The Indian economy is headed for trouble partly because of a situation not of our making—the coronavirus pandemic—and partly because of our last six years of inappropriate economic policies.
As for the coronavirus pandemic, so far the Narendra Modi government has handled the situation well and decisively. The coronavirus casualty numbers are quite low at about 200+ deaths; and this is because the Prime Minister has constituted a team with a very capable Minister of Health & Family Welfare, Dr Harsh Vardhan as leader.
Coronavirus-caused infection rates may be understated in India, but the important figure of number of deaths is not easy to understate, since no family wants to hide the fact of death in the circumstances.
The problem for the nation is not that we cannot defeat the coronavirus, but that the already crisis-ridden economy has been shattered by the lockdown. We may thus win the coronavirus battle but be badly defeated by the war to save the economy from collapse. When coronavirus enters the body of a human, which is already sick, there is a huge uphill task to save the human.
India is the only G-20 country which is not just afflicted with an epidemic raging among its citizens, but is also debilitated by falling growth rates in output and rising unemployment. The economic system of India was already ailing for three years by the time the coronavirus arrived here in February this year. By the time the government’s lockdown policy manages to contain the coronavirus, the economy may become so emaciated that there may be a situation of mass unrest among its people due to unemployment and poverty.
We therefore first need a reality check. The economic reality of today can be assessed from the following facts:
[i] The growth rate of the economy with proper index number based GDP has declined steeply over the last three financial years, 2017-20. The annual rate for 2020-21 is not available, by reason of obvious data non availability; but it is clear that the trend of decline has not changed and it has perhaps worsened due to the double whammy of coronavirus affecting output and employment and an already failed economic policy to boot.
Based on available data, I foresee that the growth rate of the GDP for 2020-21 will be the lowest since 1952—less than 2% annual rate. Even before coronavirus hit us, we needed a 10%+ per year growth rate for a decade to wipe out unemployment from the country. Now even if we achieve 10%+ per year growth, it will not be enough to wipe out unemployment within the decade.
[ii] Household savings, which form the bulk of India’s national investment, dropped from a high of 35% of GDP in 2015 to 28% of GDP in 2019 due to rising interest rates and reducing returns on fixed deposits of the middle class.
This economic decline began even before demonetisation; and the decline continues because of unrelenting, intrusive and sometime obnoxious tax measures.
I also consider GST as an idea that was borrowed from the UPA government and was, despite my lonely protest, introduced much as a carnival in Parliament, with gongs reverberating. It has remained an opaque mess since then.
[iii] NPAs of the public sector banks have also now risen sharply, in fact at a rate of growth much higher than the rate of new advances of these banks, making many large PSBs financially unviable and on the verge of collapse. This coronavirus driven bankruptcy could cause financial contagion in 2020-21 in all sectors.
[iv] The Ministry of Finance, in its 2020-21 Annual Budget, has unthinkingly cut allocations of the investments in infrastructure projects despite the urgent need for such infrastructure.
The economy, however, now needs about $1 trillion investment in infrastructure to render self reliance in manufacturing and services sectors a reality, but the actual investment in sanctioned projects, valued is even less in real terms than the amount invested in pre-2014 years.
[v] 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% and 5%, when it is capable of growing at 12% to 15% per year if generous low interest loans are available without silly hassles.
It is good to learn that one of BJP’s dynamic senior ministers, Nitin Gadkari has now taken a meeting of MSME representatives to prepare a package of incentives to revive these enterprises. The MoF must not again decline what Gadkari has asked for. MSME provides employment to the bulk of the nation’s semi-skilled workers, who, today across the country (because of the lockdown) are tragically unemployed.
[vi] 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 at least double the production as also commensurately export the excess agricultural products abroad. Agriculture, a sector which is the largest employer of India’s manpower, is sadly grossly under-performing since the last 15 years.
With the lockdown, the agricultural sector is gasping for breath. A scenario of mass revolt of agricultural labour (which is now completely unemployed and hungry due to the lockdown) is developing.
About 60% of India’s labour force works on subsistence wages in agriculture. A new crop has to be sown soon, just before the monsoons arrive. The government cannot afford to let down agriculture on the plea of a lockdown.
[vii] When crude oil prices had steeply fallen over the three years since 2014 (and now again due to a cartel formed by Saudi Arabia and Russia), we have failed to pass on the price decline to the transport sector, leave alone giving relief to the middle class with shrinking real incomes.
[viii] Moreover, despite that the dollar value of the rupee has fallen to over Rs 76 per $, nevertheless both exports and imports have simultaneously declined over the years—imports more than exports. This has created an unreal positive rise in trade balance. It’s surprising that the Finance Ministry has claimed this as an achievement!
Thus the present possibility of an economic crash induced by the lockdown should galvanise the policymakers to review honestly the way we have governed so far, and then rise to new heights by appropriate changes in policy, to achieve over the next two years the higher growth rates of 10%+ annual growth in GDP with structural changes. This should be the objective of our economic policy.
Economics is a technical subject of interdependent variables and parameters capable of objective mathematical and statistical analysis.
Economics is no more a single commodity “demand-supply” subject. In economics today we no more deal with simple equations, but with matrices and multivariate calculus.
Those who don’t understand this level of mathematical economics become leftists and IMF/World Bank advisers to India and moan on and on with a synthetic concern about poverty in India. They hand out the usual “class struggle” based silly arguments.
Hence, in their ignorance of the fact of the sophistication of modern economic theory, and by trying to put a spin and a gloss on reality, those in responsible positions in the government soon end up getting exposed as ridiculous in the public eye: we can see this today in media debates and conferences where facts stare at us in the face.
Even while having faith in Prime Minister Narendra Modi, the overwhelming number of participants in social media today think that the economic proposals are swinging from one measure to another, without a comprehensive policy formulation.
In keeping with the rigour required, economic policy prognosis must be structured on four pillars: Objectives, Priorities, Strategy, and Resource Mobilization. To implement such a policy prognosis, an appropriate physical, financial, and human infrastructure has to be set up. This has not been done even today; and instead there is reliance on ad hocism and spin.
It is true that the Indian economy is today headed for a serious crisis. It is, however, a myth that every crisis necessarily means an imminent collapse of the economy. The Indian economy is not very near a collapse yet; and collapse has not ever happened in our modern history simply because of our people’s resilience.
That is because we unite and adopt radical reforms in a crisis, as we did in 1990-91: a point I have been making for decades, that India readily adopts tough reforms in a crisis.
The situation today in the Indian economy is, therefore, retrievable, and a turnaround can be commenced within three months after the coronavirus pandemic is controlled.
Thus if the government initiates “real” and substantive reforms through economic policy changes—as was done in the 1990s of the previous century—and if we initiate major economic reforms that are credible and incentive-driven for the people, I expect that we should recover by middle of 2021. My suggestion is that for this to happen, Prime Minister Modi should replace the present lockdown scheme with a more decentralized scheme; and ensure as the first step that the MSME and daily wage workers in the agricultural and non-agricultural sectors are able to survive and revive soon.
The Prime Minister should also formulate a new economic policy with clear statement on objectives, priorities, strategy and viable schemes for resource mobilization with essential physical and financial infrastructure; and he must entrust its carrying out to knowledgable and experienced persons.
As for the coronavirus pandemic, so far the Narendra Modi government has handled the situation well and decisively. The coronavirus casualty numbers are quite low at about 200+ deaths; and this is because the Prime Minister has constituted a team with a very capable Minister of Health & Family Welfare, Dr Harsh Vardhan as leader.
Coronavirus-caused infection rates may be understated in India, but the important figure of number of deaths is not easy to understate, since no family wants to hide the fact of death in the circumstances.
The problem for the nation is not that we cannot defeat the coronavirus, but that the already crisis-ridden economy has been shattered by the lockdown. We may thus win the coronavirus battle but be badly defeated by the war to save the economy from collapse. When coronavirus enters the body of a human, which is already sick, there is a huge uphill task to save the human.
India is the only G-20 country which is not just afflicted with an epidemic raging among its citizens, but is also debilitated by falling growth rates in output and rising unemployment. The economic system of India was already ailing for three years by the time the coronavirus arrived here in February this year. By the time the government’s lockdown policy manages to contain the coronavirus, the economy may become so emaciated that there may be a situation of mass unrest among its people due to unemployment and poverty.
We therefore first need a reality check. The economic reality of today can be assessed from the following facts:
[i] The growth rate of the economy with proper index number based GDP has declined steeply over the last three financial years, 2017-20. The annual rate for 2020-21 is not available, by reason of obvious data non availability; but it is clear that the trend of decline has not changed and it has perhaps worsened due to the double whammy of coronavirus affecting output and employment and an already failed economic policy to boot.
Based on available data, I foresee that the growth rate of the GDP for 2020-21 will be the lowest since 1952—less than 2% annual rate. Even before coronavirus hit us, we needed a 10%+ per year growth rate for a decade to wipe out unemployment from the country. Now even if we achieve 10%+ per year growth, it will not be enough to wipe out unemployment within the decade.
[ii] Household savings, which form the bulk of India’s national investment, dropped from a high of 35% of GDP in 2015 to 28% of GDP in 2019 due to rising interest rates and reducing returns on fixed deposits of the middle class.
This economic decline began even before demonetisation; and the decline continues because of unrelenting, intrusive and sometime obnoxious tax measures.
I also consider GST as an idea that was borrowed from the UPA government and was, despite my lonely protest, introduced much as a carnival in Parliament, with gongs reverberating. It has remained an opaque mess since then.
[iii] NPAs of the public sector banks have also now risen sharply, in fact at a rate of growth much higher than the rate of new advances of these banks, making many large PSBs financially unviable and on the verge of collapse. This coronavirus driven bankruptcy could cause financial contagion in 2020-21 in all sectors.
[iv] The Ministry of Finance, in its 2020-21 Annual Budget, has unthinkingly cut allocations of the investments in infrastructure projects despite the urgent need for such infrastructure.
The economy, however, now needs about $1 trillion investment in infrastructure to render self reliance in manufacturing and services sectors a reality, but the actual investment in sanctioned projects, valued is even less in real terms than the amount invested in pre-2014 years.
[v] 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% and 5%, when it is capable of growing at 12% to 15% per year if generous low interest loans are available without silly hassles.
It is good to learn that one of BJP’s dynamic senior ministers, Nitin Gadkari has now taken a meeting of MSME representatives to prepare a package of incentives to revive these enterprises. The MoF must not again decline what Gadkari has asked for. MSME provides employment to the bulk of the nation’s semi-skilled workers, who, today across the country (because of the lockdown) are tragically unemployed.
[vi] 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 at least double the production as also commensurately export the excess agricultural products abroad. Agriculture, a sector which is the largest employer of India’s manpower, is sadly grossly under-performing since the last 15 years.
With the lockdown, the agricultural sector is gasping for breath. A scenario of mass revolt of agricultural labour (which is now completely unemployed and hungry due to the lockdown) is developing.
About 60% of India’s labour force works on subsistence wages in agriculture. A new crop has to be sown soon, just before the monsoons arrive. The government cannot afford to let down agriculture on the plea of a lockdown.
[vii] When crude oil prices had steeply fallen over the three years since 2014 (and now again due to a cartel formed by Saudi Arabia and Russia), we have failed to pass on the price decline to the transport sector, leave alone giving relief to the middle class with shrinking real incomes.
[viii] Moreover, despite that the dollar value of the rupee has fallen to over Rs 76 per $, nevertheless both exports and imports have simultaneously declined over the years—imports more than exports. This has created an unreal positive rise in trade balance. It’s surprising that the Finance Ministry has claimed this as an achievement!
Thus the present possibility of an economic crash induced by the lockdown should galvanise the policymakers to review honestly the way we have governed so far, and then rise to new heights by appropriate changes in policy, to achieve over the next two years the higher growth rates of 10%+ annual growth in GDP with structural changes. This should be the objective of our economic policy.
Economics is a technical subject of interdependent variables and parameters capable of objective mathematical and statistical analysis.
Economics is no more a single commodity “demand-supply” subject. In economics today we no more deal with simple equations, but with matrices and multivariate calculus.
Those who don’t understand this level of mathematical economics become leftists and IMF/World Bank advisers to India and moan on and on with a synthetic concern about poverty in India. They hand out the usual “class struggle” based silly arguments.
Hence, in their ignorance of the fact of the sophistication of modern economic theory, and by trying to put a spin and a gloss on reality, those in responsible positions in the government soon end up getting exposed as ridiculous in the public eye: we can see this today in media debates and conferences where facts stare at us in the face.
Even while having faith in Prime Minister Narendra Modi, the overwhelming number of participants in social media today think that the economic proposals are swinging from one measure to another, without a comprehensive policy formulation.
In keeping with the rigour required, economic policy prognosis must be structured on four pillars: Objectives, Priorities, Strategy, and Resource Mobilization. To implement such a policy prognosis, an appropriate physical, financial, and human infrastructure has to be set up. This has not been done even today; and instead there is reliance on ad hocism and spin.
It is true that the Indian economy is today headed for a serious crisis. It is, however, a myth that every crisis necessarily means an imminent collapse of the economy. The Indian economy is not very near a collapse yet; and collapse has not ever happened in our modern history simply because of our people’s resilience.
That is because we unite and adopt radical reforms in a crisis, as we did in 1990-91: a point I have been making for decades, that India readily adopts tough reforms in a crisis.
The situation today in the Indian economy is, therefore, retrievable, and a turnaround can be commenced within three months after the coronavirus pandemic is controlled.
Thus if the government initiates “real” and substantive reforms through economic policy changes—as was done in the 1990s of the previous century—and if we initiate major economic reforms that are credible and incentive-driven for the people, I expect that we should recover by middle of 2021. My suggestion is that for this to happen, Prime Minister Modi should replace the present lockdown scheme with a more decentralized scheme; and ensure as the first step that the MSME and daily wage workers in the agricultural and non-agricultural sectors are able to survive and revive soon.
The Prime Minister should also formulate a new economic policy with clear statement on objectives, priorities, strategy and viable schemes for resource mobilization with essential physical and financial infrastructure; and he must entrust its carrying out to knowledgable and experienced persons.
Dr Subramanian Swamy is an MP nominated by the President for his eminence as an economist. He is a former Union Cabinet Minister for Commerce and Law.
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