Boosting economic growth and export growth is as much a productivity challenge as it is going to be a political economy challenge for India. Is India’s statecraft up to it?
The Central Statistical Organisation in India recently projected that in the year ending March 2017, that India’s nominal GDP stood at Rs 152.54 trillion (or US $ 2.275 trillion). If we simply assume that, over the next thirteen years, India’s nominal GDP in rupee terms will grow at 10 per cent per annum, the Indian economy will be Rs 527 trillion big.
Many assumptions lie behind this estimate. Are they realistic or, are they conservative?
Ruchir Sharma noted in an article in Foreign Affairs last year that the global economy is in the grip of three Ds – depopulation, deleveraging and de-globalisation. That is one of the reasons China too has resorted to increasing reliance on debt, especially since the 2008 crisis. It has also launched the ‘One Belt and One Road initiative’ to put its domestic capacity to use and create growth opportunities for its industries and for the economy.
De-population
The developed world’s population and labour force growth is slowing. Even India’s population growth rate has slowed. At around 1.2 per cent, India’s population growth rate was lower by 0.1 per cent than the global population growth rate in 2016. For the world and for India, population growth rate peaked in the 1970s. But, the world growth rate slowed faster than India’s.
De-leveraging
De-leveraging is not India’s problem yet. Indian public debt – union and state governments combined – at 68 per cent of GDP is on the high side. Indian private non-financial sector (includes companies, unincorporated businesses and households excluding banks and other non-banking financial entities) has borrowed heavily from capital markets and form banks in the last fifteen years. This sector’s debt/GDP ratio was around 36 per cent in 2002. It had risen to a peak of 62 per cent in 2014. But, in the last four years, de-leveraging has been underway. The debt ratio has come down to 55.9 per cent. India’s households have very low levels of debt by global standards. There is scope for them to catch up. Hence, despite the government’s high debt ratio, India’s overall debt ratio at 124 per cent of GDP is on the lower side. Debt can be harnessed to boost growth.
However, India’s financial sector, dominated as it is by the government, is not in a position to provide debt capital. As long as banks remain under the control of the government, the government’s budget constraint will be binding on banks’ ability to raise capital. Without adequate equity capital, they cannot grow their assets, i.e., expand lending. The current crisis could have been an opportunity to pass the banking system on to private hands with safeguards and regulations for ensuring systemic stability and for ensuring that Indian banks did not repeat the mistake of their counterparts in the West. But, that opportunity has not been grasped yet. Perhaps, in the unique Indian style, we might get there – a banking system that is not dominated by government shareholding – by stealth and in our own opaque and convoluted manner.
De-globalisation
De-globalisation is a bigger threat than is understood. India routinely sets out export targets for the economy. Frankly, that is a futile exercise. Exports are determined by global demand and by the competitiveness of the goods and services that India seeks to export. The latter is in India’s control, to a large extent. The former is not. Hence, the government can set targets for improving the quality, indispensability and competitiveness of Indian exports and then hope that global buyers notice that.
Missing culture of exports
Despite setting such targets, after the global crisis of 2008, India’s export growth recovered to nearly 20 per cent in 2010. Since then, the growth rate has been declining, contracting 5 per cent in 2015 before posting a modest increase of 4.5 per cent in 2016. This performance mirrors India’s yo-yo export growth record between 1975 and 1990, a period marked by government dominance of the economy, hesitant liberalisation, political uncertainty and fiscal imprudence culminating in the Balance of Payments crisis of 1990. The unimpressive export performance symbolises a much bigger problem with productivity and scale inefficiencies in India. They constitute a big risk for optimism on India’s aspiration to join the Economics Big League by 2030.
Nations are becoming more protectionist and protective of their economies. The adverse implications of this trend for India’s exports must be understood when we try to assess India’s growth prospects for the next twelve years.
East Asian countries, led first by Japan and now followed by China, especially since 2000, had improved their economies and reached middle-income status mainly due to strong export market performance. Emphasis on exports raises the bar on domestic manufacturers with respect to scale and productivity. Exports can easily add a percentage point or two to economic growth, making up for domestic slack. India, due to a combination of internal and external factors, is likely to miss out on that for several years, if not longer. The culture of export reliance is missing.
Srinivas Thiruvadanthai, Chief Economist at the Levy Forecasting Institute in New York, laid out the challenge that India faces in no uncertain terms:
“India needs to brace itself not just for a flood of cheap imports from China but also a potential reversal in the long trend of globalization. Trump’s message on economic nationalism, hitherto banished from polite conversation, is likely to experience a revivalism across the world in the years ahead. As global trade shrinks, the positive-sum aspects of it will dwindle, making it harder to paper over the negative aspects of trade. A trade war is a distinct possibility.”
In other words, boosting economic growth and export growth is as much a productivity challenge as it is going to be a political economy challenge for India. Is India’s statecraft up to it?
In January 2018, credit-rating agency, Fitch Ratings placed India’s real economy growth potential at 6.7 per cent, but noted two big concerns holding back labour productivity: India’s low labour force participation, especially women, and the problem of skill endowments of the youth. Corporate governance, government approvals and clearances hold back capital productivity.
India’s fear of scale
The government has to take the initiative to break this spiral of lack of trust in the society and in the economy. It is the control mindset, blended with a moralistic attitude towards economic activity that obstructs the creation of capacity and scale in the private sector. In listing the ‘Six Big Economic Mistakes’ of the present government, I had identified ‘anti-big’ bias as one of them. The Economic Survey of 2017-18 also refers to the anti-capital bias that has crept into the Indian public and political discourse constraining policymaking.
A more vivid demonstration of that occurred recently when the government defended the re-introduction of the Long-Term Capital Gains tax in India for gains in the stock market in the budget for 2018-19.
The short point is that limits on India’s growth placed by low productivity could be a manifestation of psychological limitations.
This article is an edited extract that has been reproduced with permission from the ‘Industrial Economist’. You can read the full report here.