Critical Success

SINCE MAY 2014, THE MODI GOVERNMENT’S development template has had four strands—One, empowerment of citizens and fostering of entrepreneurship, the ease of doing business strand; two, empowerment requires access to what can be called inputs: social infrastructure, physical infrastructure, markets, information, technology, financial products, and so on. This is the ease of living strand, dubbed basic necessities by Economic Survey 2020-21; three, targeted subsidies to those identified as deprived under the Socio-Economic and Caste Census (SECC). SECC (Rural) was more robust than SECC (Urban), and therefore, the success in doing this was more visible for rural India. The large number of Jan Dhan accounts, seeded with Aadhaar, enabled the use of technology to push for Direct Benefit Transfer (DBT), reducing leakage. Yet, there was, and continues to be, a matching issue between individuals and households. More importantly, the Inter-State Migrant Workmen Act of 1979 (now overtaken by the 2020 Occupational Safety, Health, and Working Conditions Code) was meant to be enforced and implemented by states but never was. Hence, one had no handle on migrant workers. As an example of targeted interventions, one should also mention the Aspirational Districts Programme. Economic Survey 2020-21 documented the improvement in the basic necessities index. Such improvements are also evident in responses to National Family Health Survey (NFHS-5). Poverty estimates require a poverty line and data used to calculate poverty. The last consumption expenditure survey by the National Sample Survey (NSS) used to calculate poverty, is from 2011-12, and the last official poverty line is the Tendulkar poverty line. However, a recent UNDP multi-dimensional poverty index (which drew on NFHS-5) found that 415 million in India had been raised above the poverty line between 2005-06 and 2019-21; four, as the fourth strand of the template, there has been a deliberate attempt at fiscal consolidation, reflected in inflation remaining well within control, until the recent spike caused by imported inflation.

In the midst of this, Covid struck and caught the entire world, not just India, unawares. Among other things, it flagged a major governance issue. There is a Seventh Schedule in the Constitution, which sets out three Lists—Union List, State List, and Concurrent List. In the Seventh Schedule, in the State List, entry No 6 mentions “public health and sanitation; hospitals and dispensaries”, while entry No 10 mentions “burials and burial grounds; cremations and cremation grounds.” Health issues are squarely on the State List. They are not even on the Concurrent List. The only exception is entry 30 in the Concurrent List, “vital statistics, including registration of births and deaths.” Despite Pradhan Mantri Jan Arogya Yojana (PMJAY) and National Health Mission (NHM), health is on the State List. As a counterfactual, the adverse implications of Covid would have been worse, but for PMJAY and NHM. Entry 29 in the Concurrent List is on the prevention of the extension from one state to another of infectious or contagious diseases or pests affecting men, animals, or plants. Given a situation like Covid, would we like the Union government to do something? Assuming we do, beyond entry 29, on the inter-state spread, the Seventh Schedule of the Constitution confers no powers on the Union government to act. In addition, there is the Epidemic Diseases Act of 1897. Under Section 2A of the Epidemic Diseases Act, the Union government’s powers are limited to taking action on the border. Legally speaking, who decides on lockdown or un-lockdown? Will it be the Union government? Will it be the state government? Will it be the municipal government? Will it be the district magistrate, invoking, and subsequently, not invoking Section 144 of the Code of Criminal Procedure? The lack of a consistent approach, across all layers of government, when faced with disasters like a pandemic or epidemic, was also flagged by the third report of the Second Administrative Reforms Commission (2006): When Covid struck, one, therefore, had to seek recourse to the Disaster Management Act of 2005.

In the state of uncertainty that Covid wreaked, the Union government imposed a lockdown on March 25, 2020. In various phases, the lockdown lasted until May 31, 2020, and given the need to revive livelihoods and the economy, there was a staggered process of un-lockdown from June 1, 2020. In March 2020, models emanating from the West projected India would have 700 to 800 million infections and 2 to 2.5 million dead. As it turned out, there were 44 million infections and 530,000 deaths. The argument that there was an undercounting of deaths will not quite wash. There have been ‘models’, with questionable assumptions, that the number of deaths in India was four times the official count. We shouldn’t mix up two issues—one, are deaths registered?; two, are deaths correctly attributed to Covid? The Registration of Births and Deaths Act, 1969, makes death registration mandatory. But that doesn’t mean all deaths are registered, especially in rural India. If all deaths are not registered, it stands to reason all deaths due to the pandemic will also not be registered. This isn’t a problem sui generis to India either. For upper-middle-income countries, the World Bank tells us 75.97 per cent of deaths are registered. At 92.7 per cent in 2019, India is far ahead of this average and there have been extremely sharp improvements over time, even in the midst of Covid. It is certainly possible that deaths aren’t registered, but it certainly cannot have been a largescale problem. The Medical Certification of Cause of Death (MCCD) is different and is indeed unsatisfactory. The long and the short is that, particularly when normalised for population, mortality figures suggest, compared to many advanced countries, India handled the pandemic remarkably well, except during the second wave in April and May 2021, when medical systems were overstretched. Books and articles are now being written on how Union-state coordination ensured success, once the second wave was out of the way. Dharavi’s success is a case in point. If there was a dire prognosis about India collapsing under the burden of Covid, there was also a dire prognosis about India being unable to produce a domestic vaccine. In January 2021, vaccination was rolled out, with Covishield and Covaxin. Not only did India produce its own vaccine, but it also exported vaccines to other countries. The argument then switched to India’s inability to vaccinate its population. However, 97 per cent of the eligible population received the first shot, while 90 per cent received the booster dose too. On the narrow issue of handling the pandemic, India proved the rest of the world wrong.

AS A BASIC PRINCIPLE, KNOWN TO ALL ECONOMISTS, A tax reduction multiplier is lower than an expenditure multiplier. That is, if one is going to stimulate the economy, it is better done through increasing government expenditure and not through reducing taxes. As a related principle, again known to all economists, the multiplier is greater if the government focuses on increasing capital expenditure and not on increasing revenue expenditure. In the aftermath of the recovery from Covid and the lockdown, there was no dearth of economists who preached that India should stimulate the economy by reducing taxes or increasing revenue expenditure. In hindsight, many advanced economies, which should have known better, have got into trouble by following this prescription. In contrast, barring free food, an extension of subsidised food under the National Food Security Act of 2013, India focused on capital expenditure, such as on highways and railways. Simultaneously, the emphasis on basic necessities and financial inclusion and digital modes made the portability of welfare benefits easier. No one could have expected something like Covid, an exogenous shock. But the fact that the government emphasised this template made it easier to handle Covid. (By any estimate, the percentage of the poor is not more than 20 per cent. Unfortunately, the 2013 Food Security Act fixes this, in the statute, as 75 per cent of the rural population and 50 per cent of the urban population. Such numbers should never have been included in the body of the statute. They should be left to executive decision-making.)

Much the same can be said of the ‘Make in India’ initiative. The multiplier effects (taxes, employment) are greater if foreign investments happen in India, rather than if products are produced elsewhere and exported to India. Hence, pre-dating the pandemic, there was a liberalised and facilitating environment for foreign investments. FDI inflows were $45 billion in 2014-15, $62 billion in 2018-19, and $84 billion in 2021-22. There should rightly be discomfort at excessive import dependence on any one country, as was the case with China for items like pharmaceutical intermediates, mobiles, and solar panels. The Production-Linked Incentive (PLI) scheme, first introduced in March 2020, was a deliberate attempt to attract foreign investments and make India part of the global supply chain. While the scheme will take time to roll out and yield results, its success is already evident for mobiles, driven by Samsung and Apple. Mobiles are a subset of the broader segment of electronics manufacturing. The template for Make in India was already there; the pandemic provided additional opportunities and triggers.

Whether Guyana or Macao will grow faster or not is beside the point. Among major economies, India is projected to be a macro success in the immediate future. The International Monetary Fund (IMF) expects India to grow at 6.1 per cent in 2023 and 6.8 per cent in 2024. For growth, too, there was a dire prognosis. Was growth in a structural slowdown, stagnating at 5 per cent and below? Would there truly be a V-shaped recovery? In the midst of global uncertainty and economic problems in Europe, the US, and China, India has proved the dire prognosis wrong. The recently presented Economic Survey 2022-23 states the following. In March 2023, India’s nominal GDP will be around $3.5 trillion. After a growth of 8.7 per cent in 2021-22, growth in 2022-23 is expected to be 7 per cent and 6.5 per cent in 2023-24. The recovery is complete, ahead of many nations. Inflation is easing off. With the government’s emphasis on capital investments, consumption and private investments are expected to recover. This is a macroeconomic scenario few countries can replicate. It is a testimony to the efficient management of the health consequences of the pandemic and efficient macroeconomic management. There was nothing wrong with the four strands of the development template, outlined in the beginning. The pandemic led to dislocation for two years. But since there was nothing wrong with the basic development template, there was nothing that needed to be changed, apart from some marginal tweaking on the fringes. As growth recovers, so will employment. As with the ‘V’, there was also a dire prognosis about K-shaped recovery, with no one clearly explaining what that expression was supposed to mean. If it is meant to signify increasing inequality, there is no evidence of that. If it is meant to represent a schism between labour and capital markets, it is a global problem, not one specific to India.

To quote the Survey, “2014-2022 is an important period in the economic history of India. The economy underwent a gamut of wide-ranging structural and governance reforms that strengthened the economy’s fundamentals by enhancing its overall efficiency. With an underlying emphasis on improving the ease of living and doing business, the reforms were based on the broad principles of creating public goods, adopting trust-based governance, co-partnering with the private sector for development, and improving agricultural productivity… This situation is analogous to the period 1998-2002 when transformative reforms undertaken by the government had lagged growth returns due to temporary economic shocks. Once these shocks faded, the structural reforms paid growth dividends from 2003. Similarly, in the present decade, the presence of strong medium-term growth magnets gives us optimism and hope that once these global shocks of the pandemic and the spike in commodity prices in 2022 fade away, the Indian economy is well placed to grow faster in the coming decade.” This quote just about sums it up, and once in a while, Cassandras should come up with plaudits too. Not doing so amounts to paying scant attention to the facts. But then, that is the point about critics—change goalposts when facts are inconvenient.

Covid-19IMFIndian economyMake in IndiaMCCDNarendra ModiNirmala SitharamanOpenomics 2023Union Budget 2023