Economy: This is as good as it gets

The growth of India’s gross domestic product (GDP) dropped to just 4.5 per cent in the second quarter of this fiscal year. For the entire year, growth will, at best, be 5 per cent. The common man is no wiser as to how, despite being ruled by a Vikas Purush for more than five years, growth has crashed from 7.5 per cent to 4.5 per cent. Despondency is all around, but there were hardly any cogent, official, economic arguments (other than silly sound bites from party lackeys) explaining this unexpected phenomenon. Well, official economic arguments are now available. Bibek Debroy, chairman of the Prime Minister’s Economic Advisory Council (PMEAC), has written a piece in Open magazine, explaining what to make of the slowdown. Here are his main arguments. 

1. Hey, we are still growing; be happy: India remains among the fastest-growing countries in the world. Economic illiterates (my expression, not his) talk of a recession without realising that recession, among the few things, is precisely defined in economics as:  GDP shrinkage over two successive quarters. This is true, but Mr Debroy misses the point of expectations vs. reality. Did people vote for a better or a worse outcome? In 2014, did he honestly expect 5 per cent GDP growth after five years of the Modi raj? Or was it the opposite?  

2. Inflation is low; be happy: Since GDP figures are adjusted for inflation, with inflation around 3 per cent, nominal growth will be 8 per cent for the year. One of the major successes of the government since 2014 has been lower inflation, which we don’t seem to appreciate enough. Inflation hurts the poor more, he argues. We would have been far worse with 5 per cent real growth, 10 per cent inflation, and nominal growth of 15 per cent, he reminds us.

There are several issues here. Low inflation is an outcome of low aggregate demand. It is not an entirely independent variable. Because of various actions and inactions of the Modi government, growth — and, therefore, inflation — is down. It was an unintended consequence, which is now being touted as an achievement. There is no evidence that bringing down inflation to give relief to the poor was a policy objective. In fact, one of the often-repeated grand promises of the Modi raj was to double the farmers’ income. This would have meant massive food inflation, given that India is not a significant agricultural exporter.

3. Blame weak global trade, not the government:  At least 3 percentage points of GDP growth comes from exports, argues Mr Debroy. If export growth peters out, we go down to 6 per cent GDP growth. Three factors influence exports, according to him: Global demand, global supply, and the exchange rate. The government cannot do anything about the first and very little about the third. As for supply, “the Government has introduced measures to improve logistics”. That’s it, and so “net exports will continue to be a constraint”. 

If all this sounds too pat, academic, and unconnected to what is happening on the ground, it indeed is. In 2010, China’s share of worldwide export of textiles was 36.6 per cent, which went down to 31.3 per cent in 2018 due to higher labour cost and other structural changes. Which countries benefited? Vietnam’s share shot up from 2.9 per cent to 6.2 per cent and Bangladesh’s share went up from 4.2 per cent to 6.4 per cent. India’s share went down from 3.3 per cent to 3.2 per cent. Why so? Because of enormous frictional costs of doing business in India, imposed by the central and state governments. This needs to be fixed through structural reforms but that is a pointless argument, according to Mr Debroy. Please see the next point. 

4. Structural vs. cyclical? It’s pointless: “There is a slightly sterile debate that goes on about a structural versus cyclical diagnosis,” writes Mr Debroy. Why is it sterile? Because, here again, the government is helpless, he suggests. He assumes that structural changes only mean privatisation and changes in labour and land laws. “Privatisation is a process and cannot be rushed through. Legislative changes may be necessary and one may have to go back to Parliament,” while land, the most valuable asset, is typically owned by state governments; it cannot be sold by the Union government. 

Land and labour are partly state subjects and the Land Acquisition Act of 2013 has raised land costs and made infrastructure projects difficult, points out Mr Debroy. The all-India growth rate is a function of what happens in state governments, according to him. The Union government cannot do much. These are straw-man arguments. Structural reforms are much less about privatisation, land, and labour, and more about expanding the scope of private enterprises and allowing them to be more competitive and productive. This should start with removing the enormous frictional cost of doing business and reducing corruption in the states. In a piece in 2015, I asked why the prime minister, who is the BJP’s only vote-getter even in state elections, could not work with BJP-controlled states and show us what reforms could be achieved at the state level. 

So, net-net, according to Mr Debroy, there is no gloom and doom in a 5 per cent growth rate; it will pick up to 6 per cent, but not much more and the ongoing “clean-up” will lead to a “more efficient and more formal economy”, but not overnight. Mr Debroy’s arguments throw very useful light on what you can expect this government to do about the slowdown — something we all are clamouring to know. The answer to that is, underwhelming: Not much.

The writer is the editor of www.moneylife.in | Twitter: @Moneylifers