The Fragility Of The Indian Economy

Milton Friedman articulated it best when he said that, “Only a crisis - actual or perceived - produces real change.”

Over the last 70 years we have built an economy with neither a foundation nor a roof. It is unstable, precarious, brittle and even rickety. Our policy makers monitored it when they should have nurtured it; they licenced it when they should have fostered it.

We are the third largest economy in PPP terms. A world tom-tomming about the growth rate, sound economy, demographic indicators and healthy democracy, ignored the fragility of our economy. The Indian economy that has been the envy of the world, is now suddenly on its knees and at risk. Our success has also been our biggest failure. The economy suffers macroeconomic imbalances and structural fragilities, making it susceptible to disruptions, exacerbating imbalances, acute and long-lasting socioeconomic implications. Our social framework is frail and worsening. 

The fragility of the economy is both a cause and an effect. As a result, we are a deprived society and need a robust and holistic policy framework to secure the foundations for a stable, inclusive and sustainable development. Post the reforms our growth – led and equally driven by a clutch of ‘new age’ entrepreneurs – created enterprises (mostly services) of scale and value. The government ‘allowed’ them to be entrepreneurial.

In the pre-reforms days, the state ‘interfered’ for most (but) equally supported the few, ‘enabling those few to ‘bank and, licence’ business models. And create wealth. In a socialist milieu it was acceptable, rewarded and admired even. 

In spite of the unprecedented growth, we have had perhaps the worst socioeconomic indicators – income disparity, a gloomy Human Development Index, indifferent health. Nearly 25 per cent of Indians are deprived and denied; living below the poverty levels and continue to ‘stand and wait’ outside the ‘inclusive’ purview. The next generation may not fare better.

The pandemic has exposed several fault lines. Our economy is characterised by a resource deficit, lower productivity, exiguous technology adoption, a missing middle, cronyism and several other ills.

Let Sleeping Dogs Lie

However this is the symptom. The cause is the foundation we built and the roof we provided. This has rarely been acknowledged, never addressed.

Farming is not sustainable, not because our farmers can’t ‘weather’ the challenges, but because the ecosystem is unsurmountable and a huge headwind. Half our workforce processes and creates less than a seventh of our GDP, earn a fifth of what others do, and grow at a third. The infrastructure is non-existent, the farm size too small and reducing. However, you slice and dice the data, they remain dismal and very gloomy. 

Investment in the rural infrastructure, the agricultural ecosystem and equitable land acquisition is paramount to create sustainable and equitable growth, yielding a 15 multiplier. Then there is a case of  the 400 million ‘unorganised, unionised’ and underemployed workforce; ‘working’ the economy, paid 70 per cent of the minimum wages, with no benefits and exploited. The policymakers have accepted, and the beneficiaries’ take pride in this as a ‘working model’ that makes them competitive. 

Entrepreneurship is the last resort. A Crux study across 17 states says the ‘dice is loaded’ against the job creators i.e. the MSME. They employ 120 million; contribute to 45 per cent of the exports and 30 per cent to the GDP. They lack credit, market, technology and (because of it) are inefficient. The Inspector Raj chokes them. The government policies help big business, making smaller ones less competitive and perpetuating them to remain small (an average of less than five per unit). Less than one per cent makes it to the big league. 

The missing middle

The corporate sector faces regulatory hurdles and policy upheavals. Businesses don’t like the government going back on its promises (retrospective taxation, cancelling contracts are common) when the dispensation changes. There is more collateral damage. 

The corporate sector must symbiotically partner the MSME and other stakeholders to build and enhance the ecosystem. However, the MSME lack the much-required support; in effect reducing competitiveness, subtracting value and hurting growth.

Big corporates are neither the big employer (recruiting a fifth per rupee invested) nor are they productive (amongst the lowest in the world). Large and depredating infrastructure, unskilled workforce, lack of capital and lack of technical expertise lowers their productivity further. 

A good proportion of our large companies are debt laden and precariously leveraged. Crux research show that 20 per cent of the largest 500 companies are unable to service debt and fixed cost even for 60 days in the absence of earning. Even our largest organisations are pygmies on the global scale.

We have a ‘mixed economy’ that most people describe as ‘profit in the private pocket and loss in the public’. The public sector will not deliver because they can’t. They suffer a structural frailty. The ‘owner’ i.e. the government neither has the expertise nor the motivation to lead their growth. And consider them to be a treasure till. Over 90 per cent of the large PSUs are struggling and are on public largeness. 

Myopic approach and indifferent policymaking has caused a depreciating economic ecosystem and has hindered competitiveness. The government’s response to global trade affairs is mostly inadequate, often timid. Infrastructure is the big elephant in the room. The corporates among them deserve more; fostering innovation, upskilling, and global scale infrastructure etc. iows best’ failing us

In developing economies, the government partners industry. However, our government plays the role of the regulator at best, or a monitor and often the inspector. The economy depends as much on politics as on economic policies.  Apathy and fractiousness in policymaking hurt confidence in the economy. 

In the current uncertain environment, any unexpected developments or sudden shift will trigger an economic erosion and social disorder, weakening us further and deepening concerns on longer-term sustainability. The fact is that when a crisis is particularly severe or unusual or both, staying the same is simply not an option. 

The pandemic is a defining event. A catastrophe of this size and scale has accelerated an incoherent shift and laid bare profound, longstanding vulnerabilities in the economic system. We need a new paradigm. Sacrifices may need to be made, decisive policy actions that address a holistic and sustainable approach are needed to secure the future. Overhauling the obsolete and obstructive will be necessary. Not sufficient.

We have tried to and often have put the rail back on track. But we now need to lay new tracks. More is needed – and holistically. The cost of social disorder is staggering. It threatens internal peace, loss of public conviction in institutions and democracy.

Our policy framework must consist of policy architects and builders, both in equal measure, analytical thinkers and instigators of constructive social outcome and intuitive doers.

While the Prime Minister begins to ‘build from the start’ a robust and event- proof economy, the larger goal should be to keep the momentum, fuel growth, capitalise on the demographic dividend and propel India to the league of developed nations.