Is India’s growth story plateauing?
7th Jun, 2019
- Official estimates released on May 31, show GDP growth slowed to a five-year low of 6.8% in 2018-19, even as the unemployment rate rose to a 45-year high of 6.1% in 2017-18.
- The economy is struggling with an investments and a manufacturing slowdown, rural distress, unremunerative farm incomes, stagnating exports, a banking and financial mess and a jobs crisis.
- The top economic priority for the new government ought to be credible course correction in its attitude to policy — its formulation, articulation and the setting of goals.
- What is critically important is to an overhaul of labour and land policies and a much-needed manufacturing push, ‘Make In India’, for absorbing the slack from the farms.
- According to book – “The Lost Decade 2008-18: How India’s Growth Story Devolved in Growth without a Story”, for a large economy like India, what was needed was to do sequencing of reforms, which was not done and, worse, a measure such as the demonetization was introduced, jolting the economy.
- Today, India’s GDP is growing at a world beating rate, but little on the ground suggests that people are actually feeling better off.
- Accelerating the rate of growth is not sufficient. What sets apart successful economies from the unsuccessful is the duration for which fast growth is sustained.
- India’s economy was thriving and GDP growth was at an impressive 8.8 per cent before the global financial meltdown in 2008.
- Sequence of events prove that in the decade that followed each time the country’s economy came close to returning to that growth trajectory, political events derailed it.
- The last ten years have shown that half-baked, ill-thought-out measures produce uncertain results.
- Be it the land acquisition law, the national food security law, demonetization or GST, the big bang economic reforms agenda has plateaued.
- India must rebuild consensus for a steady stream of reforms and revive the spirit of 1991.
Is India shining?
The renewed plan to make India shine had the same blind spot — the farm sector, employer to the bulk of India’s poor, and in desperate need of structure reforms, received inadequate attention.
Is there a policy paralysis here?
- There is no policy paralysis. On the contrary, decision making was speedy. But it was poor of quality.
- The ill-informed idea of demonetization and the half-baked GST roll out demonstrated the growing disconnect between policy tools and objectives.
- The economy could have recovered and returned to the high-growth path with bold reforms, but the policy response was feeble.
What has been, and can be, the RBI's monetary policy in aiding growth story
- India has reported top gross domestic product (GDP) growth rates across the world. It is also known as one of the four most powerful emerging market countries, collectively part of the BRICs which contain Brazil, Russia, India, and China.
- The International Monetary Fund (IMF) and World Bank have highlighted India in several reports showing its high rate of growth.
- In April 2019, the World Bank projected India’s GDP growth would expand by 7.5% in 2020. Also in April 2019, the IMF showed an expected GDP growth rate of 7.3% for 2019 and 7.5% for 2020.
- Both projections have India with the highest expected GDP growth in the world over the next two years.
- These growth rates make the role of the Reserve Bank of India increasingly important as the country’s total GDP moves higher.
- India is a top 10 nation for GDP overall but its numbers fall far behind the world’s superpowers in the United States and China.
- As with all economies, the central bank plays a key role in managing and monitoring the monitory policies affecting both commercial and personal finance as well as the banking system.
- As GDP moves higher on the world rankings the RBI’s actions will become increasingly important.
- In April 2019 the RBI made the monetary policy decision to lower its borrowing rate to 6%. The rate cut was the second for 2019 and is expected to help impact the borrowing rate across the credit market more substantially.
- Prior to April, credit rates in the country have remained relatively high, despite the central bank’s positioning, which has been limiting borrowing across the economy.
- The central bank must also grapple with a slightly volatile inflation rate that is projected at 2.4% in 2019, 2.9% to 3% in the first half of 2020, and 3.5% to 3.8% in the second half of 2020.
- As one of the fastest growing emerging market countries in the world, India and its central bank have several unique challenges ahead that will require nimble navigation from the RBI.
- With the Indian economy steadily accounting for a greater share of the global economy, it is expected that the RBI will gain greater attention from world leaders while also growing in stature as one of the world’s most-watched central banks.
On Fiscal fronts - is there a job deficit orientation on policy matters?
- According to a research, the main reason for the worsening correlation between growth and jobs was a mismatch between skills and 'good jobs.
- The share of the so-called goods jobs that broadly includes formal employment with regular pay accounted for only 17 per cent of the country’s 467 million workforce.
- The World Bank, in its publication South Asia Economic Focus, Spring 2018: Jobless Growth?, says that over the long-term, India has been creating 7,50,000 new jobs for every one per cent rise in gross domestic product (GDP); at an average of 7% growth, India should be creating at least 5.25 million jobs.
- Assessing real job trends cannot be done with point-to-point data of the type the government puts out once in a while, for the choice of base year matters.
- The Census, which is the gold standard in job counts, happens once in 10 years; the National Sample Survey Office’s surveys happen once in five years, and the Labour Bureau’s employment surveys, which use methodologies similar to CMIE’s, also happen with large time lags. There hasn’t been one since 2015-16.
- This brings us to the conclusion: if we want to fix our jobs problem, we must first get our hands on the right high-frequency data. Without this, we can’t even define the nature of our jobs problem.
Link between growth and jobs
- In the 1990s, the employment elasticity in India was nearly 0.4. This number measures how much a given rise in growth impacts jobs. At 0.4, a one per cent rise in GDP growth gives us a 0.4% rise in employment; 5% growth gives jobs a 2% boost.
- Now, this elasticity is down to 0.2 or lower. This means, for every percentage rise in growth, we get only a 0.2% impact on employment.
- Secondly, this falling employment elasticity is partly the result of large-scale substitution of labour with capital and automation. This is easy in a world with surplus capital, and especially in a country with restrictive labour laws.
- Improvement in labour market information system. This way, emerging demand for skills are spotted quickly and the necessary training and certifications for the same are created quickly.
- This calls for an agile public-private partnership in capturing demand for skills and following through with quick investments in skill-building to match demand with supply.
- India need labour market reforms. Some good moves have been seen over the last few years, with the Apprentices Act being modified to make it more attractive for employers to hire young workers, and the extension of fixed-term labour contracts from textiles to all industries in the last budget.
- This is good, but not good enough. The “regulatory cholesterol", is still too high.
- The key to employment growth is not the big company or factory that employs thousands of workers, but medium-scale units.
- The enterprises-to-jobs multiple is highest for medium-scale units. India needs to nurture and expand its equivalent of the German Mittelstand. This can’t happen without deep changes to labour laws and access to credit.
- There may still be jobs in light manufacturing (apparel, leather, cell phone assembling, et al.), but manufacturing as a whole is automating in a big way, and won’t directly create jobs.
- Smart urbanization is key. The link between good urbanization and jobs growth is positive, and unless India’s urbanization is concentrated in narrower areas and serviced by good infrastructure, job creation will be sub-optimal.
Indian economy has huge potential to change the composition of growth such that our growth would be sustainable even without subsidies. Critically evaluate the challenges put forth by one dimensional growth story.