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Economic Doldrum: Real Problems Lie Elsewhere


With the GDP growth plummeting from around 9% to about 6% in just six quarters between 2016-17, economic mismanagement has become a hot button issue, which the Opposition is trying to capitalize on, in electoral terms. Of course, this is nothing compared to the massive corruption scandals and a paralysed economy that this government inherited.

To understand the deeper working of the economy, we need to go beyond the temporary numbers. First some context about what the critics are saying – there has been a scarcity of jobs, an eroding consumer confidence, a hard-hit manufacturing sector and perceptions about low GDP. There is a refusal to acknowledge that this government inherited a weak economy in 2014, plagued by high fiscal and current account deficits and inflation, besides policy paralysis and regular high-scale corruption. These are the structural constraints that won’t go away easily, especially if tough reforms are being introduced. Yet, the slowdown effect of demonetization and GDP is being made to look as if it is a permanent handicap. That it is not permanent should be obvious by the latest economic data, which shows a cooling of inflation, a rebound in exports and in capital goods production.

In any case, investment has been falling since 2011-12, exports have been weak since 2012-13, agriculture has been hit by successive droughts since 2014, industrial growth and manufacturing have been non-contributors for the last several years. Similarly, it is well-known that the contribution of agriculture to our GDP has been extremely weak for the last two decades, and rural distress has been a permanent feature alleviated only by temporary, seasonal scenarios and pushes like MNREGA – rural growth witnessed a reversal in 2013-14, not to be revived again. This is set to get worse with erratic weather patterns due to climate change and inefficacy of even best cushioning policies to address farm distress.

Economic uptick, due to favourable crude prices during 2014-15 and 2015-16 despite all these factors, was an exception. Yet, the slowdown in economic growth from the temporary state of exception – after the tapering of good oil prices – is being set as a standard of judgement, by discounting everything, right from the “temporary” effects of the GST and demonetization and the permanent structural constraints that have held back economic growth for the last six years.

At the same time, our service sector has grown consistently since the 1960s and constitutes about 70% of the economy. What sustained India’s growth in the post-2008 crisis period (2010-14) was mainly the growth in the service sector, which grew at a compound annual growth rate of 8.6%, clubbing India with other fortunate emerging economies like Brazil and China during the post-crisis period.

This sector has not been a driver of employment in India and China, even though it contributed to 2/3rd of employment in the top 15 service sector economies. Informal economy largely sustains our employment. It is, therefore, confounding that for political reasons, “job creation” is suddenly being touted as the immediate ‘single biggest challenge’ before the government. How can it suddenly be an “immediate” challenge, when stagnation in jobs has been a part of the economy for nearly two decades? It was as much a challenge then as it is now. Change of time or government does not take away from the necessity of jobs. To, now, frame the issue politically as an emergency reeks of political expediency. Small and medium enterprises that generate most jobs have been hit by the temporary effects of demonetization and GST – obviously some effects on jobs will be visible. But it is too early to know if the deteriorating condition is not remediable.

The economy has many cogs and cannot work through the good wishes of top leaders alone – account has to be taken of everyone right from the top leadership to the local-level officer, and of course, the pervasive problem of underhand deals and corruption at all levels, which cannot be controlled unless there is micromanagement or change in people themselves. ‘Project execution’ under big ticket reforms like Make in India, skill development, defence deals etc. has been stuck because of lethargy of entrenched bureaucracies, politics over land acquisition and an entrenched psychology of moral and material corruption in small sarkari offices and the people alike. Public utilities, mining and defence procurement have, after all, always been plagued by corruption and bureaucratic whims.

When the victim does not get the expected shares or fruits out of this mutually endorsed arrangement of corruption, there are loud complaints, otherwise everyone is ready to go along with the flow. The economy is dependent on expectations and sentiments and these, in turn, are inclined towards the most selfish and surface view of things. Any reform that can disrupt such a tendency or ask for even a miniscule sacrifice on the part of the selfish economic agents is naturally decried – although people’s support for demonetization, last year, confounded the economists by thwarting this instinct. Obviously then, companies are not investing and are adopting a ‘wait and watch’ approach – after all, most of their sources of illegal and easy finances have been throttled.

Poor private investment growth – with its slowdown showing no signs of a rebound since the UPA years – is a testament to this psychology. A lot of its thriving contribution to the economy has come from illegal, cross-border flows or financed through shell companies within the country or by over-invoicing. In 2010-11, it was speculated that nearly $40 billion of such money came to the aid of big companies in India.

With the government cancelling registrations of lakhs of shell companies, making the tax structure stricter, reforming the corrupt process of natural resources auctions, making the banks hawkish to lend to troubled promoters and leading a brutal crackdown on illegal flows in general, many of the traditional avenues of private investment have been wiped out in one go, compelling private capital to stick to ‘normal’ routes of making profits. Of course, we can always debate the details of whether the government did this prudently or irrationally, but the larger picture is difficult to fault. Temporary fixes that are being debated can range from hiking government spending, to reducing the interest rates to providing some leeway to private investment, but these are no panaceas for the deep-rooted systemic corruption which had been contributing to economic growth till now.

When the system itself was based on corruption at every level – call it the survival instinct of the common man – due to its endemic moral turpitude, the results of a cure will be taken as bad and painful. This is especially so when the easy factors of survival are suddenly removed, while the corruption – an inherent moral turpitude that cannot go away till a change in human consciousness – continues to persist in different forms. This is what the economy is witnessing today, but politics and sweeping expert judgments have led to an even more jumbled diagnosis.

From all available evidence, it is clear that the state of the economy has been going down for the last two decades, people are becoming worse-off and artificial and illegal factors have sustained growth. The reason can safely boil down to expanding greed. Temporary hard-hitting reforms being tried by this government – though laudable in intention – cannot take us very far. Yes, they have throttled illegal avenues to a great extent, but corruption at every level still continues, despite best efforts. And this is because even the best of reforms cannot reform our psychology and consciousness – the inevitable greed in us will raise its head and find a way out of whatever systems the government erects.

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