We are in the midst of an unprecedented and atypical global adverse shock. While all attention must focus right now on overcoming the health crisis, we must take stock of our economic prospects this decade. This article is not about India’s underlying unconstrained potential. It is about how much of it may be realistically fulfilled over the 2020s.
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India has seen a digital revolution in public services and its payments system is one of the fastest in the world. The goods and services tax, though some hiccups remain, has been implemented, and so also the bankruptcy code. With what has been termed ‘the new welfarism’, access to basic amenities such as bank accounts, cooking gas, toilets and electricity has improved. While these improvements are critical because the end goal of a policy is to raise the well-being of people, it is doubtful if they would translate into measurable economic growth soon, as with the early impact of the internet or electricity.
To begin with, we need to minimize the social and economic cost of the pandemic itself. The key to influence citizen’s expectations and behaviour is the credibility of public policy. Super-spreader events such as election rallies or religious gatherings not only increase the risk of covid’s spread, but also erode policy credibility and the effectiveness of other social restrictions. Similar is the case with India’s vaccination drive, which is the cornerstone of victory against the pandemic. Flip-flops in terms of pricing, procurement and distribution do not help garner public trust.
Productivity improvements form the backbone of rising prosperity. Non-tradable sectors include healthcare and education, where production and consumption largely take place locally. While there is room for tele-healthcare, this sector, by the very nature of its services, will remain largely non-tradable.
Not only that, India’s healthcare capacity remains low, with just 133 beds per 100,000, coupled with a shortage of healthcare staff, but its distribution is also highly uneven across states. Bihar, Jharkhand, Odisha and West Bengal have the fewest beds on this matrix.
The other key service sector, education, has been disrupted enormously by the pandemic. Technology in this sector has leap-frogged in terms of online delivery, which now makes it a tradable sector. However, we have neither an institutional set-up yet, nor household affordability for it, resulting in unequal access to education. Although the National Education Policy has been announced, delivering on its promise will require sustained attention to its implementation and consensus building with states. Education and healthcare systems that lower existing inequalities are critical for a healthy and skilled workforce, and thus for median productivity levels.
The implementation of new farm laws has been deferred and the same may be the case with revised labour laws. In contrast, there seems to be a move towards restricting labour mobility within the country, with some states enacting quotas for local recruitment.
Reforms in sectors mentioned above will take time before they show up in Indian productivity gains.
Another issue is unequal regional development. Maharashtra, Tamil Nadu, Karnataka and Gujarat account for 38% of India’s output (and 54% of manufacturing), with just over 10% of India’s population. Restrictions on labour mobility would further encourage a pandemic-forced move towards capital-intensive production in prosperous states and make job creation tougher in a young labour surplus country.
India needs millions of productive non-farm jobs, and not merely more self-employment and low-skilled services where the potential to raise productivity, and hence real incomes, is minimal. And for that, India needs its unicorn startups to turn into sustainable big businesses since it is the big business that creates jobs, spurs innovation and rewards talent and work. While we have a flourishing startup ecosystem, sustaining expansion and creating large-scale jobs takes time and isn’t yet guaranteed.
Growth is notoriously hard to predict. As a big mis-forecast by the economist Rosenstein Rodan for 1961 to 1976 shows, forecasting an upside due to good luck by way of a sudden change in the implementation of an economic-policy regime is not possible. Or, for that matter, forecasting a severe stroke of bad luck, such as a natural or man-made catastrophe.
All said, barring dramatic changes in luck, and with a global move towards trade protectionism, a pandemic-induced loss of productive capacity and employment, constrained fiscal capacity along with the possibility of higher taxes and inflation, and the anaemic state of the banking sector, a key growth enabler, India is unlikely to improve on its growth performance of the past decade.
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Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.