The official GDP growth estimate for the July-September quarter, at 4.5%, is the lowest in 26 quarters. Rathin Roy, Director of the National Institute of Public Finance and Policy, and former member of the Prime Minister’s Economic Advisory Council, discusses the causes of the economy’s troubles and suggests possible remedies. Edited excerpts:
The Finance Minister says the economy is not in recession. According to the latest official estimates, GVA growth in the first and second quarters of this financial year were 0.6% and -1.0%. Going by the technical definition, isn’t manufacturing very close to being in recession?
It’s definitely close to being in recession but for different reasons. Measuring recession in terms of negative growth in two quarters is a developed countries concept. It applies when economies are in a steady state and recession is a departure from the steady state. [A state of fully tapped land and capital so that growth is possible in case of improvements in technology and productivity, as happens in developed economies. In developing economies, growth is possible by increasing use of resources.] The Finance Minister is correct that in terms of conventional economics this is a slowdown, not a recession.
In India’s case, 6-7% is the achievable growth rate without doing much since we are a growing economy. With reforms we can aspire for even higher growth. We are now below 6%, that is below what I would expect the growing Indian economy to normally achieve without doing much. Therefore, in the sense of a developing and growing economy, I would say, and I hope the Minister is persuaded, that we are in recession.
The Chief Economic Adviser has said that growth will begin to pick up from the third quarter. Do you agree?
I think so, but what really matters is that if India is to complete its development transformation, it must grow at more than 5%, even when things are bad. Sub-5% growth is a development disaster and cannot be tolerated.
What needs to be done to make sure that the full-year growth rate does not dip to sub-5%?
The first thing we need to understand is that we are not a command and control economy. We need to accept this recession is structural in nature. Therefore, getting the growth rates consistently up to 7-plus% will require structural actions. If these actions are taken, short term-actions can be thought of to keep the growth rate above 5% over a two-year window, which is the maximum you can afford to keep such short-term actions in place because they are a bit like steroids.
What short-term actions and structural actions?
The Reserve Bank of India (RBI) can quickly increase the amount of cash in the economy. Then banks, especially public sector banks, can use that together with interest rate policy to provide easy credit. A larger supply of credit should lead to cheaper credit. This will have to be supported by reduction of the administered price of credit, which is the RBI’s repo rate. There could be hurdles to credit off-take due to fiduciary or prudential reasons, so those need to be tackled. Same for mismatched expectations. If these temporary measures for boosting aggregate demand – both consumption demand and investment demand – are the only measures taken, and structural measures get neglected, then the threat of inflation is real. The inevitable result of that will be stagflation.
How can mismatched expectations be tackled? Many people will not take on loans even at 0% interest rate today because they can no longer see what the next few years hold.
The government needs to hold granular conversations with the private sector. For instance, we have a market for textiles that we are losing to Bangladesh. What is it that inhibits us from gaining that market through import substitution? What can we do in terms of credit and securing the running of a business in that specific sector? One reason we are not able to compete with Bangladesh is that we are not able to locate moderately priced medium-value high-volume textile factories in those States where labour is relatively cheap. Tirupur and Gujarat are high-wage geographies to produce ₹400 shirts. Why are we not able to locate the industries in Bihar, Jharkhand or Varanasi? So, if you kick-start investment in north and eastern India, you start taking advantage of India’s biggest asset: an abundant pool of reasonably priced labour, which has over the years got fairly skilled because of migration. This is what I would call a skills and industrial policy. This is complex policymaking. It requires political investment.
What other sectors are key to the structural actions strategy?
Agriculture, housing, health and education. What is the balance sheet of agriculture? We have never asked that question because our priority always was to take food to the hungry, a very laudable objective. But a consequence of that is farmers have been disempowered by multiple interventions. If I divide India into 14-15 agroclimatic zones, can I take a view of the viability of farming as a business? We never hear of farmer suicides in Bengal as we do in Maharashtra. Why does the business model in Bengal work better than in Maharashtra? The business model of agriculture was successful in Punjab but temporarily so. So, business model change is needed in agriculture.
Similar problems arise in healthcare and education. Healthcare for people like you and me is expensive but affordable. In the sense, a major once-in-a-lifetime intervention costs possibly three-four months’ salary. Minimum wage earners face similar prices. We don’t have a business model allowing them use of their earnings to buy reasonable amounts of healthcare which the government can then supplement. Either you get rationed healthcare after the entire machine of government has had its fill of the public health system...
Or you get bankrupted going to the private system?
Subsidies and welfare giveaways will not work because we do not have the supply of medical personnel to deliver affordable healthcare at this scale – not at subsidy, but at scale.
We have the same problem in education. Housing is simpler. The land is available with government. The question is, is there is willingness to deploy it for affordable housing and not golf courses and flyovers.
So, the slowdown is an outcome of supply-side constraints and not demand-side constraints.
Absolutely. If you produce things that Indians earning minimum wages can afford, aggregate demand will increase.
Puja Mehra is an independent journalist
