Why optimism on India's present does not extend much beyond visible horizon

Structural unemployment problem, social unrest, poor state of education and health care, and nutrition deficits among children - tomorrow's workforce - temper optimism on India, writes T Ninan

There was a time when well-meaning observers of a struggling Indian economy used to say that they were short-term pessimists about the country, but long-term optimists. Now there may be an unexpected inversion of that view. Many people have become short-term optimists but long-term pessimists. You could argue that if we take care of a series of short terms, the long term will take care of itself. But consider the argument.

The Indian economy is manifestly an out-performer just now. It is the fastest-growing large economy (as it was briefly once earlier) at a difficult time when the Japanese and British economies are shrinking, as was the American economy till the latest quarter, and the euro area is flat as a chapati. India also has lower inflation than the leading economies of the West. And on the trade front, India happens to have a lower current account deficit than either the US or the UK. For good measure, the rupee has weakened less against the dollar than other leading currencies. So the story goes beyond growth; in terms of economic stability too, India is doing better than the other large economies — which must be a first.

China, used to putting India in the shade, has lost momentum. Its growth is projected to be half India’s, and it is beset with structural problems, notably in the financial sector. India knows from experience how long it can take to repair a damaged balance sheet. Japan, meanwhile, is a different kind of outlier, with low inflation and a long-term current account surplus; but it is devoid of dynamism.

It goes without saying that India is at a different level of development from that of these countries, with a very much lower per capita income. But if one is looking to the near-term future, economic growth could be twice the global average, even as the Reserve Bank is focused on bringing down inflation, and capital inflows plus foreign exchange reserves are more than enough to deal with the current account deficit. These contrast with the spectre of recession, which stalks the major Western economies, when the UK’s decade-long record of mis-steps has left it with falling standards of living and painful options, when Chinese growth rates might slip below the global average, and America is hobbled by its politics.

Domestically, a busy-bee government is constantly at it with new initiatives, a determined use of incentives to create a manufacturing hub, and unprecedented investment in the transport and telecom infrastructure. Complement such focused effort with its performance on the international stage: The deft set of responses to the Ukraine crisis, constant upping of its game for tackling climate change, and an influential role at this week’s G-20 summit. So what you get is the sense of a country that knows what it is doing, in notable contrast to some wealthier ones.

So why is it that, for many observers, optimism about the present does not extend much beyond the visible horizon? It boils down to familiar issues, the most important being a structural unemployment problem which is hard to tackle, and which carries within it the roots of social unrest. Allied with this is the poor state of education and health care, and the nutrition deficits that show up in extensive stunting and wasting among children — tomorrow’s workforce. It needs no elucidation that, with such drag factors operating, a country cannot expect to maintain or improve its speed of ascent. There is also a third set of issues, linked to the limited range of systemic safeguards that exist to block pilot error.

The long-term pessimism of observers worried by such issues is dismissed by those aligned with the government’s political and social goals. These latter remain supremely confident that this is India’s decade because the factors influencing the current upswing are not transient, and therefore that “upper middle-income” status ($4,000-plus per capita income, against $2,400 currently) is within reach. But it is equally true that the system’s controls have to be tweaked differently to achieve better balance and acceleration than hitherto. Without that, systemic drag will increase and one should expect turbulence beyond visual range.