The COVID-19 shock has hit all world economies and has caused a serious contraction in all of them. Ironically, it exposed the intrinsic strengths in the advanced economies, such as the USA, the UK, Japan and others, with highly evolved social security systems that were, by and large, able to absorb the labour displacement and were, able to quickly put together a fiscal fightback plan. even China has been able to quickly recover its pole position as the world’s leading exporter and industrial production centre. In India, COVID-19 has exposed our comorbidities and has further opened up the traditional fault lines, with the large unorganised labour cohort bearing the brunt of the costs. At the last count, the Centre for Monitoring Indian economy (CMIE) estimated that over 130 million daily wagers in the urban centres were rendered jobless and homeless. India’s economy, which has been in distress for most of the last decade, is now seriously stricken.
When India’s economic history is written in the future, and when a serious examination is done of when India lost its way to its ‘tryst with destiny’, the decade of 2010–2020 will be highlighted. The facts speak for themselves. India’s real gross domestic product (GDP) growth was at its peak in March 2010 when it scaled 13.3 per cent. The nominal GDP at that point was over 16.1 per cent. The nominal GDP in September 2019 was at 6.3 per cent, its lowest in the decade. Since then, the downward trend is evident and we are now scraping the bottom at about a real GDP growth rate of 4.5 per cent, this too with the push of an arguably inflationary methodology. Our previous Chief economic Advisor (CeA), Arvind Subramaniam, estimated that India’s GDP growth is overestimated by at least 2.5 per cent. Subramaniam Swamy, a Member of Parliament from the Bharatiya Janata Party (BJP) and economist, was even more pessimistic. He estimated it to be 1.5 per cent.
The decline in the growth promise of the country is amply evident from the change in the make-up of the economy during this decade. In 2010, agriculture contributed 17.5 per cent of GDP, while industry contributed 30.2 per cent and services 45.4 per cent. In 2019, that has become 15.6 per cent, 26.5 per cent and 48.5 per cent respectively. The share of industry has been sliding. This is the typical profile of a post-industrial economy. The irony of India becoming post-industrial without having been industrialised must not be missed.
The most significant cause for the decline of growth is the decline in capital investment. It was 39.8 per cent of GDP in 2010 and is now a good 10 per cent lower. Clearly, without an increase of capital investment one cannot hope for more industrialisation, and hence higher growth. What we have seen in this decade is a huge increase in services, which now mostly means an increase in public administration and informal service providers such as pakora sellers.
The turn of the century, when China’s GDP began its great leap forward (from about US$1.2 trillion in 2010 to US$14.2 trillion in 2019), was also a heady moment for India whose GDP of US$470 billion began a break free from the sub 5 per cent level of most of the 1990s to the rates we became familiar with in the recent past (to hit a peak stride of 10.7 per cent in 2010). At that pace, if growth rates kept creeping up, we could have conceivably gone past US$30 trillion by 2050. But for that the growth rate was required to be consistently above 7 per cent. It seemed so feasible then; in 2010, it seemed we were well on track. But now we are struggling to get past US$3 trillion, and the US$5 trillion rendezvous that Prime Minister Modi promised by 2024 will have to wait longer.
To be fair to Narendra Modi and the National Democratic Alliance (NDA), the decline began early in the second term of the United Progressive Alliance (UPA) government, when capital expenditure growth had begun tapering off. Dr Manmohan Singh is too canny an economist to have missed that. But UPA2 also coincided with the increasing assertion of populist tendencies encouraged by the Congress president and her extra-Constitutional National Advisory Council. The decline in the share of capital expenditure was accompanied by a huge expansion in subsidies, most of them unmerited. Instead of increased expenditure in education and healthcare, we saw a huge expansion in subsidies, such as on liquefied petroleum gas (LPG) and motor fuels, to the middle and upper classes. even fertiliser subsidies, which mainly flow to middle and large farmers with irrigated farmlands, saw a great upward leap. Clearly, the money for this came from the reduction in capital expenditure. Modi’s fault in the years since 2014 has been that he did nothing to reverse the trend and only inflicted more hardship through his foolish demonetisation policy and ill-conceived goods and services tax (GST) roll-out.
The realities are indeed stark. The savings/GDP ratio has been in a declining trend since 2011 and Modi has been unable to reverse it. Consequently, the tax/GDP ratio and the investment/GDP ratio have also been declining. The rate of economic growth has been suspect and all objective indicators point to it being padded up. The drivers of economic growth such as capital expenditure are dismal. Projects funded by banks have declined by over half since 2014 to less than ₹600 billion in 2018–2019. Projects funded by the market have dropped to rock bottom. Subsequently, the manufacturing/GDP ratio is now at 15 per cent. Corporate profits/GDP ratio is now at a 15-year-old low of about 2.7 per cent. You cannot have adequate job creation if these ratios are dipping. Declining rural labour wage indices testify to this.
Between October 2007 and October 2013, rural wages in the agricultural and non-agricultural sectors grew at 17 per cent and 15 per cent respectively. Since November 2014, however, agricultural and non-agricultural sector wages grew at only 5.6 per cent and 6.5 per cent respectively. In 2019, average rural wage growth further fell to 3.1 per cent.
It is very clear now that the urban areas have been moving well in India. Indeed, so well that an Oxfam study revealed that as much as 73 per cent of the growth during the last five years accrued to just 1 per cent of the population. This does not mean that it is just the tycoons of Mumbai and Delhi who are cornering the gains. The government now employs close to 25 million persons, and they have now become part of a high-income enclave. The number of persons in the private and organised sector is about another 10 million. In all this, the high-income enclave numbers not more than 175–200 million (using the rule of thumb of five members per family). Much of the consumption we tend to laud is restricted to just these.
Agriculture is still the mainstay of employment. Way back in 1880, the Indian Famine Commission ‘had observed that India had too many people cultivating too little land’. This encapsulates the current situation also. While as a percentage the numbers of farmers and farmworkers have reduced as a part of the workforce, in absolute terms their numbers have almost tripled since 1947. This has not only led to a permanent depression in comparative wages but has also led to a decline in per farmer production due to fragmentation of holdings. The average farm size is now less than an acre and it keeps further fragmenting every generation. The beggaring of the farming community is inevitable. The only solution to this is the massive redirecting of the workforce into less skilled vocations such as construction.
The simple fact that the share of agriculture is now about 15.6 per cent of GDP and falling while still being the source of sustenance for almost 60 per cent of the population reveals the stark reality. A vast section of India is being left behind even as India races to become a major global economy.
As the decade ends, the Bharat and India divide has never been more vivid. Our social scientists are still unable to get a grip on this because the class, cultural and ethnic divides still elude a neat theoretical construct. Yet, there can be little disagreement that there are two broad parts to this gigantic country and one part is being left behind in the path of progress. The distance between the two only increased from 2010 to 2020. This is indeed the lost decade. Recovering from this will take a long time and will be painful. If we take too long, we might use up a good bit of the ‘demographic dividend’ and the demographic window of opportunity. The ageing of India will be upon us by 2050.
This excerpt from Mohan Guruswamy’s article in ‘Securing India’s Rise: A Vision For The Future’, edited by Lt Gen Kamal Davar (retd), has been published with permission from Bloomsbury India.