State of Indian economy: Where do we go from here?

Indian Economy

It is no secret that the Indian economy is in big trouble. The GDP shrank by 24% in the April-June quarter, along with a step-up in the rate of CPI inflation (above 6%). The GDP growth over the entire fiscal 2019-20 is now estimated to be around -10% (minus 10%), instead of the earlier projection of -5%. The fiscal deficits of both central and state governments are ballooning. The central government is not even able to compensate the states for the tax revenue loss due to the introduction of GST.

There have been massive losses for self-employed and unorganised workers. Even white-collar workers (like software engineers, teachers, accountants, analysts) have lost 32.6% of jobs over May-August 2020, according to CMIE data. They are being forced to survive on their past savings or drastically cut their consumption expenditures. On the other hand, the more affluent people may end up with higher savings as their expenditures on travel, vacations (in India and abroad), hotel stay, eating out, etc., have fallen. The financial state of banks and NBFCs has worsened due to the moratorium on debt servicing and interest payments.

Where do we go from here?

The likely scenario is that with gradual unlocking, production, employment and GDP would now start to pick up, though slowly, along with a rise in the rate of infection and deaths. However, the exact timeline of these developments is uncertain.

As for the impact on GDP, there is a pure fact of arithmetic. Suppose for a country, GDP is stable at 100. Now, if in one-quarter GDP falls by 25%, it becomes 75. Assume that in the next quarter, GDP returns to the earlier trend level of 100. Growth in the second quarter would be (25/75) x100 = 33.3%, though over two quarters, there is zero growth. The government may like to take the credit for the recovery rate being higher than the rate of decline which, in reality, is simply due to the ‘low base effect’.

One advantage of the current situation is that the production equipment is already in place and can quickly be activated as demand and workers return. Migrant workers are eager to go back to their former workplaces. Much depends on how quickly demand is generated for goods and services.

Here, the government has a large role to play by spending more on infrastructure and relief for some more time to offset the temporary demand deficiency from consumption, investment and exports. A temporary rise in the fiscal deficit, even if financed by borrowing from RBI (same as printing of notes), is not likely to spur inflation or interest rates. Private investment expenditure is not going to be crowded out under excess production capacity and surplus liquidity. On the contrary, more spending on infrastructure (roads, ports, transport, power) by the government should lead to better capacity utilization by private players (especially in steel, cement, machinery and equipment) and induce more expenditure, production and jobs through demand and supply-side linkages.

The economic slowdown started long before the onset of the pandemic. So, we are not going back to the above 7% growth trajectory of the past. The scope of an export-oriented growth strategy successfully pursued by Japan, the East Asian tigers and then China is not available for a large country like India under the prevailing global atmosphere. Hence, India will have to depend on domestic sources of demand, which needs a more inclusive growth strategy. It should start with the diversification of crops away from food grains which, by catering to rising urban demand and generating better profit margins, will enrich farmers and will also add more to aggregate demand as farmers are generally poorer, with higher propensity to consume.

Though it sounds like a good idea, it is not really a new idea. The crucial question is how to bring this about. Basically, there are two alternative pathways. One, the government builds the physical infrastructure like warehouses, cold chains, 24-hour reliable power supply, and better roads to connect farms to all-India markets. Given the fiscal constraints of both central and state governments, this is not a feasible option.

The other alternative is to rely on private players. This is what the Modi government is proposing to do by allowing farmers to sell to and get investment and technology (by dismantling the monopoly of Agricultural Produce Marketing Committees or APMCs and through contract farming) from any entity in India. This is de-licensing agriculture by introducing competition along the lines of de-licensing of the industry in 1991.

It is hoped that big private players would invest in building the required infrastructure and supply chains, which would bring about the transformation of Indian agriculture. Apart from the political opposition to any such moves (which has already started due to compulsions of competitive politics, the fear of losing revenue from mandi tax and the political power of the middlemen who would be eliminated), there is always a big difference between what is theoretically possible and what actually happens on the ground in India, given the pervasive inefficiencies and corruption in the implementation machinery at different levels.

It is also doubtful how many farmers (especially the smaller ones) would like to give up the price certainty of MSP for rice and wheat (which the government is assuring would continue) for the uncertainty of price realisation under a more diversified crop pattern with more production of vegetables, fruits and flowers. At the same time, contract farming has already benefitted some farmers in states where it is already (selectively) allowed. So, it is possible that, if these success stories are widely publicised by the government and the media, more farmers would opt for contract farming. But, then again, the vast number of small farmers, with fragmented and scattered land holdings, is unlikely to gain. Bringing them together under producer cooperatives has not succeeded in India, where the success story of Amul is an exception.

Mr. Alok Ray
Former Professor of Economics, IIM Calcutta, India, and
Cornell University, USA