The Nosedive

WHEN THE QUARTERLY DATA FOR economic growth was released on November 29th, no one was under any illusion and everyone expected negative news. In the event, the Government’s statisticians did not disappoint. India’s gross domestic product (GDP) had grown by a sclerotic 4.5 per cent from July to September, its worst performance in 26 quarters.

Worse, the slowing of the economy is now part of a pattern. The decline in growth momentum has been in evidence from September last year. If sales of commercial vehicles and consumer goods, production of electricity and other economic data are considered, then there is virtually no doubt that the economy had been sputtering much before the GDP data finally showed it to be in a tight spot.

A detailed look at the data paints a difficult, if not an alarming, picture of the state of the economy. In any economy, there are four engines that power growth: private consumption, government expenditure, investment and net exports. Of these, the strength of the Indian economy has always been private consumption in a market of potentially 1.3 billion people. Data shows that private consumption improved slightly over the April to June quarter but remains low by historical standards. If that were not enough, there was a near-collapse in gross fixed capital formation—the technical name for investment—which grew by just 1 per cent in the September quarter. Only Government consumption remained robust at 15.6 per cent growth, something that has its own problems. Measured from another perspective, by growth in different sectors of the economy, the story is equally gloomy. At half-a-per cent growth, there is virtual stagnation in industry. The positive story comes from the services and agriculture sectors that remain stable in an overall climate of gloom. Economists expect the weak patch in the economy to continue for some time ahead.

Most economists now agree that a fiscal stimulus—more Government spending or tax cuts, or both—is now the only way in the short term to revive economic growth. The complication here is that the Government is already consuming practically all household savings and has breached the fiscal deficit target set in the Union Budget this year. To borrow and spend over and above that is likely to roil financial markets and, more worryingly, lead to the possibility of a downgrade by ratings agencies. If the latter situation arises, the danger of a ‘sudden stop’ of global flows of money to India rises significantly. If India is to spend its way out, it needs to carefully map out the limits to such borrowings and also ensure that a ratings downgrade does not happen. In addition, a lowering of the policy rate by the Reserve Bank of India (RBI) has to be an essential part of the revival package. Unless there is coordination between the fiscal and monetary authorities on this, it is unlikely that policy steps for revival will work. The good news is that the RBI and the Government are on the same page. Economists expect the RBI to reduce the repo rate by 50 basis points by early 2020. So what should be done?

“The Government should focus on spending on infrastructure which generates demand as well as expands capacity. It should also boost spending on welfare programmes like MGNREGA that puts money in the hands of the poor whose propensity to consume is high,” says Maitreesh Ghatak, Professor of Economics at the London School of Economics.

“A crisis should not be wasted, as a US politician once said, and I agree that the Government should carry out bold economic reforms in the medium run. But in the short run, the economy needs to be put back on track and for that, demand-side measures seem to be the top priority,” Ghatak adds.

THE CONCERNED PUBLIC

Although many economists and policy wonks are deeply anxious about a slide in growth of jobs and a rare fall in food consumption, the likes of Venkatraman Umakanth, an IT professional and leader with an industry body, feels that the loss of jobs in the IT segment are par for the course since it is driven by technology. His contention is that loss in entry-level and middle-rung jobs in the sector is thanks to automation, and that it is a global phenomenon. What few people talk about is the growth in specialised jobs in IT that need newer and multiple skills. Such positions remain unfilled due to a lack of skill sets among IT pros.

For instance, he says, earlier it was enough to be a good engineer, but now you have to be a great communicator as well to be a perfect fit for new functions. Jobs that entail such varied skills are on the rise, he insists. “Our mindset is the big problem. We need to think differently as we are advancing at a fast clip in IT,” he reasons. Umakanth, who has worked in MNCs, points out that we are heading into an era of freelance jobs, popularly referred to as the gig economy, in which companies hire people on a project-to-project basis. “You have to constantly learn new skills to be on top of your game,” he avers, emphasising that economies, including India’s, will ride out the bad times as people adapt to new realities in job markets. He agrees that the world is becoming a ruthless place, but a place where a pro gets to take a break, re-skill himself and return with a bang. He also hopes freelancers will get paid more than full-fledged employees because of a raft of reasons. “It takes a typical employee many months to settle before he starts delivering results. A freelancer has to be on his toes on Day 1, and so they would be far more creative and productive with their work,” he says. Some others, however, contest it, saying job uncertainties will take a toll on creative people who will end up expending a lot of energy in searching for new jobs in a gig economy compared with relatively secure jobs with perks.

Delhi-based structural engineer Sangeeta Wij, managing director at SD Engineering Consultants, shares Umakanth’s views on the opportunities that new jobs markets throw up for entrepreneurs. An alumnus of IIT Delhi, Wij creates design for new buildings to make them earthquake-resistant and capable of withstanding various pressures based on use. For instance, the design for a building that sees a large number of visitors will be different from that of one which anticipates fewer people. Designs are dependent on potential use. She has done work for stadiums, auditoriums, hospitals, schools, colleges, swimming pools, residential, commercial and industrial developments. Wij’s argument is that in order to make people compatible with the new world, one has to instil a bent for entrepreneurship among children at a young age. “That is where the future lies: entrepreneurship. You can’t expect the government to create jobs for you. You have to do it yourself,” she states, adding that her US-educated son is into a business inspired by digitalisation. Like Umakanth, she, too, talks about the need for a change in ‘mindset’ of job seekers who will need to identify what they want to do to make money in future. “The trend has already set in,” Wij adds.

As regards the building segment, she says that the downturn is, in fact, a correction following injudicious inflation of costs and demand in the sector by unscrupulous players. “This is a period we are seeing stabilisation in the segment and this cannot be seen as a downturn,” she claims. “It will take some 6-8 months from now for the real-estate sector to start showing a rebound,” Wij prophecies. She blames the collusion between politicians and businessmen interested in making quick bucks for the current impasse. She hopes the Government will offer more projects—for example, in the Railways and Metro construction—that will stir up the economy in the near future. This is a phase that will see some hiccups, but things will be back on track as more people re-skill and adapt to innovation and demand in newer skills, Wij asserts.

Meanwhile, many corporates and officials refused to comment on queries about the state of the Indian economy and the Government’s response to it. Close on the heels of industry veteran Rahul Bajaj’s statement that the country is gripped with a fear of the Government, Rajiv Kumar, vice chairman of NITI Aayog who had some months ago called for greater focus by the Government on ‘unprecedented’ problems facing the financial sector, tells Open that he would not like to give any interviews on the economy.

Hari Menon, CEO and co-founder of BigBasket, and Deep Kalra, founder and group CEO of MakeMyTrip, the online travel company, declined to comment on the economy. Several other businessmen Open spoke to suggested that it was not wise on their part to talk about the economy. Asked why it was so, most of them said the current environment was not conducive to making comments. Some others were of the view that giving a pessimistic view of the economy is not naturally good for businesses. But jewellery businessmen and retailers were piqued that the Government was not doing enough to propel demand, especially in the rural economy. A prominent Mumbai-based jeweller tells Open: “People who were our buyers from rural areas have stopped and others are buying for fewer sums of money than before. People are mostly spending less than earlier. This includes festive seasons as well. Even temples are buying lower quantities of gold because people in general are uncertain about future payments.”

For her part, Ravindra Kaur, Associate Professor and Director of the Centre of Global South Asian Studies at the University of Copenhagen, who is finishing a book titled ‘Brand New Nation: Capitalist Dreams and Nationalist Designs in Twenty-First-Century India,’ tells Open that the Modi Government has misunderstood how businesses are subject to pressure from societies they operate in—referring to perceptions of uncertainty about jobs and future incomes. She talked about what the Government ought to do to tide over the crisis: “The short-term recourse would be to make cash flows available in the market, so that capital circulation can take place. A major complaint the past three years has been the lack of capital for small- and medium-sized enterprises. The large businesses have been the focus of the state especially because they bring glory and publicity.”

In a sharp critique, she says she is crestfallen about the Government’s priorities. Kaur says: “The focus on billionaires is a particular outcome of the Modi Government’s enchantment with publicity and global recognition. Consider that India’s post-liberalisation economy has depended a lot on its star image as a profitable emerging market.” She goes on to add that in the past decade-and-a-half, India has been the choice destination for global capital. “This also means that the Indian economy has been initially boosted via capital inflows. Modi came to power with the promise to take the Indian economy to new heights [and this is where he has failed]. Demonetisation and GST have stalled the steady pace on one hand, and on the other, long-term investments have not been made in the population—health and education—at large. This means that Indian labour is often not skilled enough to take up jobs. All this is coming together to bite us,” she opines.

Kaur says that India has to have a double strategy: “Long-term [which no one wants to think or invest in] and short-term that will immediately boost capital circulation. Given the state of the banking sector, this is easier said than done.” She regrets that India’s image as a destination for capital in the world is getting rapidly tarnished. “This has a further negative effect on foreign investments,” Kaur adds. Incidentally, a senior Government official Open spoke to agrees with that statement. “It is late, but the Government needs to put its act together and address crises looming on the economic front at a time when its politics has brought it a bad name globally,” he says, adding that whatever needs to be done, needs to be done quickly.

THE POLITICAL UPSHOT

In recent months, the downward trajectory of economic growth has led to murmurs of unease that have been variously interpreted as concern or dissent, depending on the political persuasion of the analyst. One recent example was the comments made by Rahul Bajaj at a recent event where Union Home Minister Amit Shah was also present.

Bajaj said: “You [Government] are doing good work, but despite that we don’t have the confidence that you will appreciate if we criticise you openly.” The industrialist also hinted at an “air of intolerance” felt in the country. Shah’s response was emollient and reassuring: “About fear, I can say that nobody needs to be afraid… But still, you are saying that an atmosphere [of alleged intolerance] has been created and we too will have to work to improve that. But I want to reiterate that nobody needs to be afraid.”

These words and the exchange did not spring out of thin air and have a background and intellectual content that require unpacking. Expressions like ‘intolerance’, ‘fear’ and ‘shrinking space for dissent’ among others have been around for a while. They first emerged within a year of Narendra Modi being sworn in as Prime Minister. At that time, the bearers of ‘dissent’ were intellectuals, writers and poets and their actions included organising protests and returning awards in the name of ‘saving democracy’ in India. These were easy to brush off politically: intellectuals and writers are always part of the elite that is remote from the concerns of ordinary citizens. The political performance of the Modi Government over the next five years provided ample evidence for this.

But Bajaj is different. An industrialist whose concerns are centred on the economy—jobs, profits and growth—his concerns are seemingly harder to dismiss. Today, even he is speaking of ‘fear’, echoing the same concerns that were made by writers and other intellectuals shortly after Modi came to power in 2014.

However, that is where the similarities, differences and any reasonable comparison between the two end.

Just about a fortnight before Bajaj’s statement, former Prime Minister Manmohan Singh echoed something similar—with his characteristic intellectual polish—in an oped article. Singh wrote: ‘There is a palpable climate of fear in our society today. Many industrialists tell me that they live in fear of harassment by government authorities… There is profound fear and distrust among people who act as agents of economic growth. When there is such distrust, it adversely impacts economic transactions in a society.” Singh blamed the malaise on the Modi Government’s ‘mala fide unless proven otherwise’ doctrine of governance.

This ‘fear theory of economic decline’ has been doing the rounds in recent weeks. Ten days before Singh penned his oped, Kaushik Basu, the Chief Economic Adviser in his Government made a similar argument, while going even further, by linking dissent with economic growth.

The trouble with the link between fear and its negative impact on economic growth is that there is scant evidence for it. Mechanistically, there is much stronger evidence between the squeeze on credit and the unwillingness of large businesses to borrow as a cause for depressed investment growth in India. Here, there is more robust evidence of the forces at work. The twin balance sheet problem—evident from the very early days of the Modi Government—probably is a better explanation for what is happening in the supply-side of the Indian economy. Banks reeling from high non-performing assets are unwilling to lend while businesses that went on a borrowing binge during the boom years, lack the appetite to borrow.

Even this factually correct reason for slowing of the Indian economy has to be kept aside keeping in mind the data released on November 29th. As explained above, this data shows the Indian economy to be in the throes of a demand crunch. In such a situation, there is little rationale for industrialists to invest in plant and equipment. Fear, dissent and democracy in India have very little to do with economic growth. It is another matter that weak economic performance may have political consequences, a point that is yet to be appreciated properly in the Indian economic system.

What has changed since 2014, however, are the levers of access to political patronage and political authorities on the part of business leaders. Some of the latter have lost out in this respect. It is invidious to take names or hint at those who are ‘out’ but it is true that the resultant heartburn is publicly known. To add to this, Narendra Modi’s cleaning of the Augean Stables by launching a campaign against corruption has unnerved many people. Herein, there have been negative effects, especially from the implementation of programmes such as the November 2016 demonetisation. While it helped boost formalisation in the Indian economy, it dealt a blow to the largely cash-driven system that operated in the country. What complicated matters further were the policy mistakes and unfinished reforms that were not properly addressed.

It is interesting to note the issue of cronyism in this context and how, on this political issue, the Modi Government has been less than deft. Back in late 2014 and early 2015, when Modi invested huge political capital in undertaking crucial—but unimplemented—land acquisition reforms, the opposition was quick to latch on to the slogan ‘suit boot ki sarkar’ a pejorative for trying to clear roadblocks in the path of industrialisation. Stung by this characterisation, the Government worked overtime to correct any impression of a cosy relationship with the business class. Soon after that, the anti-corruption drive gathered steam. Today, it is interesting to see the same opposition that cried ‘suit boot ki sarkar’ in 2014 loudly proclaim that industrialists live in fear. Consistency is never a forte for parties that occupy the opposition space in Indian politics.

TWO DIFFERENT POLES

One reason for this state of affairs is that politics and economic policymaking have diverged greatly in the BJP’s vision of governance. From the very first days of the Modi Government, there was a roadmap for political projects. Repealing Article 370 of the Constitution, completing the National Register of Citizens (NRC) in Assam and putting an end to the practice of Triple Talaq against Muslim women were high on the list of things the party wanted to undertake. To be sure, some economic reforms, such as getting the politically difficult Goods and Services Tax (GST) passed and enacting the Insolvency and Bankruptcy Code (IBC) in 2016 were carried out. But on the whole, political projects received the lion’s share of attention. A roadmap of sorts for what to do with the Indian economy remains absent. What explains this great divergence?

“Clearly, we know that economics and other bread-and-butter issues do still matter, especially in state elections—where the record of the BJP has been relatively unremarkable since its triumphant Uttar Pradesh victory in early 2017. But it is clear at the national level that the electorate is willing to provide Narendra Modi with a level of forbearance that is quite uncharacteristic of Indian voters of late. In large measure, this has to do with the cardinal belief that Modi represents India’s best hope,” says Milan Vaishnav, Director, South Asia Program at the Carnegie Endowment for International Peace in Washington DC.

To a question on how long this de-linking between economic performance and politics will persist, Vaishnav says that Modi’s central claim in the 2019 election was that he cannot undo 65 years of history in five years. “To the median voter, that was frankly a very compelling sales pitch,” he adds.

Should this concern the BJP? Until now, the party has weathered many political storms on the basis of Modi’s popularity. But a decline in economic growth, if it persists, can have political consequences. The consensus among economists is that unless India grows at 7 per cent annually, making a dent to residual poverty will be hard, if not very difficult. But if growth slips below 5 per cent—as it currently has—the gains made in removing poverty will be reversed. There are conjectures that poverty may be on the rise in eastern India, economically the more weakly performing part of India. This complicates matters for the BJP as eastern states are its new and high-growth areas. Getting out of the current economic rut is, therefore, essential for it politically. It matters a lot more for India’s future as low growth leads to the kind of complications hardly visible on the horizon when its economy speeds in the 7 per cent range. The last time the country witnessed such trouble was back in the 1970s. The dangerous consequences of such a recurrence cannot be overstated.

“I think voters have given him [Modi] a rather long leash and are willing to ride out storm after storm in the hopes that ultimately his work will begin to bear fruit. However, I think Modi himself recognises that the bill will come due in 2024—it’s no coincidence that many of his targets for a ‘New India’ are set between 2022 and 2024,” Vaishnav notes.

There is, however, a different perspective on the subject as well. There was no reason why the Modi Government could not have pursued its political projects and economic reforms at the same time. “I would push back against the claim that the two—reforms and political projects—cannot be done at the same time,” says Vivek Dehejia, Associate Professor of Economics and Philosophy at Carleton University in Ottawa, Canada.

This has been one of the most mystifying political trends over the past six years since the BJP came to power. There is, of course, rationally no reason why political and economic changes cannot be carried out at the same time. Apart from cursory comments like ‘the BJP is a Congress plus Hindutva,’ no serious analysis of this divergence is available. But the divergence—success in one and indifference on the other—is there for everyone to see.

Is it too much to hope for growth reviving economic reforms in the near future? Opinion on the subject is divided even if there is consensus that India simply cannot muddle its way through this time. India’s political economy is such that incremental changes always dominate bold reforms. The latter types of changes are only carried out in a crisis situation. Two historical examples are the 1966 devaluation of the rupee and the far more wide-ranging reforms executed in 1991. Both were carried out on recommendations of the International Monetary Fund that had been approached for help. 2019 is not a 1991 kind of crisis: there are ample foreign exchange reserves and there is no balance of payments trouble on the horizon.

If a crisis is not around, it is also clear that the usual macroeconomic remedies won’t take the economy far. A fiscal stimulus looks essential now but unless it is backed by deeper reforms in the land and labour markets, India may miss the industrialisation bus. The latter opportunity has a small time window. Two factors are at work here. China re-balancing its economy away from export-led growth to a more domestic consumption-oriented one; and the advent of robotics and Artificial Intelligence (AI) that promises to drastically change labour markets in the future. Whether India plays catch-up with its long-held dream of industrialisation depends on how fast it grasps the opportunity afforded by changes in China but before the second factor—AI and robotics—makes its low labour cost advantages superfluous.

This is, of course, a tall order. But there may be some signs of change. Finance Minister Nirmala Sitharaman’s reduction of corporate tax is a step in the right direction. The three rounds at addressing sector-by-sector problems are also noteworthy in this respect.

“The Corporate Tax cut is a good move and I would wish there were personal tax cuts as well. My sense is that Sitharaman is serious about disinvestment of public sector undertakings, including strategic sales. I hope the Government will go for deeper reforms, for example, reforming the 2013 land acquisition law and labour laws,” explains Dehejia.

“The unanswered question is whether this is a response to the current situation or if it is part of a wider plan,” he adds.

Ultimately, the question is about what to do in a situation of adversity. One means is to somehow wade one’s way through it, hoping for a propitious change in circumstances. The other is to seize it boldly and carry out all the changes that were difficult in normal times. Prime Minister Modi has handled plenty of tough situations in the last six years. It is time for him to display the same will now.

2019GDP growthIndian economyindustrial productionNarendra ModiNirmala SitharamanReserve Bank of Indiaslowdown