AN AVOIDABLE SLOWDOWN
There is enough evidence to show that the Indian economy is now firmly in the midst of a slowdown. The growth in the Index of Industrial Production, an important measure of the performance of industry, is at a two-year low with successive declines in the last eight quarters. Export growth seems to have peaked in June when it hit an amazing 82 per cent and will in all likelihood see modest growth in coming months. Nonfood credit off-take from April has been a mere 2.5 per cent, reflecting a near cessation of private investment activity. New project announcements have virtually stopped with firms holding on to record cash reserves, unable and unwilling to commit investment for capacity expansion. Power shortages have become widespread. At the same time, nearly 20,000 MW of thermal power generating capacity is unutilised due to non-availability of coal. For the first time, in my lifetime, I am hearing the term “hedging against country risk” being used by Indian investors who are actively looking for investment opportunities abroad. This will ensure that the slowdown is long and persistent.
There is no denying the fact that the underlying structural features of the Indian economy should keep it on a growth trajectory of 8-9 per cent. These structural features include a favourable demographic structure, high rates of savings, entrepreneurial dynamism, burgeoning demand from an expanding middle class, huge investment opportunities and a favourable perception of India’s economic prospects abroad. It is, therefore, doubly disappointing for the people, with their aspirations raised to the highest levels, that they now face the grim prospects of slow growth, lack of employment opportunities and erosion of purchasing power.
I firmly believe that such a cyclical slowdown could have been avoided. We have the example of China which managed to achieve an average GDP growth of 9.5 per cent over three decades with minimal inflationary pressure. To argue that India’s democracy does not permit us to replicate the Chinese experience is merely to dodge the issue. There is nothing in our democracy which prevents us from implementing growth-oriented policies that will generate employment that will surely be applauded by the electorate. The problem does not lie with our democracy but perhaps with the misunderstanding that greater inclusion is best achieved through expanding subsidies and transferring payments to the loudest set of potential voters. This is clearly unsustainable as a poor economy like India can’t afford to have a majority of its people living off subsidies. To persist with schemes to boost purchasing power without simultaneous efforts to facilitate production capacity expansion and investment is a recipe for disaster.
Real inclusion is achieved by providing productive and well-paying employment to all entrants to the workforce. This can be achieved only by sustaining rapid and labourintensive growth which, in turn, requires the continuation of structural reforms that will make India a more attractive investment destination. India’s rank of 134 out of 183 countries in terms of ease of doing business does not provide the most conducive environment. It is, therefore, time we make a stronger public case for pushing forward with the reform agenda.
There seems to be an assumption amongst a vast section of the political class that India’s demographic dividend and a 7-8 per cent rate of GDP growth is a given. This results in policy complacency and a rise in competitive populism that we have witnessed in the past few years. This is dangerous because as many historical examples have shown, demographic dividend has to be earned by skilling our people and growth needs to be sustained by continuous policy interventions. The trade-off between growth and equity can be avoided only if the Government plays a role in fostering growth and ensuring a more efficient and targeted distribution of public goods and services. It is high time that all of us give up the idea that economic growth can be achieved despite the Government. Instead, we have to focus increasingly on improving delivery of public goods and services to ensure that both rapid growth and inclusion are achieved. The current slowdown should be used to initiate necessary reforms rather than waiting for a full-blown crisis, the cost of which could be extremely high in the current environment of rising expectations and greater impatience.
The trade-off between growth and equity can be avoided only if the Government plays a role in fostering growth and ensuring a more efficient and targeted distribution
of public goods and services.