes and other social capital needs like healthcare and educational spending. But with a rising government debt concern (when growth is low), the fiscal space for the government to do more – both on capex and welfare – may shrink in the immediate years after the election. A narrative-control exercise adopted by subjugating critical data and independent critique on the Indian economy may do little good for any government in power that seeks to work for the benefit of its citizens for the next ‘24 years (2047’) or ‘1000 years’. In the last nine years, not only has the state of Indian policy witnessed abrasive democratic regression, a rise in communalisation and demonisation of ethnic minorities, loss in public institutional autonomy and centralisation of power by the Centre, but also seen a worsening picture in the growth potential of the Indian economy. 

In the electoral battle for 2024, the BJP government (to come back to power), and the united INDIA opposition alliance (to defeat the BJP) may both require a clear, cohesive, economic plan and theory of economic change to address the structural woes plaguing the current state of the economy (with a medium to longer-term vision), while offering more than hollow optimism and rhetorical hype

Deepanshu Mohan is an associate professor and director, Centre for New Economics Studies at O.P. Jindal University.

India ‘Dangerously Close’ to the Hindu Rate of Growth: Raghuram Rajan

“With the private sector unwilling to invest, the RBI still hiking rates, and global growth likely to slow later in the year, I am not sure where we find additional growth momentum,” the former RBI governor said.

New Delhi: Sounding a serious warning, former Reserve Bank of India governor and professor of finance at the University of Chicago Raghuram Rajan has said that with subdued private sector investment, high interest rates and slowing global growth, India is “dangerously close” to the Hindu rate of growth.

Rajan referred to sequential slowdown in quarterly growth seen in the latest estimate of national income released by the National Statistical Office (NSO) last month. GDP in the third quarter (October-December) of the current fiscal slowed to 4.4% from 6.3% in the second quarter (July-September) and 13.2% in the first quarter (April-June).

‘Hindu rate of growth’, a dig taking off from the market term ‘secular growth’ (growth unaffected in the short term), was coined by Chicago school economist Raj Krishna in 1978 to describe low Indian growth rates of about 4% in the 1960s and 1970s.

“Of course, the optimists will point to the upward revisions in past GDP numbers, but I am worried about the sequential slowdown. With the private sector unwilling to invest, the RBI still hiking rates, and global growth likely to slow later in the year, I am not sure where we find additional growth momentum,” Rajan told PTI in an email interview.

Growth rates in the fiscal year 2023-24 will be important, Rajan said. “I am worried that earlier we would be lucky if we hit 5% growth. The latest October-December Indian GDP numbers (4.4% one year ago and 1% relative to the previous quarter) suggest slowing growth from the heady numbers in the first half of the year,” he added.

“My fears were not misplaced. The RBI projects an even lower 4.2% for the last quarter of this fiscal. At this point, the average annual growth of the October-December quarter relative to the similar pre-pandemic quarter three years ago is 3.7%,” he continued. “This is dangerously close to our old Hindu rate of growth! We must do better.”

India’s Manufacturing Growth Slowdown a Decadal Problem

In India’s growth trajectory, for over a decade, domestic private investment levels have remained consistently low and so has (domestic) manufacturing growth. 

As per recent quarterly estimates, India’s growth rate slowed to 6.3% in the September quarter of 2022-23. There is evidence of a notable contraction in output of manufacturing that’s pulling down growth.

This author has previously argued that quarterly growth estimates may not reveal the real state of an economy. Quarterly estimates of GDP are rudimentary, preliminary-stage estimates computed from limited information.

Still, there is more to the estimates than projections. In India’s growth trajectory, for over a decade, domestic private investment levels have remained consistently low and so has (domestic) manufacturing growth.

There is a need to understand the endemic forces shaping these trends: consumption demand skewed towards the top 5% elite; a credit freeze in the financial system, choked by rising NPAs, poor-credit cycles now worsened by problems in implementing IBC; low, compressed wages in non-farm segments, high gender inequality in the workforce and poor export demand volume. These collectively shape India’s macro-structural fault lines.

For a historical context on the paradoxical nature of India’s long term manufacturing slowdown, see the figure below.

Source: CNES InfoSphere Team, OP Jindal Global University.

From the 1960s, our team observed the peak manufacturing to GDP (percentage) levels of all emerging market economies (and a few industrialised nations), as a relative point of comparison for India.

India’s overall manufacturing growth as a percentage of GDP remained steady over 60 years. While nations like Argentina and Brazil saw the ratio peak in the 1970s and early 80s, other nations like South Korea and Bangladesh saw this trend rate increase over decades, driving their growth story.

Source: CNES InfoSphere Research Team.

Bangladesh’s growth story of the past decade is particularly shaped by the rise of manufacturing, helping per capita income to rise as well. China’s manufacturing intensity has weakened over the past decade (especially after the 2007-08 crisis).

India’s low-productivity trap

India has been facing a crisis of low productivity in manufacturing. Its manufacturing to GDP levels have remained almost the same since the 1960s, though most workers are engaged, after agriculture, in sectors linked to the small-medium-scale manufacturing landscape, particularly the MSME sector (see here).

Was this the case across sectors? Not really. As argued before, in electronics hardware manufacturing, India’s comparative advantage was first realised and then lost in the early 1990s through a series of half-baked liberalisation measures.

Also read: Pronab Sen on Why Q2 Growth Numbers Aren’t Cause for Celebration

India a case of premature deindustrialisation?

At a macro-manufacturing level, India experienced ‘premature deindustrialisation’. This was a concept anchored by Dani Rodrik to analyse how a (developing) nation may observe a sudden fall in its manufacturing-GDP ratio before achieving an optimal rate of development (resulting in a sub-optimal manufacturing scenario and a fragmented labour market).

For example, in 1988, for the world as a whole, the peak share of manufacturing in GDP was 30.5% on average and attained at a per capita GDP level of $21,700. By 2010, the peak share of manufacturing was 21% (a drop of nearly a third) at a level of $12,200 (a drop of nearly 45%).

The Performance Linked Incentive (PLI) scheme of the Modi government aimed to enhance domestic private investment into manufacturing activities. However, the response has been far from satisfactory across most sectors.

Yes, the Union government may continue pushing for more capex-based expenditure over the next few years as well to crowd private investment into manufacturing but so far, data suggests that supply-side economics is failing to attract the attention of long-term private capital investors to boost production capacity for consumer needs.

Private investment in manufacturing isn’t at a scale that the government hoped for. Plus, there’s a broken, deeply fragmented labour market where labour productivity (and wages) is at its lowest threshold across India.

The real question for the Modi government now, as it has been for some time, is:

Will it continue to pursue supply-side policy interventions in a sector which lost its competitive edge a long time ago (in some cases due to misplaced policy priorities), or is there another story waiting to be written?

Deepanshu Mohan is director of the Centre for New Economics Studies, OP Jindal University.

This article was first published on The India Cable – a premium newsletter from The Wire & Galileo Ideas – and has been republished here. To subscribe to The India Cable, click here.

India’s Unorganised Sector Is Being Engulfed, Further Marginalised

The organised sector must consider how much can the unorganised sector be run down without hurting its own interest.

The corporate sector is doing well, as indicated by the stock market which reflects its health. But the corporates represent only a few thousand businesses out of the crores operating in the country. Ninety-nine percent of the businesses are in the unorganised sector and reports suggest that they are declining. The official GDP for Q1 of the current financial year 2022-23 was 3.3% above its pre-pandemic level. Yet, the stock markets are close to their historic high achieved in 2021. This disjuncture between the stock market and the economy reflects the surge in corporate profits in a stagnant economy – and there is a story behind it.

The Reserve Bank of India data on around 2,700 non-government, non-financial companies released in August 2022 shows that the sales of these companies surged 41% and net profits increased by 24% over the last year. Even if these figures are deflated by the wholesale price index (WPI) which has been rising at above 10% during this period, the corporate sector surge far exceeds the growth of the economy. If one component of the economy is rising so rapidly, the other part, the non-corporate sector in industry, must be shrinking. The difficulty with the official data is that it does not independently capture the decline of the unorganised sector (it is proxied by the growing organised sector). If the true rate of growth could be obtained, the disjuncture between the official growth rate and the rise in the stock market would be even greater.

The government is arguing that tax collections are robust, thereby indicating that the economy is doing well. Indeed tax revenue has grown 52.3% according to the latest data. But this does not reflect the unorganised sector where most incomes are below the taxable limits and which is exempt from the Goods and Services Tax. No wonder, the survey of incomes by PRICE released at the start of this year shows the growing divide between the top 20% and the bottom 60% in the income ladder.

Shift in demand to organised sector

The divergence between the two sectors is visible. The head of the largest luggage manufacturer recently said that their growth is surging because the smaller units are not doing well. Same was said by a top manufacturer of leather goods and earlier by the chairperson of the pressure cooker industry. The annual report of Hindustan Unilever also mentioned that its market share has increased. The rapid expansion of e-commerce is at the expense of the neighbourhood retail stores. Such evidence is available all around.

Also read: The G20 Claims it Wants to ‘Recover Together’ – But Does it Really?

It is not being argued that the entire unorganised sector is declining. Some units are suppliers to the small and medium sector units which in turn are suppliers to the corporate sector. The growth of the corporate sector should benefit these units except where their payments are delayed by the larger units.

The government has been pushing for digitisation and formalisation of the economy on the plea that this will curb tax evasion and as more taxes are collected, better services can be provided to the marginalised. But the unorganised sector cannot cope with these changes which increase their costs, compared to the organised sector which is already largely digitised and formalised. No wonder, demand has been shifting from the unorganised and small units to the larger ones, spurring their rapid growth. This is also true of those units that are suppliers to the larger ones.

The GST was designed to formalise the economy. But that does not mean the promotion of the small and unorganised sector; instead, it has led to their displacement by the organised sector. The market of the former is being captured by the latter. This is the colonisation of the unorganised sector by the organised sector.

Colonisation was marginalising

Colonial powers had conquered other lands to promote their own prosperity. They looted the colonised and framed the rules of economic gains such that their produce could out compete the produce of the colonised. While loot was often for a limited time, capturing the markets gave their economy a long-term advantage over the economy of the colonised.

The surplus from the colonised countries was drained out, which set back their development. Simultaneously, it enabled the economy of the colonisers to develop faster and helped them in developing their technology, thereby widening the gap between them and the colonised. In self-justification, the colonisers claimed to be `civilising the barbarians’. The benefits of colonisation were listed as the setting up of institutions, universities, railways, rule of law, etc.. The fault for the poor living conditions of the colonised was blamed on their own backwardness.

Organised colonising the unorganised

These arguments have a parallel in the claims of the government and the Indian organised sector. Formalisation of the economy is stated to be for the wider good, including the unorganised sector. It is argued that benefits of development (of the organised sector) will trickle down to the marginalised. The extraction of the surplus from agriculture, via terms of trade, both for industrialisation and the lifestyle of urban elites, is also said to be for the benefit of all, even though it pauperises most agriculturists and the rural areas.

The rules of economic gains enable the organised sector to corner most of the gains of development. The marginalised sections are expected to be satisfied with their meagre material gains. Often it is implied that the marginalised should be grateful for whatever little they have got. Rising disparities are justified on grounds of merit while glossing over the impact of skewed social development at the expense of the marginalised sections. Did the colonisers’ not have similar arguments? Globalisation which benefits the organised sector is also held out as progress for the country, while ignoring its marginalising impact.

The GST, digitisation and formalisation are setting the rules of the gains in favour of the organised sector at the expense of the unorganised sector. As the production of the latter declines, the produce of the organised sector finds new markets for its expansion. The growth of the organised sector in a stagnant economy points to that.

Not only is the unorganised sector ignored in data, policies also ignore it even though it employs 94% of the workers and produces 45% of the output. This is the invisibilisation of this sector and quietly making its market available to the organised sector. But, the skewed development is reducing the size of potential future markets and that will slow down growth of the economy, as happened prior to the pandemic. This would lead to further clamour for concessions to support organised sector exports. That will further narrow the home markets, in a Catch 22 situation.

Watch: ‘RBI Was Prepared for Default in 1990, Even Considered Selling Properties Abroad’

The Atmanirbhar package announced by the government in May 2020 is a recent example of the rules of gains being set against the unorganised sector. It contained a package of policies for agriculture, designed to enable large businesses to capture the agricultural markets and eventually push the small and marginal farmers out of farming and turn them into agricultural workers. The policy makers seem unconcerned that this would aggravate the prevailing acute problem of unemployment and under employment. The labour code being introduced is another concession to businesses which will further marginalise the already marginalised workers.

In brief, neither the colonisers earlier nor the policy makers promoting the organised sector now are concerned about social justice. But that is a crucial element of any democracy – the interest of the vast majority should prevail. The organised sector must consider how much can the unorganised sector be run down without hurting its own interest. The official rate of growth was declining even before the pandemic and that is continuing. It is myopic of the organised sector that they are not only unconcerned at the decline of the unorganised sector but seem to be celebrating it.

Arun Kumar retired as professor of economics, Jawaharlal Nehru University, and is the author of Indian Economy’s Greatest Crisis: Impact of the Coronavirus and the Road Ahead, 2020.

ADB Lowers India’s Growth Forecast to 10% for FY22

The growth forecast for India in fiscal year 2022 was revised down as the spike in COVID-19 cases during May dented the recovery, the ADB said in its latest economic outlook.

New Delhi:  The Asian Development Bank (ADB) on Wednesday revised down India’s economic growth forecast for the current fiscal year to 10% from 11% predicted earlier, citing the adverse impact of the second wave of the pandemic.

The growth forecast for India in fiscal year 2022 (ending in March 2022) was revised down, as the spike in COVID-19 cases during May dented the recovery, the ADB said in its latest economic outlook.

“The outbreak, however, dissipated faster than anticipated, resulting in several states easing lockdown measures and returning to more normal travel patterns.

Also Read: In India’s Q1 GDP Numbers, a Tale of Lacklustre Private Consumption

“The economy is expected to rebound strongly in the remaining three quarters of FY2021, and grow by 10 per cent in the full fiscal year before moderating to 7.5 per cent in FY2022,” said the Asian Development Outlook Update (ADOU) 2021.

In its Asian Development Outlook forecast in April this year, the multilateral funding agency had projected India to grow at 11% in the current fiscal year.

“Because consumption will recover only gradually, government spending and exports will contribute more to FY21’s growth than they did in the previous fiscal year,” it said about India.

About the region, it said the outlook varies across South Asia. South Asia comprises Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.

The sub-region is projected to expand more slowly this year than earlier projected, but faster next year, it said.

According to ADB, growth in the People’s Republic of China (PRC) will remain strong, despite a protracted recovery in household consumption.

“The GDP growth forecast remains unchanged at 8.1% in 2021 and 5.5% in 2022, as a solid export performance and higher fiscal support in the second half of 2021 keep growth on track,” it said on China.

India’s Prized Investment Grade Status Hanging by a Thread

With the COVID crisis, growing debt and a fall in growth levels, India’s investment grade status is at risk of being downgraded by the rating agencies.

London: India’s devastating COVID-19 crisis is making investors question more than ever whether after years of debt accumulation and patchy progress on reforms, a country touted as a future economic superpower still deserves its ‘investment grade status.

A spate of downgrades last year had already left India’s investment grade credit ratings hanging by a thread and the severity of the current virus wave is making the main agencies, S&P, Moody’s and Fitch agitated again.

All three firms have either cut – or warned they could cut – the country’s growth forecasts in recent weeks and that government debt as a share of GDP will jump to a record 90% this year.

In that respect though, the world’s second most populous country has long been an anomaly.

The median debt level for countries Fitch has in the BBB bracket – India is BBB- – and on a downgrade warning with both Fitch and Moody’s – is currently around 55% and only 70% even for those languishing at the lowest depths of ‘junk’ grade.

With COVID-19 pushing up debt almost everywhere and the ratings firms signalling they will wait for this latest wave to ease before any judgements, investors who buy rating-sensitive assets like bonds are making their own calls.

“We still see India as investment grade,” said NN Investment Partners’ head of Asian Debt, Joep Huntjens, who thinks the country’s economy will bounce back quickly. “But we do think there is at least a 50/50 chance that at least one rating agency downgrades, probably next year”.

 

With calls growing for another national lockdown to tackle the new virus surge, plenty of others are wary too.

JPMorgan says rating agencies are making “a leap of faith” by holding fire at the moment. M&G’s Eldar Vakhitov says his firm’s models have been flagging a downgrade, while UBS points out India will soon have the third highest debt level among big emerging markets after junk-rated Brazil and Argentina.

UBS analysts also estimate India needs to grow at least 10% a year for public debt to stabilise and come down. It hasn’t got anywhere near that since 1988, World Bank data shows. Last year’s full lockdown saw the economy contract 24% in the first quarter and Moody’s said this week it expects growth to settle at around 6% longer term.

“We do see the risk that it (a downgrade) can definitely happen,” said UBS’s head of emerging market strategy Manik Narain. “It seems more a question of when rather than if”.

Another bric to fall?

Neither India’s finance ministry nor its central bank responded to requests to discuss the risk of a downgrade but, as Brazil and South Africa have experienced, becoming a ‘fallen angel’ – as a demotion to junk is known in rating agency parlance – can set off a wave of problems.

It automatically excludes government or corporate bonds from certain high-profile investment indexes, which means conservative funds – active managers as well as passive “trackers” – sell out, aggravating the situation.

India’s government debt is not yet in most of those indexes, so the big issue will be the roughly $40 billion to $45 billion worth of investment grade corporate debt that is also likely to get cut.

NN’s Huntjens thinks around 90% of Indian IG corporates would be hit and while giants like Reliance might be spared, India’s 7.4% share of JPMorgan’s Asia Investment Grade Corporates Index means there would be plenty of selling.

Chastening

If a cut does come, it wouldn’t be the first time India has lost investment grade status. It was first stripped in 1991 just a year after getting its initial S&P rating as a balance of payments crisis hit.

A repeat now though would be a chastening moment for its nationalist leader Narendra Modi who rallies supporters on promises to advance India on the world stage and compete with the likes of China.

While it has built up a healthy stock of currency reserves, its huge population of 1.4 billion means it still has the lowest prosperity level of any investment grade country when measured by GDP per capita of $2,164. China’s figure is nearly $13,000.

Subhash Chandra Garg, India’s former economic affairs secretary, acknowledges the government’s double-digit deficit and overall debt position are “bad”, but he doesn’t think the ratings firms will cut again.

“A debt-to-GDP ratio of 90% is certainly a matter of great concern and these things cannot go on,” Garg said. “But the fundamental view about India is that it is not a basket case, it is a strong economy.”

“In the end, the debt levels need to come down and that can only happen if growth remains strong,” NN’s Huntjens added. “And it can’t just be based on (government)stimulus because then the debt just rises even higher”.

(Reuters)

Decoding India’s Economic Playbook in the Times of COVID-19

India needs a strong and explicit industrial policy. Former CEA Kaushik Basu’s recent advice is on the wrong track.

India’s former chief economic adviser Kaushik Basu recently delivered a talk on “The Pandemic and the Changing Structure of the World Economy: India’s Big Opportunity and Big Risk”.

In the talk, Basu highlights two major points. Firstly, the Indian economy began slowing after 2011-12, with both savings and investments declining. After 2016, it began falling more sharply. While there were structural reasons for this slowdown, among the reasons was also a “trust deficit” for people not saving or investing: a lack of trust in the country’s institutions thwarts economic activities. In short, part of the reason investment and growth cannot happen is the weakening social fabric.

Secondly, efforts to increasingly close the economy in the name of “Make in India” will only hurt the economy further. Examples of Argentina closing down in the 1930s and of North Korea more recently were typical examples quoted.

Our objective is to analyse Basu’s proposed approaches. He suggested that India should specialise in areas where strengths were acquired earlier and which heralded the economy to high growth during the 1990s and the early 2000s – software, pharma, health, other services and so on, and keep the economy open. Also, further strengthen education, and put resources into health services and health research. Finally, bring the “soft power” back: embrace all communities and religions, and be tolerant.

Basu’s views could be questioned on at least four pivots.

First, growth over 2004-2008/10 happened in conjunction with fast global growth. Part of the growth was pinned on exporting raw materials (e.g. iron ore to China). When the growth tapered off, the reasons widely believed are global financial crisis, the widespread corruption (locally), and undermining of the local institutions, especially weakening of the prime minister’s office. The scam related to the Reddy brothers of illegally exporting iron-ore is well-known, and is one of many. Why no mention of these issues while lauding growth during this period?

Second, since 2004, whether owing to tax structures on imports of intermediaries, poor management of an open economy or a combination of these and more, Indian industry had begun to increasingly depend on foreign (read: Chinese) inputs for their final products. Thus, armatures of electric motors/fans, transmission shafts or alternators, or even plastic products were imported from China. The electronics hardware industry virtually vanished. Was an industrialisation policy not important to mention?

Also read: State Lockdowns and a Flattening of the Economic Well-Being Curve

Third, the much “famed” software industry earns money through low-end coding for foreign companies and through “body-shopping” – now increasingly being threatened. No Indian company has a final product or brand name. The pharma industry too depends to an extent of almost 70% on Chinese APIs. No concern about lack of vertical integration?

Finally, 8.5 million Indian workers are engaged in the Gulf countries in low-end jobs, and at the high-end, almost all from medical and engineering institutes rush abroad. In addition, there is 18+% youth unemployment (not counting the COVID-19 effect). Evidently, there are no jobs here as manufacturing, and manufacturing jobs fell in absolute terms between 2012 and 2018. In fact, even in periods of high growth, “dead-end” jobs were created in large numbers in construction, delivery, and similar work, where people retired by the age 45 years. This has worsened the income distribution: the deteriorating Palma ratio is evidence. No word on this?

India began industrialisation in the 1950s, and after six decades ended up being a (largely) low-end services economy with high prevalence of poverty, illiteracy and deprivation. China meanwhile has steamrolled India in all dimensions. Basu’s mention of China is limited to them being more cost-efficient, though at times being unfair in pricing, and the latter could be overcome through tariffs. While proposing opening up of the economy, what he is missing out is the ensuing political/bargaining inequality emerging out of a sustained one-way dependence on a single trading partner.

India’s dependence upon China was recently underlined by China’s ambassador to India, who pointed out that, “92 per cent of Indian computers, 82 per cent of TVs, 80 per cent of optical fibres, and 85 per cent of motorcycle components are imported from China.”

How did India’s economy come to this extreme dependence on China? Has India prepared itself to become a manufacturing nation? For instance, only recently, Japan’s PM Shinzo Abe ordered that Japanese companies reduce their own dependence on China. Of the 87 Japanese companies that are now relocating from China, 57 are relocating to Japan, while the remaining 20 are going to South-East Asia (Malaysia, Vietnam and Laos). None is coming to India.

Worse, several Japan’s biggest companies doing great business in India are now pressuring us not to raise import tariffs on intermediate products they source from China. These include Suzuki, Sony, Panasonic, and Honda. How did we get to this point?

Also read: Crony Capitalism on Modi’s Watch Means Invisible Hands Ensure You Never Go Bankrupt

Experiences from the colonial era show that the British came in as merchants and became masters; the reason is evidently, their technological superiority (David Landes: Wealth and Poverty of Nations). The present dynamic suggests that the Chinese vision is to enforce aggressive economics: quote unrealistic prices to obliterate industries in unsuspecting companies/countries, manipulate currency, deploy prison labour to cut costs, follow few labour standards, artificially cheapen factor costs (esp. land), steal IPRs, and repeatedly use military power to browbeat one and all. Basu overlooks the fact that the clash in Ladakh and also the on-going tension since 1962 are not a coincidence: it forms a larger agenda of Asian dominance in the genre of a “Middle Kingdom”: kill Indian economic prowess, grab their land, subjugate them and break their spirit.         

The problem is thus not of economic growth or trade, but existential. India needs a strong and explicit industrial policy, which we have not had since 1991. 

  1. The government and industry need to work closely for promoting industries through tariffs, subsidies, land and labour laws, infrastructure, R&D, and the like. Like the MITI in yesteryears in Japan or the South Koreans more recently, government must help national companies to grow and become internationally competitive.
  2. India has too many small and micro enterprises. Economies of scale are critical. In this context, a “one-district-one product approach” can bring together SMEs to form a single giant unit. Again, the state needs promote this process.
  3. Investment in education and training should rise from the current 3% to 6% of GDP, with greater enterprise-based training, focused on quality, and  STEM and contain brain drain.

Open economies can only work if the partners are on equal terms and have similar intents.

Sarthi Acharya is former Director of the Institute of Development Studies, Jaipur and Santosh Mehrotra is a professor of economics, Centre for Labour, Jawaharlal Nehru University.