P Chidambaram writes: Economy still in the woods

The National Statistical Office released the provisional estimates of national income and quarterly estimates of GDP on May 31, 2022. Addressing the media, the Chief Economic Adviser was subdued and cautiously optimistic. He knows, as most economists know, that the Indian economy is not yet out of the woods.

The Bad and Worse

The worst piece of news is that the size of the economy at constant prices on March 31, 2022 (Rs 147.36 lakh crore) was about the same as it was on March 31, 2020 (Rs 145.16 lakh crore), meaning that we are running to stand in the same place! However, individual citizens have become poorer because the per capita income has declined in the two years from Rs 1,08,247 to Rs 1,07,760.

The next bad news is that the graph of quarterly GDP growth in 2021-22 is a sloping graph: the numbers for the four quarters are 20.1, 8.4, 5.4 and 4.1 per cent. In terms of output (value addition), there is no sharp rise. In the pre-pandemic year of 2019-20, GDP in the fourth quarter was Rs 38,21,081 crore, and we exceeded that number only in the fourth quarter of 2021-22 which recorded Rs 40,78,025 crore.

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There is no place for the boast that, at 8.7 per cent, India is the fastest growing large economy. That boast has no meaning given the state of inflation, unemployment, number of people below the poverty line, prevalence of hunger, decline in health indicators and decline in learning outcomes. The growth rate of 8.7 per cent, impressive as it may appear, has to be seen in perspective. Firstly, it is on the back of negative growth of (-) 6.6 per cent in the previous year. Secondly, when China grew at 8.1 per cent in 2021, it added USD 2,600 billion to its GDP in twelve months (at current prices) while India growing at 8.7 per cent in 2021-22 added only USD 500 billion to its GDP in twelve months (at current prices).

The World Outside

Once we are sober, we may look at the prospects for 2022-23 and beyond. Obsessed with ourselves, we forget that there is a world outside. We need the world’s markets, products, capital, technology and innovation. The economies of the world are under stress. Inflation and interest rates are rising in the United States and demand is flagging. China’s GDP growth will be squeezed because of repeated lockdowns. Soaring gas prices have reduced the purchasing power of Europeans.

RBI’s Monetary Policy Committee noted (May 4, 2022) that the IMF has revised down the global growth rate in 2022 from 4.4 per cent to 3.6 per cent and the WTO has revised down the world trade growth rate from 4.7 per cent to 3.0 per cent. IMF has projected inflation at 5.7 per cent in advanced economies and 8.7 per cent in developing economies. The MPC has identified the “worsening external environment, elevated commodity prices, persistent supply bottlenecks and …..volatility spillovers from monetary policy normalization in advanced economies” as formidable headwinds. I doubt if anyone in the government is listening.

Diagnosis good, Treatment absent

The RBI’s monthly report (May, 2022) has identified five critical elements for reviving animal spirits and spurring growth:

  • private investment
  • higher government capital expenditure
  • improved infrastructure
  • low and stable inflation
  • macroeconomic stability

Of the five elements, the government has control over ‘government capital expenditure’ alone, but its capacity to invest larger amounts in capital works this year will be severely restricted because of post-budget actions like cut in fuel taxes, increase in subsidies and increase in welfare expenditure. Of the rest, private investment will not gather pace as long as there are supply bottlenecks and unutilized capacity. As for foreign investors, Cairn, Hutchison, Harley-Davidson, General Motors, Ford, Holcim, Citibank, Barclays, RBS and Metro Cash & Carry have left or are leaving India. Any improvement in infrastructure will require a radical change in the processes involving tendering, pricing, execution and accountability — all of which are missing today. We are adding ‘quantity’ to our infrastructure but not ‘quality’. And the Modi government’s past record shows that it is clueless on inflation and macroeconomic stability.

Above all, one can steer a ship in choppy waters only if the captain and the mates share a team spirit and common goals. No consensus exists today between the Center and the states on crucial issues. GST has broken the trust between the Central government and the state governments. Add the hatchet jobs done by Governors and the blatant misuse of the Central agencies against every Opposition party (witness the unprecedented spectacle of state ministers being arrested by Central agencies).

There is also a larger problem. No country can become an economic powerhouse if the Labor Force Participation Rate is 40 per cent. The bulk of India’s working age population is either not working or not looking for work. And despite educating more girls, the LFPR of women is an abysmal 9.4 per cent. Besides, the current unemployment rate is 7.1 per cent.

We have a sick economy. We have excellent diagnosis. There are medicines in the pharmacy. But, the doctors on the job are either quacks or don’t care if the patient is dying a slow and painful death.

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