The Indian economy has been slowing down for five quarters now. Frantic efforts are being made to contain and reverse the slowdown by a combination of fiscal and monetary interventions. The Reserve Bank of India has been cutting interest rates. The Narendra Modi government has announced a bunch of measures, including a comprehensive restructuring of corporate income tax rates.
These efforts suggest that even though the BJP-led National Democratic Alliance was able to win the 2019 Lok Sabha elections during an economic slowdown, the economy will remain on the agenda. Given the challenges in India, economic issues will continue to be important, even though their electoral consequences may depend on the political skills of those vying for power.
While the recent efforts are important, it is also useful to see this slowdown in the broader context of India’s long-term pursuit of economic growth and development. India’s challenges may not be such that mere stabilisation measures will suffice.
Also read: Why Indian economic tiger became puppy with tail between legs & what markets want Modi to do
Need to sustain growth
India achieved an episode of relatively rapid growth in the non-agriculture economy between 1993 and 2010 (with a further acceleration from 2002, and lower growth in 2000, 2001 and 2008). A sharp slowdown then followed. Between 2014 and 2016, the Indian economy seemed to be making a recovery. Not just the much-debated GDP estimates, investment and employment data also show this.
CMIE data shows that new project announcements by the private sector more than doubled in 2014-15 and 2015-16, compared to the previous two years, and the unemployment rate fell by more than half between 2015 and 2016.
But that growth was not sustained to create another episode of rapid growth. Since 2017, it has been clear that the economy has struggled to sustain growth. The recent slowdown in private consumption is only the latest bit of bad news.
The challenge now
The challenge for India now is to create and sustain another long episode of rapid growth. This is not easy in the current circumstances.
Most countries that are rich gained prosperity through very long periods of relatively low but stable growth, mostly beginning in the 19th century. Since the mid-20th century, a few countries (like China, Japan, South Korea, Taiwan and Singapore) have become rich by sustaining rapid growth for long periods. These “miraculous” episodes are called “catch-up” growth where countries rapidly moved resources to more productive uses, achieving structural transformation. They were able to do this by both adopting existing technologies, innovating with technologies, and by benefiting from trade. Rise in savings and investments often played an instrumental role in the countries’ ability to do these things.
But such convergence does not mean that a country like India can now simply copy-paste another country’s developmental trajectory. The technological and economic context changes, and this change is transmitted through the economic system, shaping incentives and defining trajectories. The rapid increase in automation is narrowing the path for countries looking for competitiveness in manufacturing on the basis of labour surplus. Political economy, both global and local, also changes. For instance, the political economy of trade is now less conducive for countries looking to pursue export-led growth.
It is no wonder that long episodes of rapid growth are so rare.
Also read: In 3 months, Nirmala Sitharaman’s budget has come undone, one press conference at a time
Structural transformation requires structural reforms
All the factors that create and sustain high growth are not entirely in a country’s control, but some of them are.
The pursuit of economic growth and development requires a long-term view on the impediments to growth. Most of the impediments can be traced back to some or the other institutional problem. Quick fix remedies create a “sugar high” but do not sustain. Creating sustainable growth is about creating institutions that support such growth.
Douglass North, in his Nobel Prize lecture, criticised policy prescriptions from neoclassical economists for being “concerned with the operation of markets, not with how markets develop”. He pointed at “two erroneous assumptions” underlying such prescriptions: “institutions do not matter”, and “time does not matter.” North defined institutions as “rules of the game … or … humanly devised constraints that structure human interaction”. They include both formal constraints (rules, laws, constitutions) and informal constraints (norms, conventions, self-imposed codes of conduct), as well as their enforcement characteristics.
Institutions and time are two sides of the same coin. Development takes time because institutions usually take time to change. However, as seen in the few examples of countries that were able to sustain high growth for long periods, rapid convergence is also possible.
In most of those cases, rapid changes in formal institutions were made possible by a political situation where a single party or leader had enormous powers. Those in power were in a position to make difficult decisions, and manage to overcome vested interests. The dark side of this was that many people’s rights were trampled upon. But then, not all countries that have powerful parties and leaders succeed in generating sustained growth.
Political stability can enable growth as long as the incumbent has the incentive and/or the ideological commitment to pursue reforms. This is not to say that single party domination is necessarily better than coalitions. In fact, the Indian experience on this has been very different – in the 1990s and early 2000s, coalitions led by weak parties have managed to implement reforms.
The concentration of political power can enable growth by allowing structural reforms that are risky and may generate results with a lag, and by creating space for policy experiments. However, an insight from the coalition experience that is worth considering is that creating broader constituencies for reform can make the reforms more sustainable and help avoid mistakes.
Also read: Indian economy needs structural reforms & behavioural change, not macroeconomic jargon
Need for a strategy
A burden of being a dominant political party is that the BJP needs to worry about the long term, because chances are that it will be in power when the long-term consequences of its decisions materialise. If the BJP sees things this way, it will need to think carefully about the strategy for India’s economic development. A strategy by definition requires a longer horizon.
It is in the BJP’s interest to pursue economic growth as an objective. Economic power can be made to serve its political and national security agenda at home and abroad. It is unlikely that the international response to the decision on Article 370 and the continued lockdown in parts of the Kashmir Valley would have been so muted had the Indian economy been where it was in the early 1990s.
The corporate tax decision, GST, inflation targeting, bankruptcy reform, etc. show that the BJP is willing to expend some of its political capital on difficult and risky economic reforms that may generate their full benefits with a lag. Even though it appears that the BJP’s core ideological agenda and cultural and political objectives remain the main priority, as seen in the first hundred days of its return to power this year, the party probably realises that it also needs to deliver on its promise of economic growth to maintain its domination at the Union government level. However, decisions such as demonetisation that lacked a sound theory of change generate doubts on intellectual clarity, which are required for a strategic approach to the economy.
We in India need to take a long view of economic development. The BJP is in a position where it can take such a view, but it remains to be seen whether it will do so.
The author is a Fellow at Carnegie India. Views are personal.
Mr. RRRajan one of the economics stalwarts in world & ex Governor of RBI today only said” One person should not take decisions regarding Economical problems of a nation. At first the nation or government should admit the nation is facing the slow down
Strange. Six years in power in the country with the largest number of poor people in the world and we are still debating whether the ruling party should be thinking of sustained high growth – impossible without structural reforms – as its core governance function. Not something it looks at occasionally, as a sort of break, from pursuing its core ideological agenda.