#65 Déjà Vu All Over Again?

Tough Economic Road Ahead. But for Some, the Notion Of Well-Being is Broader

This newsletter is really a public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?

Welcome to the mid-week edition in which we write essays on a public policy theme. The usual public policy review comes out on weekends.

The Indian economy contracted by 23.9 per cent in Q1 this year over the same period last year. There is a lot of hand wringing that’s accompanied this. There have been op-eds calling for the government to act now. Social media is full of doomsday prophecies. In our view, this won’t change anything. The contraction wouldn’t have surprised the government considering the strict lockdown we had. It would have sensed this for about a month now. Had it been worried about how this news plays out, it would have taken a few steps. It didn’t.

What Explains The Nonchalance?

One, it sees signs of recovery in high-frequency indicators and it believes things would turn around by Q3. The statements from the chief economic advisor (CEA) who believes in V-shaped recovery like an article of faith suggest this. Two, the stance of fiscal conservatism remains intact. The government isn’t still keen on borrowing or monetising deficit. It wants to be seen as holding out against these. Three, the government is still unsure about the merits of boosting demand through direct cash transfer. Its worry is people won’t spend that money because the pandemic case counts are at an all-time high. People won’t step out despite all the unlock communication. So, what’s the point in transferring money to them? Finally, the PM and this government are sitting atop record approval ratings. There’s a strong belief among people they are doing the best they can. The opposition is a joke. There are no political compulsions that may force their hands.

We have a sanguine view of the contraction in Q1. It could have been worse. A better-than-expected growth in agriculture and robust government spending propped up the numbers a bit. From here, a realistic case for the full year is about 8-10 per cent contraction. Considering a 4-5 per cent growth in the next two years, we will be back to the GDP level of FY 20 only in FY 23. That’s 3 years lost. How bad is this? Losing three years is about 45 million people missing out on opportunities to get out of the poverty trap. The likely contraction in this year might lead to about 15 million falling back into poverty. This is a significant social cost. How will the society or the state react to this? We have our thesis which is a bit different from what we are reading over the last few days.

The Nation As A Family    

This newsletter has argued for economic growth as a moral imperative for India. We believe for our stage of development we need to prioritise growth over other competing issues. We use argue literally here because we get regular feedback from our readers who think otherwise. Many economic commentators view economic performance as fundamental to the well-being of a nation. We agree with it in principle. But that’s not how it is viewed by most Indians. To a lot of Indians GDP growth is an abstract concept. The 8 per cent growth during the ‘India Shining’ phase didn’t impress them much. We guess they would take the 8 per cent contraction in their stride too.

I’m reminded of a discussion I had with someone steeped in what can be called Indic philosophy a few years back. He rubbished my view of economic growth as the primary priority of the Indian society. He advocated that old trope of the ‘nation as a family’. It needs economic growth, for sure. But that alone won’t make it happy. It needs the nourishment of its soul through spirituality, mental well-being, purpose, happiness, and a few other things I forget now. You get the picture. I gave him the usual retorts. A nation is an imagined community, unlike a family. It doesn’t have socially or biologically determined hierarchies. The head of a nation is not like a head of a family. We can choose another head through elections. So on. These were all dismissed as western constructs. We were held together by dharma and that’s deeper than mere economic wellbeing, I was told.

I think of that conversation often when I see how we vote or argue against our economic interests. There’s no strident demand for support or justice when things go bad for us. The easy acceptance of their fates by the millions of migrants who lost livelihoods during the pandemic is revealing. People may have lost their jobs in cities. But they are now with their families in their villages. They seem happy with that trade-off. They couldn’t have them both anyway. The subject of many ‘Mann Ki Baat’ episodes or the videos released of the PM at work in his residence that shows him feeding peacocks suggests he has a deep understanding of this psyche of our people. We want our leaders to be a bit otherworldly, detached, strong-willed and of pure intentions. We measure our well-being in a broader sense of the term. Economic performance is a but a small part of it.


That 70s Show

The other question is what will these three lost years mean for the economy? We might have a compounded growth of about 2-3 per cent over the next 5 years assuming a strong recovery. The ‘Aatmanirbhar’ programme is turning into a case for higher import barriers, import substitution and a desire to level trade deficit. Colour TV import licenses are back. Swadeshi toys are the flavour of the month. There’s even a plea to adopt dogs of Indian breed over their foreign counterparts.

The destruction of capital that has happened during the pandemic will mean the state will have to invest in infrastructure to get the investment cycle going. The MSME sector that has seen a series of setbacks over the last four years (demonetisation, GST and the pandemic) will be supported in the only way we know. Rewarding them for remaining subscale. The private sector will see a shakeout as the full impact of pandemic plays out on those with highly leveraged balance sheets. This will mean monopolies emerging in every sector where the leading player with liquidity will buy out others. This has begun. The job market will remain weak. Our best and brightest will vote with their feet and get out.

I was reading an old Pranab Mukherjee budget speech of 1984. I have produced a few excerpts here:

“In the past few years, our balance of payments situation has been a matter of concern. In my budget speech last year, I had taken the opportunity to indicate the Government’s strategy for restoring the viability in our balance of payments in the medium term. Briefly, the main elements of the strategy are to accelerate the pace of import substitution in critical sectors such as oil and fertilisers, to increase exports, and to improve the facilities available for remittances and investments by non-residents of Indian origin.”

“I have also taken the somewhat unconventional step of providing an additional Rs.300 crores over and above Rs.13,570 crores set apart specifically for the various schemes in the next year’s Central Plan. This amount will be provided as grants to the States on the basis of their better performance in implementing specific programmes. These programmes will benefit the weaker sections of the community and improve the functioning of the State Electricity Boards. The co-operation of the States is essential and, wherever appropriate, the guide-lines to be issued, would provide for matching contributions by them. Out of this allocation, I am earmarking Rs.125 crores to assist small and marginal farmers to improve the productivity of their land.”

There’s a strong possibility we might be in these territories again in the next five years. The government will have to step in with capital investments and supporting the marginalised. The penchant for big, game-changing announcements will mean we could have some form of a UBI (universal basic income) announced with a catchy slogan (Garibi Hatao is taken).

We will be back in the 70s then.

The Inevitable Response

The shape of the recovery notwithstanding, the government will have to raise funds to bridge the revenue deficits, provide demand stimulus and kick-start the infrastructure investment cycle. It will borrow more, transfer excess RBI reserves or even monetise the deficit. There might not be a political necessity to do this. But it will have to be done to prevent a long-drawn out recession. This is inevitable. A package that will have a version of UBI, more incentives for MSMEs and some rousing anti-China rhetoric will be useful to cover the significant increase in fiscal deficit. This is only a matter of time.

No Counterfactual

So, that’s the way we think this will pan out – a reversion to a modest growth rate, the state taking the lead on investment, a high debt burden for the government and a few high performing sectors to cheer about. We have lived through this phase for most of our history in independent India. We didn’t complain much. We don’t ask the counterfactual query. We just got on with it.

We will do it again.  


Reading and listening recommendations on public policy matters

  1. [Article] Shuvodeep Rakshit and Avijit Puri in The Indian Express on what the government needs to do to get back to 8 per cent growth rate.

  2. [Article] Abhijnan Rej writes in The Diplomat on what GDP contraction means for India’s strategic posture. He suggests PM Modi may be fine with an insular India that’s intoxicated with nationalism.

  3. [Article] Andy Mukherjee in the Bloomberg on the perils of monopolies emerging in the Indian economy and the lessons to be learnt from the South Korean chaebol discount.

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