India is sacrificing growth. It needs to stop

By Andy Mukherjee

Five years ago, policymakers in New Delhi were in denial about a funk in wage incomes so deep that Indians were skimping on 7 cent cookies.

Much has changed since then, but a lot hasn’t. Loans against gold are surging at a 50 per cent-plus annual pace, a tell-tale sign of desperation among lower-income borrowers struggling to keep their heads above water by pledging what is often their only marketable asset.

The recovery from the pandemic — fueled by pent-up demand, a surge in stock-market wealth and a big expansion in household credit — is exhausted. In the absence of meaningful private investment and job creation, India is slipping back into its pre-Covid-19 rut, and its economic czars are once again publicly refusing to acknowledge the slowdown, blaming a long and busy election season for tepid public spending.

Privately, though, they seem to be worried enough to abruptly shuffle a key decision maker. Sanjay Malhotra, a top finance-ministry official, will replace Reserve Bank of India Governor Shaktikanta Das Wednesday. The change will open the door to a rate cut and “correct the central bank’s restrictive policy, partly responsible for a severe slowdown in recent quarters,” according to Bloomberg Economics.

At 6.5 per cent, the benchmark interest rate is exactly where it was when Das took charge of the RBI in late 2018. He started slashing borrowing costs soon after. But there are differences. Back then, it was Indian banks’ bad-loan pile, the biggest in the world, that was threatening to overwhelm the economy by causing blowups and panic in the credit market. This time around, the problem lies not in financing, but the nature of the growth itself.

While the economy is a fourth bigger now in inflation-adjusted terms than it was before the coronavirus outbreak, it’s still missing a lot of the output that would have been produced had gross domestic product just kept chugging along at its former rate.

That production failed to materialize because, among other things, banks found consumer credit to be a more lucrative alternative to corporate loans. They shoveled enough of it to prop up demand for a while, but the loans did little to boost capacity. Growth in manufacturing output has collapsed to just about 2 per cent, from 14 per cent a year earlier, after adjusting for price increases.

Inflation, which spiked around the start of Russia’s war in Ukraine, has never been fully tamed. As a result, short-term interest rates are 150 basis points higher than in 2019, and — because food is still very expensive — the start of a monetary-easing campaign has been delayed. Fiscal policy, meanwhile, is pressed into the service of keeping 800 million Indians on free rations, a pandemic-era safety net being buttressed by state politicians with cash handouts to disadvantaged women.

But the persistent GDP sacrifice, too, deserves attention. It isn’t merely a theoretical construct. For the first time in many decades, more urban migrant workers went back to their villages and became a part of the agrarian workforce than came out to seek better opportunities in cities. A little over 46 per cent of the population was in farming last fiscal year, compared with 42.5 per cent in 2019.

India’s abysmal rate of women’s workforce participation has improved sharply, but that’s only because a lot more of them are self-employed now. Helping out on the farm or in tiny family-owned enterprises isn’t exactly producing steady cash earnings. Even as a good harvest lifts prospects for the rural economy, a funk in white-collar jobs in industries such as code-writing is weighing on urban demand. It also explains the surge in loans against jewelry, and why unsold cars are piling up at dealerships.

The slide must be taken seriously. Back in 2018 and 2019, GDP growth had slumped to just 3 per cent from 9 per cent. Yet New Delhi pooh-poohed the suggestion that there was something wrong with the economy. This time around, too, they appear to be in denial.

For the most recent quarter, expansion of output has slowed to a little over 5 per cent, from the 8 per cent-plus pace it was hitting for much of 2023. And even now, the policy debate is stuck in banalities. A group of ministers has proposed a 28 per cent tax on readymade clothes that cost $120 or more.

The garment industry is warning that 100,000 jobs will be lost if the middle class cuts back on purchases or more affluent Indians started picking up shirts on their next overseas trip. Meanwhile, the launch of an internship project in top 500 companies, one of the biggest government initiatives after an election that showed joblessness to be an urgent concern with voters, has missed its Dec. 2 start date.

In early 2022, the central bank was blithely ignoring the buildup of inflation that was starting to pinch consumer-goods companies. This time, the RBI has bungled its growth forecast — projecting 7.2 per cent expansion for the fiscal year ending in March until it became impossible to defend that unrealistic figure. The central bank lowered its estimate to 6.6 per cent last week, while raising projected inflation slightly to 4.8 per cent.

Yet the big discussion within the country, divorced from the grim reality of the present day, is about whether India will be a developed country by 2047, the centenary of its independence from British rule. Recouping the income sacrificed in the past five years doesn’t seem to get the emphasis it deserves, although that’s where authorities should be expending their energy — not on tinkering with taxes on shirts and trousers.