Extreme fringes tend to dominate debate on the Indian economy. For the Left liberals everything is going wrong, for the extreme Right it is the best of all possible worlds. Each sees what they want, even choosing to defame available data in order to do so.

It is true India’s performance has continually fallen below its promise in the past decade. Even more balanced analysts are disappointed. It touches a deep vein of under-confidence and results in a blame game, that tends to overlook many positives.

Perhaps that is why, when a global pandemic hit, the majority of predictions for the country were dire. Every misstep was blown out of proportion. Let us examine some predictions and the actual outcomes. The differences may give us a better grasp of reality.

Expectations and reality

Covid-19: Given India’s congestion, poverty and inadequate health infrastructure, the pandemic was expected to hit it badly. Initial predictions of deaths were in millions and fall in growth were in high negative double digits. Yet, the human cost was comparatively low in the first wave. The new and highly infectious Delta variant, that is spreading worldwide and even countries like China are finding difficult to contain, had a high human cost but passed in a few months.

The economic cost was low. India was one of the very few emerging markets to produce its own vaccines and vaccination is proceeding apace despite the daunting target of covering more than a billion people as well as the multiple conflicts and protests big democracies face on any issue.

Growth predictions: The strength of the recovery in 2020, even after a strict lockdown, surprised many. Through 2020 most growth predictions regularly had to be revised upwards. Pent up demand was vigorous.

The delta variant economic shock was limited to Q1 2021 with strong recovery in July. Export growth remained robust and even overtook 2019 values. Jobs returned and there were even signs of the long awaited uptick in investment. Job loss was smaller and more transient in the second wave.

Financial sector: Given the perception of high gross non-performing assets (NPAs), predictions were particularly gloomy for the Indian financial sector. The widely quoted RBI financial stability report baseline had a rise in gross NPA ratio to 12.5 in 2021 from 8.5 but the ratio actually fell to 7.5.

Moratoria and restructuring helped but repayments were more than expected, collection efficiencies were in the nineties and resort to restructuring was limited. Generous provisioning reduced net NPAs to low single digits. Large capital buffers built were easily able to absorb limited deterioration in asset quality.

While there are some signs of stress in retail loans after the second wave, affecting private banks more, the rapid recovery indicates this may be transitory.

Long-term scarring: There are signs of scarring in the education of those excluded from distance learning, in women’s work and in small enterprises (SMEs) all over the world. But in advanced economies SMEs received so much support that there is a fear of “zombification” as resources are locked in non-competitive firms.

In India, which could not afford 30 per cent of GDP as a fiscal deficit, support was too little. SMEs had to substitute towards new opportunities, away from contact industries.

Government supported bank-finance was based on assessment of long-term survival. Smaller firms had traditionally drawn on informal sources of finance that remained active under easier liquidity conditions.

Gold loans boomed. The majority of smaller firms work from home, with 96 per cent owned by one household, and could remain active through lockdowns.

Women, and their employers, may have discovered work from home as digital got a fillip. This may facilitate a rise in India’s very low women labour force participation. A vibrant NGO-CSR sector is supporting the deprived.

Growth drivers

Systematic under-prediction points to a lack of understanding of Indian growth drivers. That Indian growth was already slowing in 2019 was taken to indicate some fundamental flaws that Covid-19 was expected to aggravate. It is true that growth slowed for India in the 2010s and there was a decade-long stagnation in investment. But India was not alone in this.

In the past decade emerging markets as a group grew more slowly under many global shocks. India had the added disadvantage of public sector banks passing through a severe NPA crisis after they were forced to support the infrastructure push of the late 2000s.

Slow, fundamental reform was undertaken in the financial sector. As a result, when the rest of the world was undergoing a credit boom under quantitative easing Indian corporates were deleveraging. Private sector credit growth was the lowest in the world, and was due for a turnaround.

Other policies were also extra strict, as a reaction against corruption allegations surrounding the 2000s growth boom. Some of this was needed in an India where asking for adherence to laws was regarded as an infringement of democratic rights. The same Indians would quietly obey much stricter laws when living abroad. Critical reforms had implementation costs.

Improvements were sufficient, however, to allow a reversal in policies towards more balance. With this a growth revival took place and was visible in the high frequency data of February-March 2020, before Covid-19 hit.

That the post Covid-19 stimulus did not go overboard underlines the new-found balance in policy. Despite the required rise in deficits, the path to fiscal consolidation is clear. The financial sector was healthy prior to the Covid shock, and in order to preserve this, moratoria and restructuring given were not indefinite. Corporate governance and Board independence had improved.

There is more diversity in sources of finance. Most banks were now doing careful risk-based lending with a focus on retail. Government credit warranties helped overcome their risk aversion. It is correct that subsidies should be directly borne by the government, instead of being forced on a commercial sector that then fails.

It is not just careful policies that give India a growth advantage. Its demographic profile is the big one. In an increasingly ageing world there will be a premium on youth, talent and entrepreneurship. India has all this in abundance.

It is this energy that will find opportunities provided there is some basic support. The steady improvement in infrastructure provides this support.

Better rural roads partly explain the sharp rise in agriculture exports. Diversification of orders from China has contributed to export growth already overtaking its 2019 levels. And the potential is much more.

Foreign direct investment can complement domestic investment. It is clear that foreign inflows are discriminating among emerging markets — Indian inflows are not just due to quantitative easing. Growth prospects and stable macroeconomic parameters are pull factors. Educated youth are tolerant and committed to the country’s heritage as well as to its institutions. The country is much more than what the government does or does not do.

The factors that work for the economy, work also in sports. More openness and exposure to the world, better coaching and training infrastructure have given India its largest tally yet in Olympic medals. But this is only the beginning. There are risks and the path ahead is long, but it is becoming smoother.


The writer is Emeritus Professor, IGIDR. Views are personal. Views are personal