We are in a very worrisome place in India today. Growth has slowed considerably, the fiscal deficit is large, leaving little room to do something about growth, and there’s rising debt levels in many areas in the Indian economy, some of that distressed. India’s an economy which for 25 years has been growing at 7 percent; what we see today is much slower growth, and if we are to believe Arvind Subramanian’s work, perhaps even lower than the headline numbers that we see.

We were growing really fast before the Great Recession and then 2009 was a year of very poor growth, we started climbing little bit after it but since then, since about 2012, we’ve had a steady upward movement in growth going back to the pre-2000, pre-financial crisis growth rates and then since about early. And then since about mid-2016 we’ve seen a steady deceleration and now the latest numbers were 5 percent for the last quarter.

Investment has been falling steadily in the Indian economy ever since probably the global financial crisis, but it’s been falling steadily actually from a few years after that. Consumption has been relatively strong and holding up, but more recently consumption has also been falling. Most recently, consumption is falling rapidly.

Commercial vehicles are a good proxy for industrial demand and cars are good proxy for urban demand. You see all of them tanking; tanking to the extent of 30-40 percent levels of negative growth. A lot of it is because of a shortfall in credit availability to households as well as households themselves postponing consumption.

When you look at the trade balance – what you see is that in the years of strong growth, India’s exports were growing, in fact growing faster than GDP. Exports rose as a share of GDP. Over the last so many years, they have been growing slower than GDP growth and therefore falling as a fraction of GDP. This is true when you even take out oil – that’s the numbers on the right-hand side are non-oil exports and you see that has been falling.

The fiscal is also a source for concern. India’s fiscal deficit to GDP is officially 7 percent; that’s the sum of the state government’s fiscal deficit and the Central government’s fiscal deficit. But the reality is, this fiscal deficit conceals a lot. The headline number conceals a lot.

What is less noted, but something that the Auditor General has pointed out in India is, there’s a lot of borrowing which is going off-balance and which is not being counted in the fiscal deficit. For example, the Food Corporation of India is essentially a department of the government. The Food Corporations borrowing should be thought of as part of the fiscal deficit but is off-balance and you can see that’s skyrocketing over the last couple of years from about 0.7 percent of GDP to 1.1. Point four percentage points of GDP are buried in food corporation of India’s borrowing.

Similarly, the National Highway Authority of India – you see borrowing there go up from 0.2 percent of GDP to 0.7 percent of GDP; another 0.5 percentage points of GDP. Now, add these, you get one percentage point of GDP that is not counted in the fiscal deficit but is actually part of the fiscal deficit.

The rising non-performing assets means that banks need recapitalisations. You’re seeing the non-bank financial companies – they are in trouble and they may need some state support. You’ve got rising healthcare commitments. We have a whole new healthcare programe, Ayushman Bharat, which is being rolled out. As it rolls out, it will require more resource.

These are all contingent liabilities. We don’t account for them well in the budget, but they hit future budgets. Contingent liabilities are rising which leads respectable investment banks like JP Morgan to put the actual fiscal deficit as somewhere between nine and ten percent of the GDP. That’s a large number.

It’s especially large in India because we brought inflation down. In the past when inflation was available as the inflation tax, you could inflate away your debt and that helped make your finances look a lot healthier. Today, with inflation so low, it’s much harder to do that. You actually cannot inflate away your debt that easily, and therefore that’s a source of concern. Our fiscal is tighter than the similar numbers would be in the past.

Now, let me go on to debt and distress. One of the worrying things about the recent environment is that household savings are falling.

Households are saving less. Indian households are natural savers and the fact that they are saving less should be one source of concern. Why aren’t they saving more? Because after all, Asian economies grew on the basis of strong savings invested well. Savings are falling over the last few years, but increasingly, you’re seeing that also reflected in higher debt levels.

Household debt levels are increasing by about nine to ten percentage points of GDP over the last four or five years. Households are borrowing much more and saving less. That’s not a good combination. That means, they did not have a whole lot of debt earlier, so they started from a low base but they’ve borrowing quite rapidly and that has to be an additional source of concern.

You can see emerging signs of distress. For example on the corporate side, if you look at credit rating companies, credit rating companies will give you ratios of the number of credit upgrades to credit downgrades and so the lower this number is, the more stress your corporate sector has. This level of stress is at a six-year high.

In other words, the upgrades to downgrade ratio is at a six-year low. We’re as bad as we were at that point where we were starting to grow again. So, stress is piling up in the system probably as a result of ‘low demand slow earnings growth’ and difficulties in serving the servicing debt.

Let me talk a little bit about what the roots of the problem are. We’ve really had no significant continued reforms in India to propel economic growth since 2004. That is the year the NDA that under Atal Bihari Vajpayee lost the election.

We had first reforming Congress government in the early 1990s, followed by a number of coalitions followed by the BJP government. That 15-year period from the early 1990s to 2004 was a period of significant reforms where we cut down our tires, become a more real open economy and even did some privatizations under the budget by the Government. That was also a period where growth was not that strong, but it created the environment for really strong growth.

The problem with the Vajpayee government was that, even by the end of its term, we still hadn’t got to the spectacular growth we saw in the next three or four years afterwards. At least the experience of growth amongst the broader people was not that strong, and so the Vajpayee government’s campaign for re-election in 2004, which was based on India Rising simply didn’t catch hold and they lost narrowly to the Congress.

Congress came in with a coalition government which had the communists in it and really could not continue the reforms that the NDA had started, because simply there wasn’t that much consensus within the coalition partners. Nevertheless, there was an explosion in investment, and what you can see here is the rise in new projects announced as we go into three-four-five, just before the financial crisis you have a substantial explosion in projects announced. Strong growth and many of these projects were completed on time. There was strong infrastructure investment and strong growth.

The collateral effect of that sprung growth was, it put a lot of pressure on resource allocation, including the institutions to allocate resource: A lot more need for land, lot more need for iron ore, a lot more need for coal, lot more need for spectrum. One of the consequences of the strong growth was a series of corruption scandals which came to light in UPA to the second term of the UPA government.

The UPA got what it thought was a boost at the end of its first term to a massive farm loan waiver. My suspicion is, populist measures were an important factor in their re-election and so when UPA 2 came into power. Further reforms were stymied despite their ability to do further reforms by the fact that they really believed it was not from growth, but from these populist policies, that they had gotten re-elected, and the emphasis was much more on populist policies in UPA.

The net effect was right through UPA 1 and UPA 2, they were relatively few of the growth enhancing liberalising reforms, especially because in UPA 2 even the reforms they wanted to do like the goods and services tax (GST) were stymied by opposition protests which grew louder and louder as some of these corruption scandals came to light. So, UPA 2 was essentially a period where we didn’t have significant growth enhancing reforms – we had a lot more spending, especially on distribution of stuff such as food security, and inflation started going through the roof.

Inflation started going through roof in part because of strong demand but in part also because we saw increasing supply bottlenecks being created in the economy. Because land acquisition got much harder, many of the bureaucrats, because of corruption scandals, became much less willing to put out for fear that they would be held up by investigative authorities.

The bankers who were really quite willing to lend in the phase before the financial crisis when projects were doing really well, now became a little more risk-averse also for fear that if loan went bad, they get hauled up by the investigative authorities. So, essentially, the economy started slowing down considerably post-financial crisis. Macro-stability was a great concern at this time and India had basically all the bats – high levels of inflation, high physical deficits and not-so-strong growth.

At which point there was a course correction in the Congress government. It started the process of fiscal consolidation. Chidambaram came back to the finance ministry.

India was one of the fragile five that time and we lost capital very quickly. The government listened at that time and transformed to focus much more on macro stability: Bring the fiscal deficit down, try and enhance growth, try to whatever reforms were possible. At that time, I think the Reserve Bank of India also joined in to bring down inflation into making that a focus.

Move forward from the UPA 2- to Modi One. As it came in, it started implementing some important reforms on the macro side, on the sectoral side, and to some extent, on the household and populace side. We brought inflation down in India from the double-digit levels.

Unfortunately, it has been a mixed bag. It has been a mixed bag because, on the one hand, we haven’t been able to revive investment. We haven’t brought investment back. A lot of the promoters who started projects in the past are now highly stressed with high levels of debt. They simply cannot start new projects and banks are anyway not interested in lending to them.

Even old projects haven’t been brought down significantly. The reason they are stalled is because promoters have lost interest. Now, one of the successes of both the old UPA government as well as the NDA government was essentially giving the RBI a free hand to bring down inflation. That has been a success.

Inflation is low and has stayed low for a considerable period of time. The RBI also undertook a series of reforms- for example, opening up branching, licensing, improving retail electronic payments. We now have a state-of-the-art payment system of retail payments called the Universal Payment Interface which actually is better than many places in the world. These were all small level reforms.

But one of the big concerns was, as projects initiated fell, there were also a whole lot of old projects which were stalled and getting into distress.

Bad loans started building up in bank balance sheets. That’s what you see here. The NPAs of public sector banks started rising. The problem with banks when they start seeing bad loans is there’s a temptation hide them, to push them under the carpet, especially if the bank CEO has a short horizon.

Now, the classic way of dealing with this is: force them to recognise, force them to start dealing with these loans and working them out with the promoter so that they can be put on track. In the meantime, recapitalize the banks so that they have enough capital to make few loans where lending is necessary. Now, bank recapitalization has been halting. The government has taken some measures but typically been a little behind the curve.

What the government did which was very important was pass the Insolvency and Bankruptcy Act. One of the problems in India in the past is, some of you in India know is that it’s very hard for a lender to recover money from a borrower because there’s no way of essentially forcing the borrower to pay up. We had a bunch of Acts passed. But every time we had an act passed, it worked initially. The Insolvency and Bankruptcy Act was an attempt to try and force the borrower to repay their lenders and not have the lenders go from pillar to post in trying to look for their money. Initially it worked in putting the fear of God in borrowers and forcing them to repay.

More recently, however, it seems as if it’s going the way of the old Acts. The promoters have figured out how to end-run the banks, and the judiciary has also intervened in a way as to make it longer and longer and possibly impossible. So, unless we do something about the Insolvency and Bankruptcy code, it will go the same way as the older reforms. It will be essentially gamed to ineffectiveness.

What also has happened in India and the financial sector is that, we’ve had the public sector banks getting into trouble. Because they got into trouble, their lending started slowing down significantly. The private banks and non-bank financial companies have lent much more.

The private banks have been relatively careful about their loans. A lot of their loans are retail loans. The non-bank financial companies were also generally careful about retail loans, but one source of lending has been a lot more problematic for them – which is they lend to developers who built out some of these projects.

Those developers have gotten into trouble because of the slowdown in the retail sector and as a result, the non-bank financial companies also had incipient loan losses on their balance sheet. This came to a head when a big non-bank financial company IL&FS essentially imploded in September 2018, and as a result of that, non-bank financial companies found it hard to get credit. A lot of them have gotten into deep trouble since because not only do they have little access credit, but they have loans building up on their asset side which are going from bad to worse.
So, this is broadly legacy problems piling up. We’re not able to clean up the projects that are stuck, we’re not able to clean up the banks fully but that process is underway, non-bank financial companies have filled the breach but are also starting to get into a little bit of trouble.

Two big actions also happened over this time which created significantly more problems for the system. The first is, out of the blue, India demonetised 87.5 percent of the currency. Now, essentially what happened was the government said that Rs 500 note and Rs 1,000 note are no longer valid. What happens when you demonetised 87.5 percent of the currency? Basically, people don’t have currency to do transactions. Some of it was replaced; but it was replaced slowly. It took 3-4 months to replace it entirely.

In that period, the informal sector basically didn’t have money to do its transactions. These are people who don’t use credit cards, don’t have checks and essentially a whole lot of them got into trouble. It’s hard to measure the damage that was done to the informal sector because we really don’t collect statistics of them, but the anecdotal evidence is, a lot of people went out of business and there are actual studies which show it now that especially new rural areas.

Real estate is one sector that is especially focused in cash and this sector was weakening. With demonetisation, it got into trouble. That also spilled over to the developers who had built this real estate and then further to the non-bank financial companies. Measures of how much the set back growths vary from 2 to 3 percent of GDP for a couple of quarters to 2 to 3 percent of GDP on an annual basis.

This is all using stuff we can measure. What is harder is to think about the stuff we can’t measure. If you look at employment numbers, for example, put out by the Centre for Monitoring Indian Economy (CMIE), unemployment went up significantly possibly close to demonetising.

The second big blow was the Goods and Services Tax. Demonetisation was introduced without substantial preparation. I say substantial because we know there wasn’t enough currency printed to replace the currency that was taken out. You had to print it full speed for the next four months. Typically, you don’t do such things. You typically when you demonetise, have the money ready to roll out on the day you demonetise. That was not done suggesting the timing was chosen for other reasons than everybody was fully prepared.

That leads to the next issue which is, we had the rollout of the Goods and Services Tax. This is a wonderful concept. Demonetisation was misguided in concept. It was not a thing which either affected its aims — which was to bring down black money or what became a later aim which substantially increased the level of electronic payments or substantially formalise the economy. What it did was, create a lot of pain in a very short period of time especially for the poorer informal segments of the economy. It was brilliant politically though, because the government won the UP election. It was sold politically very well but it was not an economically well-thought-out idea.

The goods and services tax was the next big reform and it is something that the UPA government has been pushing and gone through because the BJP had opposed it then. The BJP took it on and to its credit managed to push it through as a constitutional amendment. It was a sound concept but again, initiated without enough preparation. The computers weren’t ready for the volume of transactions which means right off the bat you had to say “Don’t do this. Don’t do that. We are going to simplify the forms”.

There is a lot of back-and-forth which essentially undercut compliance, and the constant fiddling with the rates, I would presume, also created uncertainty. One could argue that some of the recent fall in demand, for cars for example, is because people are still trying to figure out. Are they going to reduce the tax? The goods and services tax on this from 28 percent in order to enhance demand? If so, I don’t want to buy now, I want to wait till they’ve reduced it.

The issue of trade and investment has been a focus of the Modi government, a good and necessary focus. However, what trade and investment needs really is an increase in the ease of doing business because, ultimately, you get more trade if you have more efficient firms who are able to produce both for the domestic economy and internationally. Here again, what one would want for is a slashing in some of the old regulations that holdback firms and focusing on improving the ease of doing business.

There’s been some attention but largely focused on the World Bank indicators of the ease of doing business rather than the actual conditions in India on what prevents businesses from working easily. So, as a result, we haven’t got that significant boost so far in business opening because in fact it may not have become that much easier for businesses to operate in India. One of the recent concerns has been on tariffs and taxes.

If you want more trade, you should bring down your tax, because today the way trade happens is through global supply chains moving goods back and forth. In order to move goods back and forth across borders, you need low and stable tariffs. Instead, what we have is high in fluctuating tariffs in certain areas; not all areas but certain areas. And that becomes a concern for business.

What will the tariff be next month? If in fact I open a business here, India is not part of any significant global supply chains and that makes it a problem if India wants to increase its exports. Similarly, taxes, the recent cut in corporate taxes is beneficial in attracting firms to India, but what firms worry about is not just the level but the changes. Is this going to change? Am I assured that when I put my investment in India, it will stay at 15 to 17 percent?

Unfortunately, in India, we have a history of going back and forth, some of which was reflected in the recent budget in taxes on foreign investors. So, we need to have a process where if we stabilise rules and regulations and taxes and tariffs, if we want to attract new companies into India.
That is one reason why if you look at the level of foreign direct investment, despite the emphasis on ‘Make in India’, you see in the last four years the level of foreign direct investment hasn’t changed very much. We get about $40 billion. In comparison, Brazil gets $90 billion in FDI.

We are starting to assemble more cell phones in India, and this has gone up. If you look at the cell phone imports, they have come down significantly and that’s not because we are buying fewer cell phones, but because we’re importing that. And if you look at exports, that have gone up. So, India is starting to export cell phones that it assembles in India.

The problem, however, is, it’s largely just assembly because one of the counter parts to the increasing cell phones is the fact that you look at electronic components, we’re importing far more. In other words, we are doing assembly now that’s not to be sneezed at we did do assembly before and doing assembly today is a good thing but it’s not value-added assembly. It’s basically importing the components and putting them together.

China is moving out of textiles. Who is taking its place? India has moved up from about 3 percent of world exports in textiles to 3.3 percent. But it’s over a period of nearly 20 years. On the other hand, if you look at Bangladesh, it’s gone from 2.6 to 6.4 percent. If you look at Vietnam, it’s gone from 0.9 to 6.2. So, Vietnam and Bangladesh are absorbing the textile market while we have plenty of people to work and we’re not getting any of the textile market. That suggests we are still not seen as an export friendly place. Our businesses are not doing as well as they should.

When a country grows richer, the taxes actually go up because people move into higher tax brackets and can pay more and especially with all the reforms this government has done, we should see higher taxes instead real taxes actually have actually fallen as have nominal taxes of this period. So, that’s something of concern, basically, signs of deep malaise: Growth is significantly lower, the fiscal space is narrowing, debt and distress is growing, India is losing its economic way. The reason is, we are centralising power without a persuasive economic vision, and if we do this, we risk wasting the demographic dividend.

Courtesy: Counter View

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A Wide-Angled Perspective:  A rural-led strategy will deliver slower overall growth but it will have a bigger impact on poverty under the present circumstances that keep the East Asian strategy out of India’s reach for now.

 

Image Courtesy: economictimes.indiatimes.com
 

In the absence of structural reforms for transformative growth, a rural-led growth strategy is the only option for economic revival at this point of time. Growth may be slower but it will be sustained. Supply-side measures like corporate cuts will not help.
 

The Indian economy has had the distinction of being one of the fastest growing economies in the world over the last three decades. Yet, today there is a sense of economic malaise in the air. The young are feeling frustrated as there are too few good jobs on the horizon for them. Rural areas are in distress as farm incomes have stagnated. Corporate investment has declined. Banks burdened with bad loans are finding it difficult to lend. Exports have declined. There are telltale signs of the onset of a further slowdown.

The Government is also showing signs of panic. Soon after witnessing the unease in the corporate sector after her budget speech in July 2019, the Finance Minister started holding consultations with business leaders to assuage their displeasure. The tax surcharge on income of over Rs 2 crore on capital gains of individual and institution investors (domestic and foreign) has been removed; only that on salaries and rent received by individuals remains. Several other measures have been announced: the merger of some public sector banks, recapitalisation, loan melas and moratorium on repayment of micro, small and medium enterprise (MSME) loans. All of these, except the last one, are supply side measures and are unlikely to have much of an impact anytime soon on stimulating demand.
 

Will the corrective measures recently taken by the government arrest the slowdown? If they do not, what would?

The measure that has received the most media attention is the corporate tax cut. In the third week of September came the announcement that the corporate tax rate would be cut from 30% to 22% for firms that do not seek any exemptions and from 35% to 25% for those who do. For manufacturing firms the tax rate would be as low as 15% for those making investments after October 2019. The news was welcomed by the corporate sector and boosted the Sensex index on the day of the announcement by as much as 4.5%.

How did such a state of affairs come to pass in this fast growing country? Will the corrective measures recently taken by the government arrest the slowdown? If they do not, what would? This essay is an attempt to answer these questions by examining the genesis of the present problems and then asks what should be the way forward. The goal is to put together a plausible and coherent story.
 

1. Development in a Dual Economy

Before we start putting together an explanation for the present state of affairs, we should understand the structure of the Indian economy.
Let us start by defining the terms ‘formal’ and ‘informal’. The ‘formal’ sector consists of all the registered firms (i.e., firms employing 10 or more employees) plus the government sector. The ‘informal’ sector consists of the rest. Typically, formal sector jobs are better jobs in which the workers get some basic benefits like provident fund, pensions, etc. Informal sector workers do not. Agriculture — the sector that employees the largest part of Indian labour force (over 40%) — is informal. Much of the rural economy is informal and so is a part of the urban economy. Eighty percent of India’s population makes their living in the informal sector and produces half of India’s GDP. Almost all the poor toil in the informal sector.

Consider India as a dual economy made up of two free trading regions – “Urban” and “Rural”. Urban is more developed and hence the average incomes are higher there. This is so because typically Urban growth is based on productivity growth in the formal sector while Rural growth is based much more on productivity growth in the informal sector (agriculture).

Typically, labour productivity and also the potential for productivity growth tends to be higher in the formal sectors like industry than in an informal sector like small-scale agriculture. Faster industrial growth would allow agricultural labour to move to higher productivity jobs in industry, and this can be a significant contributor to the overall growth propelled by productivity growth in each sector.

When there are fewer farmers left tilling the same amount of land, they too see an increase in their incomes. There can be a further increase in agricultural incomes through productivity gains in agriculture. When rural incomes rise, they also result in an increased demand for industrial goods, thus producing a virtuous cycle of growth. This is what happened in successful Asian countries. Not only did they grow fast, but they also managed to drastically reduce poverty in a generation.

All developed countries have gone through this process. Even large agricultural exporting countries like the United States (US), Canada and Australia have a miniscule percentage of their labour living off agriculture now.

The two oft repeated questions: ‘Why is the economy not creating enough good jobs?’ and ‘Why is there such rural distress?’ have a common answer. India has not succeeded in producing enough high productivity jobs to draw labour away from agriculture. Of course, there are further reasons for the present distress in rural areas, demonetisation being an important one. We will discuss these later.

If developed countries underwent this process and so did many other Asian countries, why is India taking so long to do this? To understand this let us first understand the strategy employed by the successful Asian countries.
 

2. A Successful Developmental Strategy

Except for the city-states like Hong Kong and Singapore, all the successful Asian countries were primarily agrarian before they industrialised. What they accomplished within 20 years was a total transformation of their economies.

Initially, the policymakers concentrated on increasing productivity in agriculture. This directly increased the incomes of the rural population, and, in addition, allowed a higher level of agricultural exports that would, in turn, enable imports of machinery and technology.
 

When a country industrialises in a transformative way, it needs to undertake some major structural reforms.

Late-developing countries have the advantage that they can rapidly improve their productivity by transferring technology from developed countries rather than having to invent it themselves. Some of the technology transfer is done through foreign investment and the rest through direct purchase or copying. However, in order to absorb the transferred technology they need a well-trained labour force and supporting infrastructure. Moreover, in order to sustain a high rate of capital formation, they needed to have a high rate of domestic savings. All the Asian success stories paid due diligence to these essential aspects of development.

When a country industrialises in a transformative way, it needs to undertake some major structural reforms. In order to facilitate a movement of land and labour to their more productive use, laws pertaining to land and labour may have to be reformed. In order to facilitate savings by households, the financial system needs to be modernised. The financial system should be easily accessible for people no matter where they live and also it should be able to inspire trust. Foreign investors should be assured of legal protection of their intellectual property rights. The success of these Asian countries was based on these basic preliminaries.

Another crucial aspect of their development strategy was to start by focusing on producing labour-intensive goods (textiles, footwear, toys, etc.) for the markets in developed countries. They could thus take advantage of their cheap labour and then produce these goods in quantities far in excess of what they could have sold domestically. Thus, domestic demand was never a constraint for them in expanding their industries producing goods in which they had a comparative advantage.

There is a certain logic behind this export-led strategy for fast growth. First, when firms can see that there is a potential market for their products they are inclined to make investments. Second, to be able to accumulate capital, a country needs to have a high savings rate; but high savings imply low domestic consumption and hence low domestic demand. However, when a country produces for foreign markets, the trade-off between savings and consumption becomes irrelevant. It can afford to have a high savings rate domestically. With access to export markets, it can have both high domestic savings and high demand coming from consumption abroad. In addition, there is a much greater choice in what to produce as the world demand is bound to be more diverse than domestic demand.

The manufacturing sector, especially labour-intensive manufacturing, does not require years of university education to acquire the requisite skills. A high-school graduate or less with some on the job training is often adequate for most of the jobs in manufacturing.

Surplus labour from the informal sector, including agriculture, can move into labour-intensive manufacturing with minimum additional training, as long as they have basic skills like literacy and numeracy. This is what happened in Taiwan, South Korea, Thailand, Indonesia and China. Lately, even Vietnam and Bangladesh have followed course.

Most importantly, as their industrial sector expanded, they absorbed more and more labour from agriculture – a sector with markedly lower productivity. Poverty declined as labour moved to a more productive sector, and the productivity of the remaining agricultural labour also increased. The growth was fast and also inclusive.

It is important to mention that their respective governments actively aided this effort to develop a manufacturing sector in select areas with an eye on export markets. This was done through an industrial policy that included low interest loans, land grants, tax holidays and requisite infrastructure like power, container ports and other transportation networks. Albeit, it is easier to do it in countries where the democratic norms are rather flexible.
 

3. Why has India Failed to Follow the East Asian Script?

Unlike the East and Southeast Asian governments, the Indian government did not direct the course of the post-1991 growth. Liberalisation certainly helped unleash market forces but the course of development was determined more or less through serendipity.

When the licence raj ended in 1991, a few significant aspects of the reforms determined the subsequent course of the Indian growth story.

In 1992, the government monopoly on the communication sector officially ended. The years between 1994 and 1999 saw a great deal of churning in this sector. Gradually, cell phones became pervasive. This was an opportune time for communication technology to take off in India. Due to excessive emphasis on public sector investments since 1960s in high-end technical and managerial institutions like the IITs and IIMs, there was a surplus of highly trained manpower available.

At the same time, there was a sudden surge of demand all over the world for IT professionals as the Internet was appearing on the world stage. Indian engineers who were over-skilled for the Indian market had been migrating to the US since the 1960s where they had managed to establish quite a reputation. All this turned out to be fortuitous for Indian firms like TCS, WIPRO and Infosys to emerge on the world stage. Communications and business services grew to be India’s fastest growing sectors from 1993 to 2004 at 20.7% and 24.3% per annum, respectively. Software exports grew at the astronomical rate of 34% per annum over that period¹.
 

[I]nclusive growth in India is a far more difficult prospect for India in 2020 than for China in 2000.

India’s fast growth episode was propelled by exports of IT services. It was indeed an export-led growth. However, unlike China’s or South Korea’s growth through manufactured exports that absorbed low-skilled labour in vast numbers, India’s growth episode was led by a high-skilled service sector that failed to adequately absorb unskilled labour from agriculture.

In the early 1990s, India could have also developed its manufacturing exports like China and South Korea. But there were several major obstacles: restrictive labour laws that created incentives for keeping the scale small; an outdated land acquisition law that made the process of acquiring land extremely messy; weak infrastructure limiting access to power, ports and roads and, most importantly, a badly educated labour force. Successive governments have found it challenging to address, let alone overcome, these obstacles.

India has some unique problems that make any progress on this front difficult. First, any laws pertaining to agriculture and land are in the State List of the Constitution. This means that each state makes its own laws. The Centre can only override them if and only if they are repugnant to a law passed by Parliament. Land is also designated by whether it is agricultural land or not. In order to locate a large industrial project on any land designated as agricultural land, the state government needs to buy it from the farmers and sell it to the industrial house or change the land-use classification of the concerned area. In most states, this is a source of massive corruption and creates incentives for state politicians to block any attempt by the Centre to change these laws.

Labour laws are in the Concurrent List of the Constitution. This means that the residual powers remain with the Centre, and the Central Government has greater degrees of freedom to change the laws. Yet, successive governments have found it politically difficult to do so. Rajasthan made some changes under the Bharatiya Janata Party (BJP) state government, but these changes were marginal.

The existing laws are set up so as to put more restrictions on larger employers, especially with regard to adjusting the work force in response to changes in demand. This discourages attaining scales that would allow Indian manufacturers to compete internationally.

These laws can be endured in situations where demand does not move cyclically, which was the case in India for many years in the past.

However, international markets are notoriously cyclical, and firms need to adjust their output with a fair degree of flexibility.

More importantly, since the mid-1990s, the Indian economy too has been displaying distinct business cycle behaviour, which makes the impact of these laws even more damaging. In fact, this could be an important factor driving the process of automation and robotics in Indian industry.

After China entered the World Trade Organization (WTO) in 1999, it went on to occupy most of the unfilled space in the developed countries’ markets for manufactured goods. “Made in China” became a universal brand. It became much more difficult for countries like India to compete with China after that. In addition, the climate for international trade has recently changed. Developed countries have witnessed a denuding of their manufacturing sectors and the widespread resentment due to it has led to the election of right wing nationalists like Donald Trump. Countries such as the US are not so receptive any more to importing cheaper goods from low wage countries.

Moreover, Indian workers now have to compete not just with Chinese and Vietnamese workers but also with robots and artificial intelligence. Even in India, firms have strong incentives to make production more capital-intensive. This is not just because of labour laws but also because long-term interest rates are not that much higher than short-term interest rates. The long and short of this is that inclusive growth in India is a far more difficult prospect for India in 2020 than for China in 2000.

Yet, we must ask how other democratic nations like Thailand, Malaysia, and Indonesia have managed to solve these problems. Especially the problem of skilling the labour force. Even Bangladesh managed to develop a strong textile sector that could compete in international markets. When primary and secondary education itself fails to impart basic literacy and numeracy, any subsequent skilling programme is bound to fail. Why has public education been such a challenge for India?

The genesis of India’s present problems of a lack of job creation and rural distress lies in these factors.
 

Why did the growth of domestic investment and consequently the rate of gross capital formation slow down after 2008?

It is important to note that the Asian success stories including that of China were based on an extremely high rate of investment. You need investment to create jobs and wages by bringing in new technology as well as by adding more capital (machines). India’s investment rate has not been bad at all, compared to the other Asian countries, except China. But it has faltered of late, particularly post the Global Financial Crisis of 2008.

Why did the growth of domestic investment and consequently the rate of gross capital formation slow down after 2008?

 

4. Investment Slowdown

To understand the present slowdown it is useful to examine the ups and downs in the rate of domestic investment or gross domestic capital formation (GDCF) as a percentage of GDP between 2001 and 2018 as in Chart 1 below.

 

It is easy to see that GDCF as a percentage of GDP grew impressively from 25.3% in 2002 to 30.7% to 2004, then kept growing to 35.8% in 2007 (the highest rate of investment reached so far). This was a high growth period for the Indian economy. However, it was also a period of high credit growth. The investment spree was financed by heavy borrowing by the corporate sector. Corporate exuberance during the boom period of 2002-08 partly explains the present state of indebtedness of the corporate sector, but it is a necessary corollary to a high investment/high growth development process.

In the aftermath of the Global Financial Crisis of 2007-08, corporate investment fell. The post-2011 period is a period of decline in investment as massive corruption scandals rocked the Indian economy and the corporate sector faced a backlash from watchdogs like the CAG and from investigation agencies like the CBI etc. There was some recovery after 2014 but that was torpedoed by demonetisation at the end of 2016. Initial exuberance during the high growth period of 2002-08 and then the shock of the 2008 financial crisis are the root causes of corporate indebtedness of today.

There was a major slump in international demand after the 2008 crisis and inevitably Indian exports slumped. There is no doubt that the slowdown in the Indian growth rate as well as in domestic investment should be attributed to this world-wide phenomenon.

What is surprising is the fact that the GDCF rate does not decline that much and in fact recovers to 34.3% in 2011. A plausible explanation for this is that in 2008 international food prices rose due to many extraneous reasons, including because following high oil prices, large food producers in North and South America shifted their land to cultivation of crops to produce crops for gasohol. This rise in world prices pulled up domestic agricultural prices in India. (Minimum support prices — MSPs — were repeatedly raised during this period.) As a result, the terms of trade shifted in favour of agriculture. This most likely brought about a significant redistribution of income in favour of the rural sector which, in turn, gave a boost to investment in the informal sector. This compensated to some extent a fall in corporate investment.
 

[A] change in the terms of trade probably played a significant role in maintaining a high rate of investment even after 2008.

This hypothesis is supported by the fact that this was also a period of rising rural wages and declining poverty numbers. Perhaps the introduction of the National Rural Employment Guarantee Scheme (NREGS) helped to some extent. But the scheme took several years to get going in many parts of the country. We believe that a change in the terms of trade probably played a significant role in maintaining a high rate of investment even after 2008.

This episode does offer a clue as to how a transfer from the urban to the rural sector suggests itself as an antidote to the present slump in aggregate demand. This is an issue that we will explore toward the end of this essay.

GDCF declined steadily from 34.31% to 28.73% in 2015 and has stayed stagnant thereafter. There are two big reasons for this. First, by 2015, it had started to become clear that the Indian corporate sector was heavily indebted. As debt soared, investment growth declined. Also, at the end of 2016, the Indian economy had to suffer the enormous shock of demonetisation that hit the informal sector especially hard. A decline in the demand from the informal sector also resulted in unsold inventories of the corporate sector. In a 2017 report, Credit Suisse pointed out that 40% of corporate debt was held by firms that could not hope to earn enough to even cover their interest costs. There was an alarming growth in corporate debt. It grew from 34.2 % of GDP in 2002 to 56.8% of GDP in 2018. (https://fred.stlouisfed.org/series/QINPAM770A, Original Source: Bank of International Settlements.)

Why did corporates over-borrow? Was it just irrational exuberance? Or was it the result of the weakness of the Indian banking system? Unfortunately, it was both. After the heady days of fast growth from 2002 onwards, faster growth was anticipated despite the fact that world demand had slackened. Corporates invested heavily on the back of bank credit. Infrastructural investments, clearly essential for long-term development, also reached a peak around 2012.

Much more importantly, there is systemic moral hazard built into the Indian banking sector. Public sector banks can always rely on public revenues to bail them out. As a consequence, they have never bothered to develop a decent risk assessment system. Moreover, politicians have often directed them to loan money to their pet projects. For example, there is the present government’s MUDRA programme that obliges banks to give small loans to informal sector businesses without collateral. Or, periodic loan waivers to farmers. All this has made the Indian banking sector prone to moral hazard.
 

Infrastructural projects are typically long gestation projects. They take a long time to complete and a long time to start yielding financial returns. To preclude the strain on public revenues, the government resorted to Public Private Partnerships (PPPs). It was both, the public sector banks as well as private banks, that provided funding for these projects. Both types of lenders exhibited poor risk assessment. Non-bank financial corporations (NBFCs) also joined in the lending spree and faced even fewer obstacles in doing so as they were not constrained by even the kind of regulation that commercial banks have to observe.

There was a great deal of infrastructural building during the years 2006 to 2012. Infrastructural investment went from 4.7% of GDP in 2006 to 8.4% of GDP in 2012 and then declined to 5.1% in 2013. It very gradually rose very slightly to 5.6% of GDP by 2017².

Large-scale projects have to face many hurdles – acquiring land and then getting environmental clearances being two of the most difficult ones. Even the most recent land acquisition legislation (2013) makes acquiring land for industrial production a complex and time-consuming process. You can now understand why private investors especially those who had borrowed for infrastructural projects ended up defaulting on their loans. If the project gets stuck in legal wrangles for a few years, the horizon for getting returns from the project moves away while they are obliged to pay interest on their loans over a longer period. At some point, the project becomes worthless and investors walk away or default.
Roads and power stations can remain half built and end up as non-performing assets on the balance sheet of the lending agency. See Chart 2 to appreciate the rise in non-performing loans ratio (defined as the ratio of ‘loans overdue by more than 90 days to the total loans (which defines a NPA)’) over the last decade. Notice how steeply it goes up after 2015.

This article first appeared in The India Forum

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Kulda opencast mine operated by Mahanadi Coalfields in Sundargarh district of Odisha

Projects are expected to comply with these safeguards during construction and through the period of operations. In case of mining projects, backfilling and ecological restoration of the land also form part of the safeguards. In effect, the purpose of conditional project approvals is to minimize and mitigate environmental and social harms caused by large projects.

During the first four decades of implementation of India’s post-independence environmental laws, there was little or no emphasis on the status of compliance with conditions by projects. The focus was on the needs of the economy and national development on the one hand, and on the other hand, the social conflicts caused by land displacement. Even though legal clauses related to environmental compliance existed in these laws, projects operated with impunity, causing widespread degradation of the environment.

It is only in the last decade that environmental non-compliance by projects and the inability of existing institutions to enforce laws have come under the scanner. Since 2010, the office of the Comptroller and Auditor General (CAG) has produced environmental audit reports and reported on non-compliance. The courts have observed large-scale legal violations in specific sectors such as mining. Non-governmental studies have also recorded high rates of non-compliance.

Unable to brush the problem under the proverbial carpet, the government engaged in a series of hurriedly thought out mechanisms to deal with it. These include:
 

• Self-regulation through the use of pollution monitors or devices to capture and relay information on pollution and other performance indicators directly to pollution control board authorities
• Provisions for penalties, fines, bank guarantees and other financial disincentives based on the ‘polluter pays’ principle
• One-time amnesty schemes to violating projects and grant of short-term or temporary approvals to violators in an effort to bring them into compliance

But these measures have neither improved environmental performance of projects nor stemmed the flow of complaints and legal cases by affected people against polluting projects.

Why should compliance be addressed urgently?

Robust and well-thought-out environmental compliance mechanisms are hardly seen as a necessity for India’s development. In fact, governments have approached the idea of regulating projects as a liability and a drag on economic growth. They have been slow to implement existing regulations and selective enforcement has earned them the reputation of creating a ‘license raj’. This can be seen in the Supreme Court’s ongoing efforts to enforce the mandatory emission standards on coal power plants. Even though the standards have existed for several years as part of the consent permits issued under Air and Water Acts, the central government systematically dragged its feet on getting projects to comply with the norms.

Today, the impacts of unregulated projects have made it politically unfeasible for governments to ignore their effects on the economy and on people. The recent conflict due to the operations and proposed expansion of the Sterlite Copper Smelter in Tamil Nadu is a case in point. The project was India’s largest copper production plant but also causing toxic emissions, soil and water pollution.

Despite numerous complaints and legal cases against the project’s pollution, the company was allowed to continue its operations for 20 years. Last year, when the company sought permissions to expand its operations, there were massive local protests for over 100 days; they finally turned violent when the local police shot down 13 protestors. Sterlite also became a political flashpoint with the opposition party making it an important issue in their 2019 election campaign in the state.

There are numerous cases that are being litigated in court for non-compliance with environmental safeguards. These have resulted in huge financial implications for projects and for related economic sectors as a whole. The Goa mining case led to the total state-wide ban on mining since 2012. The National Green Tribunal imposed penalties of over INR 873 crores as fines for environmental violations in the first quarter of 2019 – an amount that is close to the total fines imposed last year.

Poor compliance causes critical environmental blowbacks in the form of severe water shortages, productivity losses and toxic air. While these conditions have been building up in most parts of the country, climate change dynamics add to these local conditions, making their impacts far more acute and complex. For example, areas already affected by large-scale water extraction for industrial purposes, coal washeries and thermal power plants could also face frequent and more lasting droughts.

The visible effects of environmental impacts in eroding the positive gains of development have already caused a shift in mainstream economic thinking that traditionally ignored the economic cost of degraded and damaged habitats. It is accepted that crisis management is hardly possible any more, and that there is a need to plan reforms and strategies for economic and environmental transformation. Environmental compliance systems will form a key part of these reforms.

The case for compliance as a bulwark of environmental regulation has never been more compelling than in the time of climate change. So far, the success or failure of compliance has revolved around the compulsions of domestic politics, but it is now tied to the geopolitics of climate change. After years of wrangling over who should do what to check global warming, nations finally thrashed out the Paris Agreement, which obliges every signatory to put in place, by 2020, a set of measures to meet their respective carbon mitigation targets.

However, without a systemic and robust protocol to ensure compliance, India runs the risk of falling short of its targets. Therefore, it is imperative, not to mention politically expedient, for the political party coming to power after the 2019 general elections to set up, in the first place, a credible and effective mechanism of compliance with domestic regulations before it goes about honouring its Paris commitments.

Who should regulate projects and how

Successive governments have emphasized the quantitative aspects of economic growth. They have focused on increasing the number of projects approved during their tenure and reducing the time needed for impact assessment and granting approvals. These projects have been accompanied by severe impacts as pollution and environmental degradation are viewed as the trade-off for growth. However, with over 16,000 centrally approved large projects operational and several others promised or in the pipeline, the scale of the problem has today expanded exponentially in both industrial and ‘greenfield’ or less industralized areas.

The government can neither ignore nor delay tackling this problem. Compliance with environmental and social safeguards is a necessary if not sufficient condition to improve the quality of our economy’s growth. The question, therefore, before the new government, will no longer be ‘if’ projects need to be regulated but of how to regulate and who will regulate. Given below are three sets of policy reforms with the potential to shift the government’s approach to the problem of environmental compliance of projects and achieve better results.

Compliance-based approvals

Agencies implementing environmental laws view the procedures for grant of approvals as linear systems rather than cyclical ones. This problem is best illustrated by the number of flowcharts put out by them explaining these procedures. Compliance comes downstream in these processes and there is little room for feedback. Project performances on compliance almost never influence government decisions on project expansions, extensions or applications for permission by violating companies to set up projects in new areas.

For example, the Kulda opencast mine operated by Mahanadi Coalfields in Sundargarh district of Odisha has violated several conditions of its approvals. Yet, it received approval for expansion and capacity addition twice in two years, for a period of one year each. The validity of environment clearances for mining projects is otherwise 30 years. This decision of the Expert Appraisal Committee (EAC) set up under the Environment Impact Assessment (EIA) notification, 2006, to review such projects was ad hoc, with no precedence and legal basis.

The lack of systemic mechanisms to address non-compliance in recent years has also created huge pressure on the bureaucracy to show legal compliance without affecting the financial status of ongoing operations. For this they have offered one-time amnesty to violating projects under the EIA, Coastal Regulation Zone and biodiversity laws. But these measures only improve the record of compliance on paper and not in reality.  Now with so many projects already operational, it is crucial to place a very high bar on projects being granted approvals.

The basis of regulatory procedures should shift from approvals to compliance. Only those projects that have an established record of high compliance or which can surpass the compliance performance of others in the field, and certainly meet the legal standards, should be granted permits and approvals. The permissible standards for pollution are already pending major reforms. But these changes will prove futile if projects are not held to the highest compliance standards.

Third-party monitoring

The present practice of monitoring a project’s compliance in effect involves two parties: the project proponent and the regulatory authority. This system has so far not been able to address the problem of non-compliance and has instead led to concerns of collusion and corruption. A review of this practice has resulted in recommendations that monitoring should be done by an independent third party. The environment ministry proposed an amendment to the EIA notification in September 2018 to include this recommendation. This is yet to be finalized. The ‘third party’ proposed in this amendment is expert government institutions.

In reality, the genuine ‘third party’ in this context is the communities who experience effects of non-compliance such as loss of livelihoods, poor living conditions and displacement. Although they have the greatest stake in remedying the damages caused by non-compliance, they are nowhere in the picture when project monitoring is done. This is contradictory to the participatory turn in environmental governance in several countries since the 1970s and the constitutional mandate for it in India. Data from our research on cases of environmental non-compliance in four states shows that when communities have been involved in collection of evidence, reporting of violations and official monitoring by regulators, environmental compliance can improve significantly. Their participation also helps regulators understand community priorities for remedial actions. Regulatory bodies in these states are beginning to recognize the benefits of community participation and are more open to including communities in procedures such as site visits conducted by them for monitoring. But practices that foster community participation ­– such as social audits of projects (which provide access to monitoring data and formal spaces for interaction with affected people) – are yet to be systematized in environment regulation.

Integrated regional networks for compliance

India’s environment regulations have largely been implemented with a project-centric approach. Approvals are granted to projects after their impact studies, cost-benefit analysis and environment management plans are assessed by regulatory bodies. These assessments routinely understate the potential impacts of projects, making them seem benign or operations whose impacts can be easily mitigated. Such assessments also generate quicker approvals from regulatory bodies, thus helping to meet the government’s economic growth targets.

For long, activists and experts have demanded cumulative impact studies so that the full range of project impacts can be ascertained prior to the grant of approvals. But such comprehensive studies have been done only in a few cases. Cumulative studies are needed not just at project levels but also for regions that are affected by environmental degradation.

Similarly, a project-based monitoring system is resource intensive and not very effective in terms of the overall outcomes. But if regulators could be reorganized as integrated regional networks, they could use the resources available to them more efficiently to improve environmental standards regionally. Multiple regulatory agencies within the concerned region could pool their expertise and human resources towards coordinated responses. Such a mechanism can bring an inter-displinary approach to compliance monitoring.

The regions identified for such integration could cut across administrative boundaries such as districts or states. It could be at the level of large industrial sites like Special Economic Zones (SEZs) with multiple projects operating within them, metropolitan regions, entire districts or geographical regions already identified as critically polluted, or entire airsheds or river basins.

Although envisaged by law, such a regional approach to environmental governance has only been used in a few cases. It has been used in emergency responses to environmental pollution, such as the moratorium on industrial activity in Vapi, Gujarat, or the ban on mining in Goa. But a regional approach to systematically  improve post-approval compliance of projects has not been envisaged.

This is mainly because compliance with safeguards has rarely been the focus of regulation and institutional reforms to improve environmental compliance have never been on the government agenda. The ministry could develop pilots to understand the optimum scale at which such integrated compliance networks could deliver the most effective results. Given that the scale of the effects of non-compliance is such that they are no longer restricted to project areas, a regional approach is needed to improve the outcomes of regulation.

Conclusion

Environmental compliance is a critical part of environment regulation. While regulatory actions have prioritized economic growth for several decades, the costs of environmental degradation due to industrial and developmental projects are no longer possible to ignore. These issues have become politically and economically salient in recent years. This paper makes three sets of recommendations for how environment regulation can approach the issue of persistent and pervasive non- compliance by projects. These reforms are critical to avoid the costly and harmful disruptions of development.

Courtesy: Counter View

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Image Courtesy: People’s Film Collective

On 31 May, the India International Centre organised a series of documentary screenings under the theme – “Negotiating Spaces: Films on Development and Gender”. Though distinct in subject, each documentary was connected by the many stories of personal, political and organisational resistances from individuals and communities who are forced to the margins.

One of the documentaries, Agar Wo Desh Banati (If She Built a Country) brought attention to an issue that has been ignored by the media and policy makers alike: How capitalist interventions changed gender relations and dispossessed women.

Mines and power plants appeared and grew to monstrous proportions around them. Adivasi women from the village of Raigarh, Chhattisgarh were cheated of their land and compensation. Their relationship with the forest and environment was severed, leaving them a polluted land. The documentary showed women grapple with all this, as they sought justice for themselves and their communities. The filmmakers, Maheen Mirza and Rinchin, both part of the Ektara Collective, are committed to cinema born of collective practice. Released in 2018, and made over the course of four years, the documentary records the journey of the women from struggle to resistance and from activism to leadership and has been screened at several film festivals across the country.

Agar Wo Desh Banati looks at women’s role in adivasi households, in the forest and in agriculture systems. It proves that women’s immense contribution to domestic and agricultural labour is invisible and unpaid. The women from Raigarh, who were the narrative force behind the documentary, through their testimonials challenged the assumption that modernisation or industrialisation has improved the position of women in agriculture. Most women feed and run their households based on forest produce. Corporate penetration of forest land, led to regulations over subsistence farming that women were in charge of. In cases when land was owned it was registered in the name of the man. Thus, dealings with the corporate became transactions between the patriarchal head of the industry and the patriarchal head of the family; leading to the further exclusion of women.This dispossession was so tiny compared to the scale of the industrialoutput that it was easy to overlook. Butit was a tremendous blow on the day to day health of the family. The woman lamented being unable to provide her children with food or nutrition since they could not grow vegetables for themselves ever since their land was taken away. From being cultivators, they became unpaid workers.

In February this year, the Supreme Court ordered the eviction of around 10 lakh families of forest-dwelling tribal communities in at least 16 states. The order came in response to a Public Interest itigation (PIL) filed to challenge the Forest Rights Act of 2006, which empowered traditional forest dwellers to “access, manage, and govern” forests within their villages. Leaders of opposition parties, environmental experts and adivasi rights activists strongly criticised the order by the SC as well as the central government’s failure in upholding the rights of the adivasis.

The National Alliance of People’s Movements expressed outrage over the order which was like a “death knell” for the FRA. “The FRA,” they argued, “had been a beacon of hope to millions of forest dependent people in the country for securing their tenure over land and access to forests. However, this order has turned the wheel backwards.”

“For centuries now, we the adivasis, fisher-folk, hill, forest dwellers and others who are the original inhabitants of theIndian subcontinent have been systematically pushed off our ancestral lands and forcibly confined to small, remote and increasingly vulnerable corners of the country. In this process we have been subjected to unspeakable atrocities bordering on genocide by successive regimes ruling what has been styled as the ‘world’s largest democracy’,”is the cry from the margins.

Their demand in the documentary and in reality is that, “We have never accepted these policies of loot and plunder and will resist them to our last breath. We have never begged or asked for anything. We only assert our rights to what is ours and has been taken from us.” The community that has been thought primitive for decades released their Election Manifesto in April 2019, to proclaim that they were fully capable of self-reliance even when those in power forgot all about them.

We live in nature! We die in Nature! It’s our life, if you occupy our land where should we go and how do we live? Whose land is this?– This was the call at the first National Dalit and Adivasi Women’s Congress held on February 2013 at the Tata Institute of Social Sciences, Mumbai. In June 2016, we hear of a priestess from the Dongria Kondh tribe in Niyamgiri, become the guardian of ancient cermonial seeds.  In July 2016, writing for Adivasi Resurgence, Jaya Lakshmi Atharam, a civil engineering student, asks the capitalist, patriarchal powers, Why can’t she, being an Adivasi?  Set apart by geography, Agar Wo Desh Banati, with its image of a woman Sarpanch leading her community to sustainability showcases a beautiful world of inclusivity, where growth of one equals growth of all.

Courtesy: Indian Cultural Forum

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Prof Kaushik Basu (middle) with Kumaramangalam Birla, Errol D’Souza 

Without naming Modi, Prof Basu regretted, under him professionalism and morality in managing the economy are taking backseat, leading to such decisions as demonetization and manipulation of economic growth data. In sharp contrast, he praised former Prime Minister Manmohan Singh for showing extraordinary degree of professionalism in revamping the economy in 1991.

Recalling his years of working as chief economic adviser under Dr Singh post-2009, Prof Basu — flanked by IIM-A director Prof Errol D’Souza, and Kamaramangalam Birla, IIM-A chairman, who called him “one of India’s most illustrious economists” — said, India was then known for its “quality and integrity of its statistical system” among World Bank circles as also top economists like Nobel laureate Angus Deaton – something it may lose now.

Excerpts:

I have, over the years, become convinced that reasoning is the most under-utilized of human faculties. Read some of the discussions and commentary on social media, and listen to television debates, and you will wonder where reason has vanished. This is a telling commentary on education and explains why we make so many policy mistakes.

Within economics game theory illustrates the power of good reasoning. One important axiom of game theory asserts: It is not good enough to be rational yourself. You must recognize that others are likely to be rational too and take that into account.

Policy mistakes, such as the demonetization, which has hurt India’s growth, would not have occurred if there were policymakers that paid heed to this simple axiom. For every policy, you have to anticipate how ordinary individuals and also bureaucrats will respond. That is the key to designing successful policy mechanisms.

How good, professional reasoning is critical for good policymaking is illustrated well with India’s foreign exchange reserve story. For more than 20 years, till 1991, India’s foreign exchange reserves used to be roughly 5 billion dollars. The years 1991 to 1993 India saw some of the most far-reaching and well-designed reforms ever undertaken.

Those were the reforms that changed India’s growth story. One of the policy changes pertains to foreign exchange reserves. For a long time, the government’s belief was that since we have so little foreign exchange, we must not let people take foreign exchange out of the country. What this missed out on was not realizing that if you don’t allow people to take foreign exchange out, they will not bring foreign exchange in.

This logic led to the conclusion that you have to make it easier for people to take foreign exchange out of the country to increase the amount of foreign exchange in the country. This was part of the policy reform package of 1991-93. The benefit was magical. The foreign exchange reserve which used to be roughly 5 billion dollars for 20 years, rose in the next 20 years to nearly 300 billion dollars. It was professionalism with fine reasoning that led to this huge success.

Traditional economics talks a lot about profit-motive and individual rationality. What is often forgotten but is actually as important for a society’s long run success is morality. Morals and trust provide the nuts and bolts of society. Without those you can get short run success but not long-run development.

In 2009, when I was Chairman of Cornell’s Department of Economics, and taking a vacation in India, I got an unexpected phone call from the Prime Minister’s office. The caller, a Joint Secretary, quickly got to the point. Dr Manmohan Singh wanted to know if I would consider being the Chief Economic Adviser to his government.

The following day, after I met Dr Manmohan Singh and had a wonderful meeting, I made a vow. I told myself that, since my life till then had been one of pure indulgence, that of the joys of research, if I were to wean myself away from that, I must do so with only one purpose, that of serving society. That is what I tried to do during the 7 years I worked as a policymaker – 3 years with the Indian Government and 4 with the World Bank. Looking back, I feel better.

In the rough and tumble of everyday life, in trying to be successful at any cost, many people push aside all morality. We see this among politicians, who try to win elections at all cost; we see this among business persons, who try to earn more profit at all cost. This is the cause of many of society’s woes. Indeed, for long-run success of a society, it is essential to have these moral anchors.

Let me briefly turn to India’s economy to illustrate some of these arguments. There are unmistakable signs of India’s economy slowing down over the last few years. The latest data on industrial growth, pertaining to January 2019, shows that India’s industry is barely growing, with the growth rate down to 1.7%.In the year 2017-18 India’s exports were a little less than what the country exported in 2013-14, which means virtually 0% growth in exports on average for 4 years, which has rarely happened in the past.

What is happening to overall growth? The official data shows that GDP growth in the last quarter has gone down. And there are analysts, such as Arun Kumar, in Caravan magazine, arguing that growth is even lower because the unorganized sector for which we do not have proper data shows signs of a massive slowdown.

Further, the agricultural sector is in recession, and the farmers feel neglected. The most worrying is the jobs situation. If you put together all the piecemeal data coming in, it is clear that our workers are suffering greatly, with unemployment rate at over 7%, according to the Center for Monitoring the Indian Economy, and youth unemployment at 16%, as per a study by Azim Premji University. It is unfortunate that data on unemployment are being held back.

The concern about this, expressed recently by 108 leading economists, is a genuine concern. When I was Chief Economist of the World Bank, it was always good to see that India stood out, not just among emerging economies but all countries, for the quality and integrity of its statistical system.

The Nobel prize-winner, Angus Deaton, in an article with Valerie Kozel in 2005, gave India tribute for its pioneering statistical work. He mentioned how India’s “NSSO surveys, pioneered by Mahalanobis in the 1940s and 1950s, were the world’s first … household surveys to apply the principles of random sampling.” We must take care not to damage this reputation. None of all this is necessary. India’s fundamentals are strong and we should be doing much better.

The two reasons why this is happening are a shortage of professionalism and a disproportionate focus on big businesses and their interests. The first pertains to reason and the second to morals. Professionalism means policymaking based on data and reasoning. The economy is too complex to be handled by hunch and gut feeling. Passion is important but you cannot have exports booming, jobs being created by passion alone. Expertise and professionalism are critical.

Make no mistake. Business and enterprise are important. Big business is also a fact of today’s world and technology. But in trying to nurture business and enterprise we must not neglect the poor and the unorganized sector. India is still largely an agricultural nation and it is sad to see this major sector suffering.

India’s is a remarkable history. Around the time that we got independence, several nations – in Asia, in Africa, in the Americas – also gained independence. Many of these nations wanted to be open and democratic. It is an amazing fact of history that the only new nation from that time that has managed to hold on to democracy, secularism, and free speech, for all this time, is India.

We were lucky to have open-minded founding fathers, like Gandhi and Nehru, and thinkers with global humanity, like Tagore. They had their own struggles but in the end they strove to build a nation that was open to all religions, all races and tried to banish divisions of caste and gender.

Did India do right by holding on to democracy, secularism, free speech and quality higher education so early? I do not have a definite answer. But I do know that nations like the United States by holding onto these qualities did phenomenally well in the long-run. In the early 20th century, Argentina and United States stood neck to neck in terms of economic status.

My point is simple, whether or not the early investment in democracy, secularism, free speech and higher education was right, having made these investments, we must not fall into the trap of narrow-minded group identities, and begin to imitate nations that do not value these qualities, and make ourselves in the image of those nations.

On February 8, 1994, on the occasion of receiving the Indira Gandhi Prize, Vaclav Havel, Czechoslovakia’s great revolutionary and, later, president, spoke about his admiration for India and its founding fathers. And how India’s victory “was a great victory for the ideas of nonviolence, tolerance, coexistence, and understanding.”

He went on say, “I am convinced that the creation of multicultural civilization I have talked about, the creation of conditions based on mutual respect and tolerance of different cultures … will always find one of the important sources of its vitality in Gandhi’s work.”

India commands a huge global respect for its polity of openness and tolerance. There are forces at work in the country that want to destroy this and make us in the image of failed nations.

Courtesy: Counter View

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India ranked 130 out of 189 countries on the 2018 HDI index with a score of 0.640 which places it in the “medium” category of development. It fared worse than Sri Lanka (HDI 0.77, rank 76) and China (0.75, 86) but better than Pakistan (0.56 and 150), Nepal (0.57, 149) and Bangladesh (0.68, 136).

Source: 2018 Statistical Update, Human Development Indices and Indicators

India lost out 26.8 points on the index due to inequalities while the south Asian average for this factor is 26.1 points. Since human development index is driven by health, education and income, India would have to focus on excelling on these fronts to progress economically and reduce inequalities.

If India plans to double its economy to $5 trillion (Rs 350 lakh crore) by 2022 as Prime Minister Narendra Modi stated in August 2018 and grow at 8% per year as he predicted, it will need to invest more in health and education.

Consider this: Despite being the sixth largest economy in the world, with a gross domestic product (GDP) of $2.59 trillion (Rs 180 lakh crore), India accounts for about 30.8% of world’s stunted children. Not just short for their age, but one in five children in India is also wasted and underweight. Undernourished children struggle to stay healthy and find it hard to catch up with their peers in classrooms and at workplace.

Malnourishment may have cost India upto $46 billion (Rs 3.2 lakh crore) in terms of income opportunities lost which is more than double of what India spent on health, education and social protection schemes in 2018-19 Union budget ($21.6 billion or Rs 1.38 lakh crore).

Indians work for just 6.5 years at peak productivity (compared to 20 years in China, 16 in Brazil and 13 in Sri Lanka), and India ranks 158th out of 195 countries in an international ranking of human capital published in medical journal The Lancet, IndiaSpend reported in September 2018.
“Our findings show the association between investments in education and health and improved human capital and GDP–which policymakers ignore at their own peril,” said Christopher Murray, director of the Institute for Health Metrics and Evaluation (IHME) at the University of Washington, author of the study.

IndiaSpend analyses these gender and income inequalities and offers solutions:

Gender imbalance
There were 919 girls born for every 1,000 boys in the last five years–the numbers are worse for urban areas (899) than rural areas (925)–which shows a male preference, showed National Family Health Survey (NFHS-4) 2015-16.

Also, when it comes to literacy, women compare poorly (68.4%) with men (85.7%). Only 35.7% women completed more than 10 years of schooling, the survey showed.

While boys and girls had almost the same enrollment rate in school till age 16, by the time they turned 18 significant differences started showing up. And while both girls and boys struggled to do simple tasks like counting men, telling time and adding weights, girls performed worse, showed the 2017 Annual Status of Education Report.

Made to focus on domestic chores, more than one in four girls got married before 18 years of age (26.8%). Her status after marriage remained poor–one in two non-pregnant women was anaemic (53.2%), one in four was underweight (22.9%) and one in three married women faced spousal violence (31.1%), showed NFHS-4.

Despite being more educated than before, Indian women aren’t working as much. In 2013, women above the age of 15 accounted for only 27.2% of India’s workforce–as compared to men who comprised 78.8%–and down from 34.8% ten years before, IndiaSpend reported in August 2017.

India’s performance on gender indicators is worse than its neighbours’–India ranked 127 out of 189 on UNDP’s gender inequality index, lower than Nepal (118), China (36), Sri Lanka (80) but higher than Bangladesh (134) and Pakistan (133).

Widespread inequality
India is one of the most unequal countries in the world with the top 10% controlling 55% of the total wealth against 31% in 1980, according to the 2018 World Inequality report. The bottom 50% control only 15.3% of the total wealth. The report shows that while the wealth of top 1% has been increasing since 1980s, the wealth of bottom 50% has been sliding.

Certain castes and communities are at more disadvantage than others. Muslims and Buddhists have the least share of assets and it has declined from 2002 to 2012, showed the 2018 Oxfam India report.

Scheduled tribes, despite accounting for 8% of India’s population, account 45.9% share in the lowest wealth group, IndiaSpend reported in February 2018.

Much of this wealth is less likely to be distributed anytime soon, Indians are least likely to break out of the income and educational bracket of their parents than the citizens of five other large developing countries–Brazil, China, Egypt, Indonesia and Nigeria–IndiaSpend reported in June 2018, citing a World Bank report.

Lesser wealth results in lower life expectancy, poorer health outcomes and poor education outcomes, various studies showed. This adds to the fact that health emergencies often push people into poverty–55 million Indians in 2011-12.

Why it is becoming increasingly important to invest in people
These factors show that investments in social spending is a necessity. “Investing in people rather than primarily in infrastructure is the best way to achieve sustainable development, and investments in human capital through health and education offer compelling returns,” World Health Organization director-general Tedros Adhanom Ghebreyesus said in a statement.

Ensure women’s well-being: Women’s well-being, estimated from their body mass index (BMI), education, early marriage and access to antenatal care (ANC), could explain half of the difference between high and low stunting rates in India, a 2018 study by the International Food Policy Research Institute showed, as IndiaSpend reported in July 2018.

Women’s BMI (19%) mattered more than even children’s adequate diet (9%) when it came to likelihood of stunting in children, the study found. Women’s health and empowerment have shown to directly influence child health and nutrition in many previous studies (here and here) as well.
Ensuring good health and more opportunities for economic growth for girls is certain to result in not only increased productivity and economic returns but also a more healthy future population.

Cash transfers: Cash transfers have been used to reduce poverty in Latin America, Africa and Asia and these have delivered faster results than expected from the “trickle-down” effects of economic policies, said a 2017 International Labour Organization working paper.

“Although in practice benefits have tended to be lower than needed, a cash transfer at an adequate level can bring people out of poverty overnight,” the paper said.

Cash transfer helped reduce inequality in Brazil by 28% by GINI index–a measure of inequality–between 1995 and 2004 and child stunting halved from 13.6% to 7% in 2006.

A universal basic income (UBI)–a periodic, recurring, unconditional cash payment–was discussed at length in 2016-17 Economic Survey of India. UBI could help reduce leakages from current welfare systems and improve the quality of life of the poor, the report had said as IndiaSpend reported in June 2017.

“If 75% of the population received Rs 6,450 per capita per year, the UBI would cost India 4.2% of its gross domestic product,” we reported. However the government had said it may not be politically or economically feasible.

A truly ‘universal’ health coverage: India’s public health expenditure is among the lowest in the world at 1.02% of GDP (2015), far behind the 5% recommended by experts and other low-income countries that average 1.4%. India has committed to spending upto 5% of its GDP on health by 2025 according to its National Health Policy.

Investing more and strengthening its public–especially primary–healthcare system is the way to improve accessibility and affordability of healthcare. While India has rolled out its ambitious Ayushman Bharat Yojana (National Health Protection Scheme) to insure 100 million Indian families and provide a cover of upto Rs 500,000, previous experience has shown that insurance model does not prevent impoverishment as it does not cover outpatient cost or medicines cost which are the two big healthcare expenses.

“We need a [healthcare] system that actually provides financial protection, appropriate care and universal access. The insurance programmes are well intentioned, but they do not fulfill these objectives,” said Srinath Reddy, director of Public Health Foundation of India, a think tank, to IndiaSpend in January 2018.

Universal health coverage, combining primary, secondary and tertiary services and creating a single payer system through pooling of multiple healthcare-funding resources and creating a large risk pool is one way to provide a truly universal coverage, Reddy said.

Correction: The story has been updated to show that $5 trillion is Rs 350 lakh crore, and not Rs 35 lakh crore as we said earlier. We regret the error.

(Yadavar is a principal correspondent with IndiaSpend.)

Courtesy: India Spend
 

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