The depredations of the pandemic had been somewhat controlled, the lull of the lockdown was behind us and some green shoots of economic growth had become evident from the third quarter of the 2020-21 financial year (FY2021), when a more deadly second wave of Covid-19 engulfed India. Now major headwinds may quash the green shoots of an economic recovery from the mammoth slowdown of the year gone by.

April did bring news of some good economic indicators like a record GST collection, good exports, some foreign direct investment (FDI) and a real GDP growth of 1.6 per cent between January and March 2021. The slight increase in India’s gross domestic product though, comes at the end of a 7.3 per cent contraction of the Indian economy during FY2021. That long year when both industrial production and key services were literally locked out by a lockdown also saw record job losses, a record in debt defaults and in mortgages of gold jewellery. The picture on the ground looks bleak.

Union Finance Minister Nirmala Sitharaman’s Union Budget was built on hope, but with the severity of the second wave of the coronavirus and the lockdowns it necessitated, the growth projections of that budget are now mired in uncertainty. Economists are downgrading the GDP forecast to 9.3 per cent from 13.7 per cent. What is more worrisome is that all the hopeful projections of the current year are built on the low base of FY2021. So the dramatic increases on these year-on-year projections do not always give away the fact that effectively statistics like the GDP forecasts, the index of industrial production (IIP) and external trade do not compare well with the period before the onset of the pandemic. A more realistic perspective of the Indian economy, therefore, would be to compare the FY 2022 statistics with those of the pre-pandemic years.

The Index of Industrial Production, for instance, grew by 22.35 per cent in March 2021 over that of March 2020, which is actually a misleading statistic, considering the low base of that month. When the IIP is measured against that of the same month the previous year (FY 2019), it shows a contraction of 0.5 per cent. The 197 per cent growth in merchandise exports in April 2021 over the same month of 2020, reflects the same illusion.

So should we assume that the economic rebound of the 2021-22 financial year is largely a statistical illusion drawn from a low base?

“No, it is not an illusion. The economy was recovering for real ‒ as one would expect after such a huge down-shock,” says Nobel laureate and Ford Foundation International Professor of Economics at Massachusetts Institute of Technology, Abhijit Vinayak Banerjee.

“Indeed, when I was asked a year ago, I did say that I didn’t expect the shock to be permanent and that there are natural forces for recovery,” he told this writer in an exclusive interview.

He hastened to add though, “But I (and other optimists) could have all been wrong ‒ economic predictions are often a dicey business.”

Yes, there is chaos in the economy, masked inadequately by optimistic growth statistics, and an unprecedented and extraordinary situation prevails. But that is not the core issue. The real issue is: what will drive growth in such a situation? India needs to grow by double digits to attain a $4 trillion GDP by 2022-2023 in real terms from the $2.7 trillion GDP of the 2017-2018 financial year. It is imperative now to make sense of India’s macroeconomic indicators and draw some conclusion of where we are headed. It is the time and an opportunity to take the boldest steps.

The Financial Burden

While India had announced a $266 billion (Rs 20 lakh crore) stimulus package to support the economy in May 2020, the stimulus largely comprised liquidity support to financial institutions so they may be in a position to offer collateral free loans of about $40 billion. So basically, till the last financial year the effective financial support turns out to be one per cent of the GDP. Second wave has left what is called psychological barrier when public health collapsed amidst mass hospitalizations. By the time the second wave of the coronavirus hit India, the unemployment rate was at a record high of 11.9 per cent and had spread to rural India. Rural unemployment hit a high of 10 per cent.

On top of that India’s budgetary deficit ballooned to a record high last year, as the government borrowed more to spend its way out of the pandemic-induced slump. At the end of FY 2020-21, the fiscal deficit was estimated by the Controller General of Accounts to be as high as 9.3 per cent of the gross domestic product. While the government surpassed its revenue target, collecting 105 per cent of its revised Rs 15.6 trillion goal for the full year, it was more on account of a year-end rush to pay up taxes.

Fiscal Policy

A fiscal policy gone awry had led to the payments crisis in 1991 ‒ which is possibly when the Indian economy hit an all-time low. So, the conservatism in fiscal discipline is right step by the government but unfortunately, situation is extraordinary. In a situation as extraordinary as the present one when government expenditure is essential and economic activity needs to be spruced up in the interest of public health, fiscal prudence may have to be thrown to the winds. The situation demands more liberal spending to stoke the dwindling consumption and a demand that is fast drying up.

Many economists argue that the fiscal deficit target is irrelevant during an extraordinary situation such as this and that the government should rather focus on a large enough stimulus package.And, we are still talking about one per cent of the GDP, while other emerging economies have spent far more. On top of the pyramid is the United States, which has so far spent 10 per cent of its GDP to revive the economy. Even though, the US and Indian economies are not comparable, the recovery rate in the US shows how a right fiscal policy works to revive an economy. (Please see chart).

“I agree that even two per cent of the GDP seems perfectly reasonable,” says Abhijit Banerjee, “to put that in perspective, the US is planning to run a deficit of more than 20 per cent of the Federal Budget for the next decade.” Both his books ‘Poor Economics’ and ‘Good Economics for Hard Times’ co-authored with fellow Nobel laureate Esther Duflo, speak of the effective use of fiscal support to revive an economic system.

The question that we need to ask then, is whether the much tom-tommed Rs 20 lakh crore stimulus package announced by the Union government in 2020 contained measures to recoup the economy. A broad consensus is that the stimulus drifted mostly towards banks and non-banking financial institutions. “There was no stimulus package as such,” says P. Chidambaram, Former Union finance minister and now a Congress member of Parliament. “In 2020-21, against the pre-pandemic BE of Total Expenditure of Rs 30,42,230 crore the RE was Rs 34,50,305 crore. Not much to boast of in terms of ‘stimulus’ expenditure,” he adds vehemently.

So, are we likely to spend enough to give a fillip to the economy in FY 2021-22? Chidambaram points out that the revised estimate of the total expenditure in the Union Budget of FY 2021-22 was Rs 34,83,236 crore, demonstrating a negligible increase over the original budgetary estimates. The Opposition leader’s criticism of the present government’s strategies is scathing. Chidambaram accuses the Narendra Modi government of going against the advice of every renowned economist in the world. “My advice to the government is ‘borrow and spend’” he tells BW Businessworld.

India’s principal think tank, the NITI Aayog, also argues against a conservative fiscal policy.

NITI Aayog Vice Chairman and leading economist, Rajiv Kumar echoes similar sentiments, when he says: “I also think it is not the time or the circumstance to hold on to some rigid fiscal framework. Monetary policy has done the heavy lifting and its space is somewhat limited at this point.

So the fiscal policy will have to play its due counter cyclical role. The fiscal balance can be achieved once the pandemic induced crisis is behind us,” he says.

But he also cautiously points towards the broader financial policy framework to address the complexity of the fiscal challenges.

Rajiv Kumar talks about encouraging far more robust quasi government financial mobilisation by sub-sovereign entities and private agencies that do not increase the government’s debt to GDP ratio.

“And we must note that our government’s debt to GDP ratio remains lower than that of most other G-20 member countries. And our total debt to GDP ratio is far lower than that of either advanced economies or even some of the larger emerging economies,” he says, talking of the scope for spending more. Kumar is known to be prudish as an economist, and his measures beyond the rigidness and ineffectiveness of academic economic theories. India carries that economy with nearly half of the economic indicators are not mapped due to the financial exclusion of large population.

The Chairman of the Prime Minister’s Economic Advisory Council and an economist of repute, Bibek Debroy, prefers to focus on the flip side of the coin, namely servicing the debt that the country will accrue through an increase in expenditure.

Bibek Debroy: “There is not much point in making comparisons with other countries, with more favourable fiscal balances,” he tells BW Businessworld. “Per se, the fiscal deficit, or the three per cent share of the GDP, is not important.

What’s important is an ability to service debt (meaning, in this case, the Union government’s debt). The fiscal deficit numbers are derived from that,” he says.

The Growth Conundrum

The constraints before the Union government are undeniable. While public expenditure threatens to balloon up as India battles a pandemic the world has never seen before, revenue channels are constrained in times when business and commerce face hiccups at every step. It is that classical Catch 22 situation for policymakers.

It is quite certain, however that the Union government intends to spend more to give a fillip to the economy. India’s Principal Economic Adviser, Sanjeev Sanyal explaines, “If you see last year as well the last six months of the last financial year we mostly targeted very carefully towards the poor, giving them free food. We provided the world’s largest food programme for 800 million people. We also did some transfer to the very poor, but once the economy was opened up, we focused on capital expenditure.” He says the focus remains on accelerating the economy through capital expenditure.

But by any yardstick, India's budgetary support for the Covid-19 pandemic has so far been conservative (see chart). Reports suggested a Rs 5.5 lakh crore stimulus package to deal with the crisis. “Bold measures will be required to emerge stronger from the crisis” is the verdict.

But the larger question is: what will drive growth? We sound out some of India’s leading economists and policymakers on some key economic indicators.

Export-orientation

India must remain an integral part of the global economy if it has to grow at nine per cent to 10 per cent over the next three decades, as India’s key policy think tank Niti Aayog envisages. So far India’s growth pattern has banked on its large domestic consumption, unlike the export-orientation of other emerging Asian economies. The question before us is, will India be able to achieve the targeted 10 per cent sustained growth in GDP without a strong export policy to back it up? Nations that are more open to international trade and that are more advanced in technology can easily ensure economic growth.

India is not usually considered competitive in the global supply chain, even though Debroy differs with that view point, pointing out that the competitiveness of Indian exports vary from sector to sector. “Pre-Covid, I don’t quite agree that India is not becoming part of the global supply chain. Depends on the sector. I am not suggesting everything desired has happened. But I don’t buy the argument of it being a binary, that there was no integration into supply chains across sectors,” says Debroy.

But as economist and Chairperson, CERG Advisory, Omkar Goswami points out, “We have neglected exports for 50 years. When the South-East Asian and East-Asian countries were building their economic strength by creating world-class exporting capacities and related infrastructure, we focused on import substitution.

As we still do, for what else is Atmanirbhar Bharat? Suddenly, we can’t change our genes, can we? Besides, the train has left. Even Bangladesh thoroughly beats us at this game.”

The train has left, but will India be able to catch the next one, or will growth remain an elusive dream built on unrealistic projections. To be on that express train of high growth, the country needs technology, innovation and sound export policies. “I am of the firm view that we do not need long winded and verbose policy documents for expanding our exports,” opines Rajiv Kumar.

Rajiv Kumar: “Instead we need [export policy], as is being done by the relevant ministries and departments, to identify binding constraints and effectively address them. This will yield stronger and more timely results.”

The success story of South Korea in our neighbourhood, though, was built on a coherent export -driven policy and support from the government over decades. How soon Government brings about change in export strategy and make it ‘mission export’ a central scheme will directly impact or growth status.

But there are two important factors at play here. The flow of foreign direct investment (FDI) has not made Indian industry competitive enough to be part of the global supply chain, and India is still not comfortable with many global trading blocs. How do we overcome these hurdles?

Investment & FDI

FDI is always positioned at the heart of economic growth for emerging economy like India--rightly so as it is not only about precious capital to re-energize the scale of economy but more so, it is about the infusion of technology, international standards and competition.

During the 2020-2021 financial year, Gujarat received Rs 1.63 lakh crore of FDI, or 37 per cent of the total FDI received in India (please see chart). “More than 7.7 lakh applications have been processed on the investor facilitation portal, which is a single-window system developed and tracked,” points out Gujarat’s Additional Chief Secretary Manoj Das.

Manoj Das: “We don’t like to keep piles of files, we move it to the conclusion and that eases investors a lot.”

FDI Inflow in State (2020-21) Credit-Manish Jha/BW

Gujarat’s track record of attracting FDI is impressive because of the initiatives at the state level. But in general, foreign investors are still known to dread the red tape interface. The frequently touted ‘Single Window Clearance’ often entails many hidden doors that a prospective investor has to pass through. The Chairman of the Prime Minister Economic Advisory Council says, “All efforts should be made to attract investment into India so that India can play a major role in the global supply chains.”

But first, let’s talk about the nature of FDI. How real is it? A contrary view comes from India former finance minister, P. Chidambaram. “We must subject FDI to a closer analysis,” he says. “Is FDI in equity or debt? Is FDI an additional investment in the business or for changing ownership from Indian hands to foreign hands? Which are the sectors that are attracting FDI? Without such a close analysis, the debate on FDI is a sterile debate and the boasts about ‘greater FDI’ are empty boasts,” he says.

The record FDI inflow into India in April has, however, been viewed with enthusiasm, for FDI is usually accompanied by infusion of capital, technology and international standards in Indian industry. So logically FDI should make India a part of the global supply chain. It should make Indian products competitive, leading to more exports and sustainable growth within the country. Some of the country’s policies are, however, still not seen working in that direction.

The Indian Bilateral Investment Treaty (BIT) Model 2016 and Retrospective tax move have been criticized as protectionist and not investor-friendly.

What attracts foreign investment? Firstly, a policy that has a clear roadmap for investors in terms of a clear-cut incentivized plan and scheme. Secondly, Acts like Gujarat’s Single Window Clearance Act 2017. Even measures like the Production Linked Incentive (PLI) scheme which is a part of the National Policy on Electronics, helped attract foreign investors after it was notified.

The PLI simplified the ambiguous incentive plan into well-structured incentives of four to six per cent for electronics companies that manufacture mobile phones and other electronics components.

A surefire way to be part of the global supply chain is through the trade blocs, especially the regional trade blocs, where too India has missed a step with the recent controversy over joining the Regional Comprehensive Economic Partnership (RCEP), which is now among the world’s largest trading blocs. Openness, active participation and timely negotiated agreements such as those with the EU and India and free trade agreements (FTAs) with other countries could take the country a step forward in this direction. “As far as regional trading agreements are concerned, there is a quid pro quo ‒ what one gains in market access as a result of what one grants in market access,” cautions Debroy. In an apparent allusion to India’s abrupt exit from the RCEP negotiations, he says, “In some historical RTAs, India’s hopes were belied.”

Privatization

The Union government targets Rs 1, 75,000 crore from privatisation and disinvestment. In 2018 as many as 1970 CPSUs incurred cumulative losses of Rs 0.32 trillion. Even though Covid-19 did play it part, some state enterprises like BPCL and Air India do have a huge baggage of liabilities. Will these enterprises sail through the privatisation process this year? Is it time, perhaps, to revive the Disinvestment Commission?

Most of Indian economists still tend to oppose the market friendly ideas –like they did in 1991 against the opening of economy and concept of free market and even the technology like –computers. Reason given that largely, the Old School Socialist orientation dominates their argument.

Prof Abhijit Banerjee, who has seen the malaise of public sectors fallout in the context of Indian economy expresses surprise and concerns too.

Abhijit Banerjee: “My general sense is bafflement. This government is willing to take such big political risks to pursue what it believes in, for example with the farm laws. Why is it so slow to take on a much more obvious case of pure rent protection?”

Some privatization proposals like those of PSU banks, do not always find approval among Indian economists and policymakers. While P. Chidambaram cautions against dyeing all banks with the same tar. Consolidation of banks can be part of that review. He says private banks have failed too. The crux of the issue is regulation, not ownership. We are in favour of improving regulation and oversight of the banking sector. But that is real problem.Government needs to regulate banks not to run it. It is classical empire and player dichotomy. The Non Performing Assets (NPAs) touched 6.8 trillion rupees in fiscal year 2020. It is bad regulation as well besides the grossly under-performing public sectors banks. Though Government has come up with list for further consolidating, proposal for Privatization is submitted by NITI Aayog, namely, Bank of Maharashtra, Central bank and IDBI bank. The case of consolidation with big giant of PSU banking Punjab National Bank is not about making it efficient as a basic service like Debit card takes two months of waiting time. Besides, Govt infused Rs 20,000 crore in public sector bank as part of its recapitalization for FY21. How relevant then our banks could be in 21st century? Answer lies in divesting Government stake in all while keeping maximum two under the umbrella.

Amidst the apprehensions and conservatism about privatization, will the privatization proposals of the Indian government sail through? What is even more pertinent to ask at this juncture is that in times when massive public expenditure is inevitable, how else will the government be able to bridge the yawning gap in its budgetary resources? More so, privatization is about restarting the growth engine in full throttle and weed out the archaic –loss making—dysfunctional public sector enterprises.

The Indian government expects to raise Rs1,75,000 crore from privatisation and disinvestment, points out Omkar Goswami. “If that reduces by even 50 per cent, with all other revenues and expenditures remaining exactly the same, the fiscal deficit for 2021-22 will jump from 6.8 per cent of the nominal deficit to 7.2 per cent. That aside, each privatisation will take away huge future expenditure outflows of the central government on account of these PSUs.”

But government has been vocal on this, the problem lies in implementing it.

Prime Minister Modi has often lauded the merit of-- colloquially called-- a laissez-faire economy.

Bibek Debroy who advises PM Modi on this, defends the timeline and affirms:“There is a time-line for privatization and a process, after a decision to privatize has taken place. In some cases, legislative changes are required and those have to go through Parliament.”

Bibek Debroy: "The Union government is quite clear about the decision to privatize several Union government PSEs (public sector enterprises)."

However, the processes still have to be completed, he explained.

But Privatization is still a bad word in the world of politics. While the privatization is usually considered for sick industries many others are left out in the name of strategic assets. For example, we have 50 ordnance factories which are redundant, unproductive and a huge liability since the British era. Yet, they are still considered strategic assets and have not been considered for disinvestment. Such gaps will be pull India back from achieving full potential.

Defence economy is next big bang opportunity of scaling up on advance technology and export boost. It is such that with a little push from Ministry of Defence (MoD), the defence export from India exploded from a mere Rs. 1,400 crore to about Rs. 11,000 crore in 5 years.

So far, OFB is being corporatized. It will drain another couple of years. It is worth US 500 billion of defence ecosystem and that requires the flow of technology and orientation on R&D in India. When are we unlocking it?

P. Chidambaram points out that the Congress embraced free trade first. He believes that chronic loss-making units can be privatized straight away. In the case of strategic industries, we must weigh the option of total privatization and the alternative of private and public partnership. Is that not half-hearted reform?

The question that will haunt both policymakers, industry and the country at large for a long while now will be how soon India will be able to leave behind the huge depredation to its economy caused by the Covid-19 pandemic. Till that happens the quest for a $5 trillion economy and a strident voice in the space of geo-economics, will remain a distant dream.

Indian Economy--That Illusive Double Digit Growth