Economic recovery will be not be easy

It is a fact that was evident to every India watcher except Prime Minister Narendra Modi and his colleagues in the government, but it has now been declared by the Reserve Bank of India in its Annual Report of 2019-20: The economy had slowed down through 2019 and much before the outbreak of Covid-19 and the national lockdown from March 25 onward.

The RBI states the fact in as bland a fashion as only a central bank can: “Over the course of the year (2019), the weakening of the growth momentum became increasingly broad-based geographically from which individual countries, including India, had no escape.” It takes note of the fact that global economic growth in 2019 was 2.9% and it was the lowest since 2009. And India was facing the brunt of it as well: “The year 2019-20 (April-March) also marked India’s lowest gross domestic product (GDP) growth since the global financial crisis (GFC).”

More interestingly, the report plots the growth cycle: “Going back in time, the Indian economy had experienced a V-shaped recovery from the GFC but this stimulus-driven upturn failed to sustain: average GDP growth slumped from 8.2% in 2009-11 to 5.3% in 2011-13. From 2013-14, a cyclical upswing took hold and it turned to be one of the longest in the post-independence period, reaching 8.3% in 2016-17. Ahead of the cyclical global downturn which commenced in 2018, India’s real GDP growth showed signs of slowdown during 2017.”

Why are these facts crucial? They are crucial because Modi and his colleagues had been loudly messaging ever since they took office in the summer of 2014, that Indian economy had picked up growth the moment they had come into power. The statements of Modi and then finance minister Arun Jaitley will reveal that they believed sincerely that the economy had started to function well because of Modi’s and that of the BJP’s predictable victory in the 2014 general election.

The message was that the political victory was an economic booster. The sober truth as revealed by the bank is that the economy has done relatively well in the first three years of Modi’s first term in office because of the cyclical upswing in growth.

The Modi government believes that its policies are driving economic growth when the fact is that there is no discernible link between the two, and the growth that had happened was due to the cyclical factor. The government would have to make a realistic assessment of its economic policies, and they must be able to separate rhetoric from reality.

The RBI report observes that agriculture had done well in 2019, but the MSMEs had been in trouble because of structural issues like lack of financial support, that manufacturing has been a laggard, and that it is only the services sector which had kept the economy going, and that this sector alone provided 44.4% of employment in the country.

There is little doubt that innovative policies could help in turning the economy around but things like Insolvency and Bankruptcy Code (IBC), demonetisation, and Goods and Services Tax (GST) have not so far served as economic stimulus whatever else their virtues may be. The NITI Aayog had not even given a realistic assessment of the state of the economy and what needs to be done to push it further in the next decade.

The NITI Aayog’s rickety predecessor, the Planning Commission, at least used to do the clerical exercise of number-crunching, and what demands would be made on the economy in terms of energy, education, health system to meet the needs of the growing population. Today, the government has no real numbers to fall back upon to reset the goals and targets. Even for programmes like financial inclusion through Jan Dhan Yojana, total electrification or total sanitation, credible statistics are lacking to assess their effectiveness.

The government then will have to abandon the two myths it has created for its six years in office. First, that the economy was performing extremely well from 2014 to 2019, and second, that the good times came to an abrupt end because of Covid-19 – an ‘act of God’ as Finance Minister Nirmala Sitharaman put it. The record shows that the first three years, from 2014-15 to 2016-17 were the good years because it was part of the upward phase of the growth cycle, and that from 2018 onward the global economy slowed down and so did India’s.

The post-pandemic recovery will be hard because the global economy will have to come out of the negative territory before India can hope to benefit from it because Modi’s Aatmanirbhar or self-reliance orientation is quite dependent on India improving its exports while restricting the imports, an old-fashioned economic thinking which might be difficult to implement if the major economies, including that of India, were to erect tariff barriers.

Agriculture is the only sector that has shown positive growth in the midst of economic gloom but it is not in a position to carry the burden of turning around the economy as a whole on its shoulders. The sale of tractors and two-wheelers had shown signs of growth. But it is too weak for sustained growth. And the fallout is limited to the upper, and middle, income farmers.

The rest of the rural populace, majority of them distressed migrant labour, cannot sustain rural consumption. The government’s own ability to spend is getting constrained due to the fall in tax collections – which was inevitable – and it may not be able to continue for long to undertake cash transfers – which were meagre in themselves given the magnitude of the economic breakdown – to holders of Jan Dhan accounts, including women, old and disabled people, and farmers.

Resumption of economic activity is a way out of the impasse. The government has to focus more on pandemic management through Covid-19 protocols and monitoring them to facilitate resumption of economic activity.

(The writer is a political commentator based in New Delhi)