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Where the Indian economic story went wrong – analysis

A set of economists has defended the record of reforms of the present government. This must be taken seriously. But there is a more fundamental question here: Reforms, even if yes, towards what end?

The Indian economy has continued to slow post the sudden demonetisation (one of the big ticket “reforms”) and the roll-out of the ill-conceived Goods and Services Tax (GST) regime. Investment, exports, private consumption and government expenditure were already seriously impaired before Covid-19 put the proverbial last nail in the coffin. Gross Domestic Product (GDP) has fallen into a technical recession and most independent economists are unanimous that contraction this fiscal will be 8-10%. Even with the vaccine in sight, the economy will continue to be seriously impacted for the next two years before we can see a real turnaround.

The global slowdown or pandemic alone cannot explain the current situation. While the pandemic is unprecedented, it is important to understand how the economy has come to a sorry pass. Thirty years since the 1991 economic liberalisation, there is much we can be proud of. For one, State intervention in the economy was minimised, allowing free markets to develop. As negative consequences, such as increased inequality, became evident, schemes such as the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) were brought in to reduce poverty. This has been globally acknowledged. The Oxford Poverty and Human Development Initiative report has noted that, “India remains the country that has the largest reduction in number of poor, with over 270 million persons leaving poverty (from) 2005-6 to 2015-16.” India went from being a poor, slow-growing country to the fastest-growing major economy in the world. According to the World Economic Outlook (2016), the United States (US) and India were the two pillars of strength of the world economy.

So what went wrong? It must be acknowledged that during the tenure of the United Progressive Alliance (UPA)-2, with inflation going double digit and fiscal deficit running out of control, the economy was taking a severe beating. In 2013, with the US Fed indicating withdrawal of Quantitative Easing (QE). India faced what infamously came to be known as the “taper tantrum” with the rupee plummeting to a then record low of more than ₹68 to a dollar. With 2G, coal and other crises, the government seemed to have lost the plot. Much has been said about the new government inheriting an economy that was in a downward spiral in 2014.

However, the truth is otherwise. From 2012-14, UPA-2 took bold measures which reflected in the quick recovery over the following two years. Apart from clearing bottlenecks for large infrastructure projects, the FDI regime was liberalised considerably, financial market instruments such as Infrastructure Debt Funds, InVITs and REITS were introduced, price deregulation of diesel was put into motion, a fiscal consolidation roadmap was laid down and the rupee tantrum very effectively managed. The results were dramatic. GDP clocked a growth of 6.9% in 2013-14 as against 5.1% in the previous fiscal. Growth in 2014-15 was 7.4%, built on the back of the dramatic recovery the previous year. The government has the instruments to effectively intervene and manage economic cycles provided it has the capacity and the will to do so.

The sudden negative shocks of demonetisation and hasty introduction of GST started the downward spiral, which has led the economy into recession this year. India is no longer in the list of the top 25 nations in AT Kearney’s Global FDI Confidence Index 2000 despite claims of improving the country’s ranking in the Ease of Doing Business. Once an alternative model for economic growth vis-a-vis China, India has dropped to the 23rd rank for 2020 from among the top three fastest-growing economies in Economist’s weekly chart of 43 major economies.

Unfortunately, there doesn’t appear to be a well thought-out strategy to bring the economy out of the morass except for a much touted Atmanirbhar Bharat package, which has received mostly adverse reviews. According to global research firm, AB Bernstein, “The need to announce measures that add up to this top down number made the entire package aimless”. The firm described it as a “lost opportunity”.

By various estimates, close to 90% of the workforce in India is employed in the unorganised sector and this has been severely impacted. There have also been huge retrenchments and salary cuts in the organised sector and an estimated loss of around than 80% of the demand. The much acclaimed fact about the “economy bottoming out” is a mirage. The latest Consumer Confidence Survey, conducted in the first half of November, states that more than half of the respondents continue to report a fall in income and employment. Clearly the ongoing economic recovery is being driven by a small section of the economy, and led by profits rather than wages. We can hope, on a wing and a prayer, that the government will finally act.

Arvind Mayaram is former finance secretary of the Government of India (2012-14) and currently serves as vice-chairman, Rajasthan Economic Transformation Advisory Council

The views expressed are personal

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