Through a crystal ball, darkly

Likely slow economic growth in the medium term will be bad for jobs, social harmony and defence capabilities

In my article last month (“Recovery: The long hard road ahead”, Business Standard, September 10) I had ended with the conclusion “average, medium-term growth higher than 3-5 per cent looks a bridge too far. The economic, social and strategic consequences will be profoundly negative”. By medium term I was referring to the five years beyond 2021-22. It is worth spending a little time speculating on the nature of these possible consequences.

On the economic side, the most worrisome dimension relates to employment and unemployment. Despite fairly high economic growth at nearly 7 per cent per year, India’s employment-unemployment profile had worsened considerably between 2004-05 and 2017-18, especially after 2011-12, according to official National Sample Survey (NSS) data. The rate of open unemployment had tripled to 6 per cent, the youth (15-29) unemployment had also tripled to an unprecedented 18 per cent, the labour force participation rate (LFPR, is the ratio of those employed or seeking employment to the working age population) had dropped from 64 per cent to under 50 per cent and, most depressingly, the LFPR for females had plummeted from 43 to 23 per cent. On all these ratios, India compared very unfavourably with her Asian peers, such as China, Indonesia, Vietnam and Bangladesh. Fundamentally, 13 years of robust economic growth up to 2017-18 had been far from job-full. Successive governments had, through their unsound economic policies, squandered a great deal of the much-hyped “demographic dividend” of a large, youthful population.

The more recent data from CMIE surveys show that slowing growth since 2017-18, followed by the Covid-lockdown shock, had reduced the LFPR by another 3 percentage points or so by the middle of 2020-21 and cut the proportion of working age population actually employed by around 4 percentage points to below 40 per cent. Thus, out of a working age population of about a billion, less than 400 million actually had employment.

With the anticipated slow economic growth after 2021-22, especially in relatively employment-intensive service sectors and low-end manufacturing, the current massive jobs crisis in the Indian economy is likely to persist and could even worsen in the medium-term. This would be prolonged tragedy not just from the livelihoods perspective but many others.

Slow or negligible growth in jobs and incomes would likely sharpen existing social and political stresses in respect of tensions between religions, castes, classes, states and even genders. Managing India’s unparalleled diversity has been a huge challenge for all governments since Independence. Slow economic growth will make those challenges that much greater. Just as a rising tide lifts many boats and usually softens frictions between diverse groups, the persistence of slow growth and stagnant job opportunities will heighten these tensions, raising the probability of unpleasant social and political eruptions, with unpredictable fallouts. Problems of law and order and crimes against women could well worsen.

Slow growth will likely exacerbate already high tensions between the Central and state governments. There will be strains on the federal structure and institutions, which will need to be managed through wise statesmanship on all sides. Otherwise, matters could get ugly.

Illustration by Binay Sinha

Slow growth in the medium term will reduce India’s global profile and clout in important ways. Geopolitics is a harsh business. Our robust economic performance in the 1990s and the 2000s was the crucial ingredient in our rise in global affairs, which could be skillfully deployed by our leaders and foreign policy practitioners to enhance our geopolitical profile. A tepid Indian economy can be expected to have the reverse impact on our international standing and limit our geopolitical possibilities. Other nations tend to be more friendly and accommodative when a country is strong and prosperous. The reverse is also true. It is no accident that the civil nuclear deal between the US and India and the ensuing Nuclear Suppliers’ Group (NSG) waiver, that lifted the embargo on India to participate in civil nuclear trade, happened when the Indian economy was booming. Eight years later, India’s application to the NSG for membership did not find favour.

India lives in a tough neighbourhood, with long-standing territorial and other disputes with our neighbour in the west and the rising super-power to our north. With slow economic growth in the medium term, India will find it hard to fund the levels of armed forces, modern weaponry and equipment necessary to successfully deter or counter hostile actions by China and Pakistan, possibly acting in concert in particular areas. Alliances with friendly nations like the US, Japan and Australia can certainly augment our defence capabilities, but only up to a point. It is highly unlikely that any of these nations would commit armed forces to support defensive military actions by India in any combat roles. So “Aatmanirbhar” has to remain the guiding principle in our defence capabilities and postures. But for that we need a stronger economy and more rapid economic growth. Until we can achieve that our defence and strategic needs may not be adequately fulfilled.

In the short run, our ratio of defence spending to GDP has to rise from the low levels they have fallen to. The challenge will be to secure these vitally necessary increases, without significant damage to those categories of government spending that are most supportive of economic growth. That means there will have to be reductions in so-called “non-essential” and “populist” expenditure categories, such as large allocations for subsidies for major areas and unsustainably high real wage and salary levels of public employees. These will pose tough political choices to the government of the day.

Clearly everything would be easier, if medium-term growth were higher than the 3-5 per cent I expect. But that will require greater discipline in fiscal, monetary and financial policies and a programme of sustained strong economic reforms. The government’s recent reforms in agricultural marketing and labour laws are promising. But a great deal more needs to be done. In particular, we need to target growth impulses from a recovering world economy, especially in Asia. For that we need to reverse our protectionist policies of the last three years and recognise the benefits of membership in the Regional Comprehensive Economic Partnership. Many decades of development experience strongly suggest that sustained high economic growth requires an open economy with rapid export growth. Without an open economy rapid export growth will not happen. And without that, nor will fast overall economic growth.

The writer is honorary professor at ICRIER and former chief economic adviser to the Government of India. Views are personal