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Crisis in economy retrievable with major policy changes

NewsCrisis in economy retrievable with major policy changes

New Delhi: After months of spin on the economic situation, the Finance Ministry has been confronted with its own widely credible intra-Ministry statistics [in Macroeconomic Report; June 30, 2020] that contradicts the spin.

I forwarded these statistics which confirm my analysis [published in my earlier articles in The Sunday Guardian], in a letter to the Prime Minister stating that what I had informed him in my earlier letters has been vindicated in the Macroeconomic Report.

My letter was forwarded by the PM to the Ministry of Finance for a reply and Minister of State Anurag Thakur replied politely that “Your concern and suggestions in this regard are duly noted.”

Since then the Finance Ministry has put up a brave face and admitted what the Indian people had experienced all along during the said pandemic [See the above cited Ministry publication].

So let us now talk on the moment of truth about the current economic situation.


The first confession of the true state of affairs was made by the Minister herself when she told the Economic Times in an interview [published on 30 September 2020] that “it will be too early for me, based on this [what she saw as an ‘uptick’] to conclude as to how the year will end. We’ll have to wait and watch.” Thus this is a confession of the MoF being reduced to spectators while the economy tanks [pun unintended].

The second confession of truth came from the PM’s Council of Economic Affairs and the PM-chaired Niti Aayog. Media report e.g., Indian Express [2 October 2020] quotes these government think tank “high brows” as being despondent of the Finance Minister’s tight fisted attitude to monetary stimulus for the poor, the unemployed and the middle class who face salary cuts due to the coronavirus pandemic.

The Prime Minister’s Economic Council and the NITI Aayog members, reportedly, according to media reports, have picked up courage finally, after waffling for the last six years, to express their view to the Prime Minister that the Finance Minister’s mindset on direct cash stimulus has actually hampered the early recovery of the economy despite now the gradual relaxation of the hard lockdown of 24 March this year.

Thus, these two think-tanks remained thinking, without any traction for their proposals in the Finance Ministry, and were allowed to wallow in gloom about the economic future of the nation.

I had explicitly warned about this gloomy forecast in my earlier  The Sunday Guardian  artices based on macro-economic theory. The Finance Minister’s late realisation of this is also revealed in her  ET  interview when she stated: “..there is a need to have a holistic approach to handling the economy instead of a silo based and myopic approach with blinkers.”

The good news is that the Prime Minister now has decided to hold meetings of his own on the state of the economy.

It has thus become appropriate for me to write another article herein this week to bring on record some further facts now become available.

In the first quarter of financial year 2020-21, for example, the GDP growth rate according the official publication: “Macroeconomic Report” [30 June, 2020, Ministry of Finance] was a mere 3.1% growth on an annual basis.

Available  statistical indices reveal that the Indian economy has been on the edge of falling into a serious tailspin-caused crisis that has been unattended since financial year 2015-16; i.e., pre-Covid-19.

Post the coronavirus pandemic, decline or deceleration has been very sharp, leading negative growth rates. The Finance Ministry now admits this in its Macroeconomic Report published on 30 June.

The Ministry’s “revised”  data now show a sharp yearly fall in GDP growth rate to 3.1% in the last [fourth] quarter of 2019-20 [The report para 35, p.29]. Could not anyone have earlier informed the Prime Minister of the simple growth arithmetic, that under the circumstance prevailing [even before the coronavirus pandemic], the doubling of GDP in five years was an impossible target that he should not speak of it again?

It was the duty of think tank members to do so. Prime Ministers cannot be expected to know every subject relevant for governance. That is why experts are hired at high emoluments to advice the PM by position papers with an executive summary for him to read.  But not one of the appointed economists did so. Persons like Raghu Ram Rajan and Arvind Subramanian spoke up only after they lost their high posts, and after migrating back to the United States.

The Prime Minister thus continued to repeat several times economically impossible target, that he said he was committed to achieving, till Coronavirus Pandemic gripped the nation and a lockdown was declared by him from 25 March—which was at the end of the financial year 2019-20.

Today thus, a reality check has become necessary.


This pre-Covid 19 growth rate is less than the disparaged Communists’ “Hindu Rate of Growth” of 3.5% per year of 1950-90. It was not then the Hindu Rate but the Communist Socialist Soviet Five-Year-Plan rate.

We do not yet have data for the first quarter of 2020-21 i.e., April-July 2020, although it was promised for this September, but it is obvious that the coronavirus pandemic will cause a further steep decline in GDP growth into negative digits.

Predictions galore range from the Ministry of Finance’s –4.5% [Report op.cit., p.29 para 35] to –15% of international financial agencies.

As stated in my last published column, the sectoral growth rates, pre-pandemic, had also been declining across the board since 2015, and now these rates are alarmingly negative since coronavirus descended on us.

These negative trends in the Indian economy will continue unless the  unstructured uninformed economic “policy” of the Modi government  changes to a structured policy which is based on realities of today and a recognition of the follies of the past. That is, if the economy is not to become irretrievably stunted and the economy fall far behind G-20 economies, other East Asian and Southeast nations.

What steps are now in need to be taken? Let us first review what the stakeholders in the economy want and suggest.

But since 2016 household saving has dropped from a high of 34% of GDP on 2014 to 28% of GDP in 2018-19 mainly due to the poorly implemented policies such as demonetisation and low fixed deposit rate of return. Since the lockdown there is a panic cut in consumption and a consequent rise in unproductive savings.

Household saving have to be incentivized [such as by abolition of Personal Income Tax] for it to rise back to a productive 33% of GDP available for investment. For example, fixed deposits in banks, the rate of interest should not be less than 9% per year and this will boost institutional saving in fixed deposits.

That is, if the rate of investment inclusive of household saving and corporate savings and FDI add up to 39% and capital productivity [measured by capital-output] ratio is 3.9, then GDP growth rate is 39 divided by 3.9, which equals 10% annual GDP growth.

Thus higher the productivity in the use of capital [i.e., lower is the capital output ratio], higher is the GDP growth rate for the same level of gross investment.

The decline in the level of household saving thus causes a decline in the GDP growth rate and it is this we must address in a future Budget, but have done not so in any of the last six Budgets seriously.

Since end-2016 there were certain economic measures, but badly managed in implementation by the Ministry of Finance, which caused a setback to the economy. Principally, measures were (a) Demonetisation (b) Goods & ServicesTax [GST] (c) Bankruptcy Code.

The economy needs about $1 trillion investment in infrastructure to render “Make in India” a reality, but the actual investment in sanctioned projects is valued even less in real terms than the amount invested in pre-2014 years.

The manufacturing sector, especially MSME which provides the bulk of the employment for the skilled and semi-skilled in the labour force, has been growing at abysmally low rates between 2% to 5%. To remedy this, the interest rates on loans to MSME should not be more than 9%. At present MSMEs are lucky if loans can be got for less than 14%.

India’s agricultural products are among the cheapest in the world, and despite a low yield per hectare, we are not able to increase the yield to its potential maximum and thereby at least double the production and export the agricultural products abroad commensurately.

Consequently, agriculture, as a sector is the largest employer of India’s manpower, but is grossly under-performing. Measures such as doubling incomes by doles or writing off debts are ad hoc and not long term or structural. Problems will thus recur. The recent agriculture reforms in terms of the three Acts passed recently in Parliament are a welcome and the first relevant reform of the Modi government.

When crude oil prices had steeply fallen over the four years since 2014, and despite the dollar value of the rupee had till mid 2018 had been steady around Rs 65/$, nevertheless both exports and imports, declined over the three years 2014-17. Therefore, today to claim to have reduced CAD in the Balance of Payments Accounts is trivial.

As India struggles through the coronavirus pandemic-led economic downturn, the road ahead may have more bumps as lakhs of jobs may get washed away in the next three months.

About 41 lakh youths may lose jobs in the next three months due to the ongoing disruptions in business activities, accordingly, to Samrat Sharma writing in  Financial Express  [18 August 2020], basing it on an ILO-ADB Report.

In the six-month scenario, job losses for youth may equal 61 lakh in India, it further said. The highest impact is expected to be seen in the construction and MSME sectors.

The findings of the report showed that youth (15-24 years) working ad hoc, such as in road side dhabas, will be hit harder than adults (25 and older) in the immediate crisis.  Nor was there any concrete proposal in the Budget for liquidating the NPAs burden on public sector banks. This has now got much worse. No wonder the Supreme Court on 26 August 2020 came down heavily on the Ministry of Finance on being clueless.

Despite India being in “unlock” mode, supply chains are far from normal—frequent shutdowns of local wholesale and retail markets are taking a toll on primary producers. Consumers, particularly from lower-income groups, are already struggling to put food on the plate.


Until normalcy returns it is not appropriate to be concerned presently with constructing a long term structured policy. However, for the present till the pandemic vanishes, the government needs to do the following:

The human distress caused by Covid-19 has to be first addressed by non-market Government intervention. A Rs 21 trillion package was announced with great fanfare, but only Rs 1.5 trillion was specifically for direct stimulus. This is disappointing. All vital industries whose revival is essential for economic recovery need a demand boosting new stimulus package that places cash in hand and not chase these industries with oppressive loan liquidation measures.

The remaining of the package is in terms of concessions for loan repayments, etc. This has had minimal impact. Moreover, the loan moratorium announced at the beginning of the pandemic by the RBI was temporary suspension of required EMI payments against term loans, which expired on 31 August 2020. Now it is not clear what the objective loan recovery policy is.  Industrialists such as Adani with loans of unpaid loans are on a buying spree. During this pandemic they have managed to buy six airports.

This opaque policy on un-repaid loans is going to cause misery especially to small traders, businesses, and those in the salaried class whose jobs have been terminated because of Covid-19. There is no relief promised by government so far.

That is why the Supreme Court on 26 August this year came down so heavily on the Union Government. The Bench tersely said, according media reports, that “this happened because you locked down the entire country” and added, “don’t hide behind the Reserve Bank of India”.

However, the government must seriously address several priority problems. It is essential to implement a new menu of measures to uplift (a) by dramatic incentives for the household expectation and sentiment to save (b) lowering the cost of capital via reducing the prime lending interest rates of banks to 9%, by shifting to a fixed exchange rate regime of Rs 50 per dollar for FY 21 and then gradually lowering the exchange rate for subsequent years to Rs 10 per dollar.

Abolish Participatory Notes while invoking the UN Resolution of 2005 to bring back black money of about $1 trillion abroad held illegally, and print rupee notes to fully finance basic infrastructure projects while keeping concerns about fiscal deficit ratio for the time being in the cold storage.

Thus the present possibility of an economic crash should galvanise us to review honestly the way we have governed and done the business of governing, and then rise to new heights by appropriate change in policy, and thereafter achieve higher growth rates of 10%-plus annual growth in GDP with structural changes.

The good news is that the current developing crisis does not necessarily mean an irreversible collapse of the economy. In the last 73 years, India has always come out of crises, once these were acknowledged as such, and then dealt with, bereft of self-deluding spin.

As examples: the food crisis of 1965-67 on which foreign scholars predicted a massive famine, instead led to Green Revolution and food self-sufficiency; the foreign exchange crisis of 1990-91 led to economic reforms, by moving away from Soviet socialism to a market system and which led to high GDP growth rates rising from 3.5% annual trend rate of four decades [1950 to 1990] to 7.5% in 1995-96.

The situation of crisis in the Indian economy today is also, according to this author, retrievable and that the turnaround can be achieved within three months after certain “real” economic policy changes.

The Indian economy is also saddled with a national unemployment rate that is now over 25% of the adult labour force, and a prevalence of child labour arising out of nearly 50% of children not making it to school beyond standard five, a deeply malfunctioning primary and secondary educational system, 300 million illiterates, and 250 million people in a dire state of poverty.

India’s infrastructure requires at least about $150 billion (Rs 10,000 billion) to make it world class, while the education system needs 6% of GDP instead of 2.8% today.

All these problems can be addressed only by comprehensive, second generation, systemic reform that makes the economy an efficient, competitive market oriented one that leverages our potentialities (such as our civilizational heritage of innovative intellect), and which minimizes the inefficiency, squandering and corruption in the deployment of our vast resources.

As an economist, the only advice I can give the Modi government is to take some steps that will raise the morale of the consumer and investor. That means income tax abolition and reducing the annual interest rate [prime lending rate] to 9%.

The good news is that the built-in potential in the economy is easy to tap for revival, as is the basic resilience of the Indian people to face any situation as demonstrated from past crises.

India can rise to new heights by appropriate changes in policy and governance, and thus achieve higher growth rates of 10%-plus annual growth in GDP with healthy structural changes for productivity-raising innovations.

Dr Subramanian Swamy is a sixth term MP. He has taught economics at Harvard and at IIT Delhi, and has been senior Union Cabinet Minister of Commerce and Law & Justice.


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