More pain in store for the economy

The honeymoon seems over. Two senior economists from within the Sangh Parivar have sounded an alarm about the state of the economy and the direction in which it is headed. S Gurumurthy has said “we are hitting rock bottom” and Subramanian Swamy has repeated his earlier warning that the “economy is in tailspin”. Both have urged urgent corrective action which, they feel, can still set things right. Thereafter, former BJP finance minister Yashwant Sinha has added his voice to the criticism.

Their perception, it seems, is that growth will not revive on its own once the one-time disruptions caused by demonetisation and the introduction of goods and services tax (GST) work themselves out. And growth is important. Less than a year ago, while announcing demonetisation, Prime Minister Modi had approvingly noted that in the two and a half years since the BJP came to power, the ‘I’ in BRICS had turned from being “shaky” to “bright spot” in the global economy.

That something may be fundamentally wrong with the economy stems from the fact that global trade is reviving but an uptrend is not seen ahead for Indian exports. This is contrary to the economy and exports moving in tandem with the global economy both during the boom of the early 2000s and the great recession after the financial crisis of 2008. It is critical to identify the underlying cause for the current ills as otherwise only palliatives will be administered.

One obvious villain is the appreciation of the rupee which has affected exports, which, in turn, has pulled down both the growth rate and job creation. The strength of the rupee comes from foreign inflows which have responded to the ongoing reforms and global interest rate differentials. But this inflow has not resulted in investment on the ground. Instead, stock prices have risen out of step with projected corporate earnings. Other than exports not doing their bit, a key reason for the decline in the growth rate is the slowdown in investment, largely from cutback in private sector investment. In the corporate sector, the mood to invest in new capacity is missing, partly in response to the lack of buoyancy in consumption demand.

The Government will be on the right track if it goes in for an unambiguous fiscal stimulus. But it has not done this yet, only announced a scheme for taking electricity to all by end-2018 at a cost of ₹16,000 crore. Not much of a stimulus, when spent over more than a year.

Other than administering a stimulus, the big challenge before the Government is to convince the Reserve Bank of India to lower interest rates so that the revival effort does not rest on one leg. This will be particularly impactful when the US Federal Reserve gets on to reining in monetary easing in response to healthy US economic growth. This realignment of Indian and US interest rates will likely stem foreign inflows, thus putting an end to rupee appreciation and helping exports get back on their feet again.

This scenario has to address three arguments. The RBI may not take a benign view of inflationary expectations as after being thoroughly tamed, it is going up again. Food prices will not behave the way they have done last year. The country has experienced both drought and floods in different regions which will affect output. Plus, global oil prices seem set for an upward journey.

Most importantly, RBI may lower policy rates and banks may follow suit but will it result in corporates borrowing more? A revival in corporate lending by banks will not come until the issue of banks’ bad debts is sorted out and a new set of promoters take over the stalled projects. This will take time.

Even if we assume that all this will happen — both fiscal and monetary easing along with resumption of large scale bank lending — where will this take the economy? The policy changes will improve sentiment among number crunching analysts and commentators but what about the people in general and in particular those at the bottom of the pyramid and the unorganised sector. The current reality is that the mood there, buffeted by demonetisation and GST, is distinctly downbeat.

A Government with a popular mandate and serious reform agenda usually meets headwinds around mid-term. (Witness the fall in popularity of French President Marcon as he sets out to bring labour reforms.) Then, armed with some positives from the reform effort, the Government goes in for a populist run-up to the elections. What is the likelihood of there being a popular feeling soon that the attack on black money is yielding results and changing the way India runs and this, coupled with a dose of populism (fiscal easing plus some giveaways), will create the feeling that acche din is coming? Your guess is as good as mine.

While looking at the roots of the current economic slowdown, if we put all current and coming short- and medium-term policies in one basket, there is a need to look at a critical long-term issue? Is the Indian economy losing steam in the journey it successfully undertook since the 1990s to improve its global competitiveness?

The future of two great Indian success stories of recent decades, in information technology and generic drugs, appears threatened. The phase of reaping cost arbitrage, in software services and generic drugs, is over and there is tremendous need for Indian business to innovate. But except for pharma and software, the R&D spend of India Inc is pathetic.

In the coming age of machine learning and Internet of Things, all built on the foundation of hardware capability, India is nowhere vis-à-vis China. Plus, Indian micro, small and medium businesses are threatened by Chinese imports.

Is ‘Make in India’ going to get anywhere? With the growth rate merely slowing down a bit, the short term outlook looks distinctly better than the long-term one.

The writer is a senior journalist

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