INDIA’S GROWTH CONUNDRUM

India must face the permanent changes since the world economic crisis of 2008 and find new ways of triggering growth, writes Ashok Sekhar Ganguly

http://www.telegraphindia.com/1141023/jsp/opinion/story_18939640.jsp#.VEiEivmUfb4

One of the principal concerns of India’s growth story is that it is a “jobless growth”. This is not entirely correct. As a matter of record, the growth in employment was 1.0 per cent/1.5 per cent per annum between the years 2004-05 and 2009-11, and then jumped up to 3-3.5 per cent in the subsequent years, when India’s economic growth was actually slowing down. There is apparently a lag phase between economic growth and job creation. Statistics aside, no country can sustain jobless growth. In spite of the importance of growth in jobs, it is economic growth which is, and remains, the top of the mind issue.

The national mood regarding economic growth vacillates between euphoria and pessimism. What tends to be ignored is the fact that much of our growth is driven by internal production and consumption, alongside factors such as foreign trade and the state of the global economy.

During the early years of the new millennium, India’s ambition was to match and surpass China’s record of consistently high economic growth. Gradually, the expectation of consistent high economic growth took roots as a firm belief. To be fair, a few eminent Indian economists did advise caution, in the light of certain global trends. But the Indian financial media and stock markets created their own mood swings, which are not only vague, but mostly subjective.

Economics is the single most powerful influence on the emotions of the common person, disproportionate to reality and history. The recent referendum in Scotland regarding whether or not to remain in union with England, was defeated by a 55 and 45 per cent split in favour of Scotland staying within the United Kingdom. Some of the most powerful arguments were based on the difficult economic consequences that Scotland would have to deal with as an independent nation. It so happened that a majority believed that it was economically viable, among several other factors, to remain in the union. But a strong minority believed in the ‘independent’ Scotland story, and were convinced about its economic viability as well. Thus, in a manner of speaking, the ‘Scottish Issue’ remains uncertain.

Given our preoccupation with the daily problems of the cost of living, domestic savings, and so on, what is astounding is the feebleness with which people responsible for guiding and managing India’s expectations, even attempted to describe in simple terms the larger picture of the global economy and its impact on India. Even after the collapse of Lehman Brothers in 2008 and the subsequent meltdown in the developed economies, the general public in India was hardly aware of the deep and lasting consequences of these in their daily life and India’s future prospects.

Thus, India entered the era of low economic growth post-2009, ignorant of the global turmoil and its lasting impact on the country. The only silver lining for India was that agricultural growth remained robust, which, along with social investment — for example, poverty alleviation and widespread entrepreneurship — has sustained India’s reduced growth momentum. Very large infrastructure projects have remained incomplete, investment sentiment dampened dramatically, but the stock market kept rising and quarterly company results provided little hint that the country was facing serious challenges. One noteworthy exception was the prudent management of foreign exchange and interest rates and monetary policy in general, by the Reserve Bank of India, especially since 2008. Sadly, the RBI’s persistent efforts to stave off a fiscal disaster remains below the radar screen.

In the past few years, public dissatisfaction kept rising with the rise in the price of goods of daily consumption and high inflation, both of which were attributed to domestic administrative inaction, corruption in high places and several other real or imagined problems of mismanagement.

The Indian media, and especially the pink pages, were unable to communicate the economic tectonic shifts around the world and the impact it was having on the “India Story”. China’s growth momentum kept it going for much longer, creating the mistaken view that China would remain unaffected. However, the issues were alarming enough for the creation of G-20 to deal collectively with the serious prospects of a world-wide economic downturn, deflation and de-growth.

Just before the 2008 economic crisis, there was a change of guard at the helm of the US Federal Reserve. Alan Greenspan had presided over a long period of unprecedented global prosperity, driven primarily by the increasingly less regulated banking sector of the United States of America and the UK. In retrospect, the single biggest factor leading to the collapse of banks in 2008 was the creeping laissez-faire of checks and balances in the banking and investment sectors. The annual gathering of the great and the good of the global bankers and economists, hosted by the Federal Reserve Bank of Kansas at Jackson Hole, Wyoming, that year, was dedicated to celebrating the achievements of Greenspan, who had presided over the liberation of banks from several critical regulatory checks and balances, to usher a long period of economic growth in the developed economies. As history records it, during the celebrations, the only word of caution and restraint was raised by the young World Bank economist, Raghuram Rajan, in his speech. His discordant note was dubbed as ‘Luddite’ by Larry Summers, then high priest at the White House. The rest, as the saying goes, is recent history. India is fortunate that the RBI continues to provide leadership of caution and prudence, a factor which holds the key to the sustained economic growth revival of India.

Following the 2008 banking meltdown, the US Federal Reserve, under Greenspan’s successor, Ben Bermanke, launched a massive injection of funds to revive American industry, generate employment and prevent serial bank collapse; in brief, to avoid repetition of the long and persistent depression of the 1930s. The European Union faced, and still faces, an equally massive challenge of revival, especially in Greece, Spain, Portugal and Italy. The French economy was already in deep trouble owing to the socialist policies of President François Hollande, while the UK fortunately followed America’s lead to rescue its financial sector and stave off disaster. The silver lining was Angela Merkel’s leadership of the German economy, which provides a beacon of hope to the rest of Europe. The appointment of Mario Draghi as the head of European Commercial Bank created a sense of optimism with his determination to save some of the Southern European countries from defaulting on their loans and obligations and triggering deflation.

The world banking turmoil of the last six years has taken a heavy toll. That the BRICS economies were severely affected soon became apparent, other than to some of the leaders and opinionmakers in our own country. China’s slow-down was delayed, but has now become apparent, while Brazil is inching towards deflation. The BRICS nations, which were considered the leaders of emerging economies, have now been labelled as the “Fragile Five”, with uncertain prospects in the foreseeable future, and unlikely to regain their growth momentum.

While the revival of large parts of Europe still remains uncertain, the US recovery and employment data are now positive. The US Federal Reserve’s policy to start tapering off the “Quantitative Easing” of money supply has sent shivers around the world. There is, mercifully, a temporary slow-down of the tapering and tightening of money supply owing to the Ukrainian crisis and the rise of ISIS in the Middle East. The RBI has been consistently warning about these developments and their impact on India’s inflation and monetary policy. The commitment to reduce inflation is what is most likely to help India manage the uncertainties of growth. We are uniquely fortunate to have a leadership in central banking, which will hopefully guide India’s monetary policies through the uncertainties and challenges of economic growth.

India’s flagging morale has been somewhat lifted by some recent developments. There is an unusually strong expectation that investors are lining up to put money into India’s manufacturing modernization and infrastructure. The India stock markets and Indian business leaders are pumping the euphoria and optimism. Sadly, the not-so-widely-known fact is that, historically, of every one hundred MOUs entered into by India, less than 3 per cent resulted in actual investment during the past several years.

Thus, the visibility of growth revival and employment generation in India remains obscured by mist, at least for the time being. Some of the most critical issues to re-ignite growth are the completion of major infrastructure projects, modernization of road and rail transport, and investment in and rapid upgrading of manufacturing; second, to derive significantly more commercial and social value from the bounty of India’s agricultural output; third, and finally, to share honestly with the people of our own country the real challenges that the “India Story” faces, while taking a few visible steps in dismantling some obvious barriers to investment and growth by ushering in some real reforms.

The IMF has again warned that, other than the US, the revival of the rest of the developed economies will remain uncertain. The effect of the persistent downturn has had, and will continue to have, a significant negative impact on all the emerging economies. These conditions are unlikely to improve in the foreseeable future. If we take such a scenario seriously, it is possible to plan and deal with economic adversity and plan a different strategy, rather than assuming that somehow all will be well soon. The global economic crisis, which began in 2008, is compelling the world to manage the market realities rather than just hope for better times. India, like China, has to face up to some of these permanent changes and seek new ways of triggering its growth momentum in order to overcome the conundrum it faces.