Indian economy has withstood 8 years of shocks

Thanks to resilience built overtime, at a macro level, we have withstood DeMo, flawed GST, a pandemic and global headwinds

As the Narendra Modi-led government completes three years during this Lok Sabha, and cumulatively eight years since Modi first became Prime Minister in 2014, there have been many articles assessing the government’s performance. Such assessments can be done through the social, political or economic lens. On the former, we can look at the metrics of social mobility and empowerment, social cohesion and social tensions, law and order and feeling of safety, and so on. For the political lens, we can look at stability and evidence of political will to enforce difficult decisions. For the economic lens, which is the topic that this column will cover, it is metrics like generation of jobs, rise in people’s incomes, and price stability. These are the main variables that affect most people’s daily lives.

People care about economic well-being and opportunities to rise, especially for their young ones. The non-income related variables are education and health. One can examine many other indicators that are indirectly related to job-creation and incomes. These could be exports, investment, savings, stock markets, foreign inflow of investment, rising stock of foreign exchange, and so on.

We will not undertake a detailed analysis of how various conventional economic indicators have behaved in the past eight years. That would be left to another column, for another day. Suffice to say that eight years ago, India was emerging from an externally-induced shock called “taper tantrum”, and internally caused stress due to high inflation and perceptions of corruption. Perhaps voters were unhappy with the perceived scale of corruption (remember the three-year movement called India Against Corruption?) and were also worn out with the prevailing double-digit inflation. The “taper tantrum” refers to the phenomenon that the United States had started to “taper” their monetary expansion, leading to an instinctive and massive outflow of dollars from developing countries. Which in turn caused their currencies to crash, and the Indian rupee was one of them. This led to much macroeconomic vulnerability, hence the term victims of the “taper tantrum”.

But beyond the trajectory of variables like GDP, jobs and incomes is the somewhat qualitative aspect of resilience of the Indian economy. This term “resilience” is difficult to quantify, as compared to the number of jobs, or rupees of investment or percentage of growth in GDP. The term resilience refers to the ability of the economy to withstand economic shocks, be they internal or external.

For instance, 1991 was an external shock, caused by the first Gulf War and steep rise in oil prices. Because India’s macroeconomic fundamentals were weak, i.e., very high inflation, very low stock of foreign exchange, negative growth in the industrial sector and very high fiscal deficit, the country almost went to the brink of default. This meant that the economy was not “resilient” enough.

Similarly, in earlier decades, whenever there was an adverse shock from the weather front, like failed monsoons or drought, the agricultural output and incomes would suffer, and so would the economy. This, too, is an example of inadequate resilience. Thankfully, since then, the agricultural sector has become much less vulnerable to weather shocks, thanks to better irrigation systems, integration of markets domestically and internationally, and diversification of sources of income for farmers away from agricultural commodities to animal husbandry and the services economy.

In the past eight years, the economy has suffered major adverse shocks, both internal and external. There have also been positive shocks (one can debate whether these should be called windfall gains, actually). The positive shock was a steep fall in oil prices worldwide, by more than 50%, and they stayed low for nearly two years.

The internal negative shocks were the big crash of a large non-bank finance company (NBFC) called Infrastructure Leasing and Financial Services Limited (ILFS) in September 2018. Two years prior to that was the sudden announcement of the banning of high denomination notes i.e., demonetisation of nearly 86% (by value) of the currency in circulation. And a third internal shock, which was not sudden and somewhat diffused, was the clumsy implementation of the Goods and Services Tax, a major tax reform which made the entire country shift to a completely different tax regime.

One of the more recent external shocks has been the Covid pandemic, which has affected us for more than two years. And now, the war in Ukraine. These are of great magnitude, for they have affected the entire global economy.

Beyond these six shocks, there were several smaller ones, like the severe floods and natural disasters, hurricane-induced evacuation, and so on. There was also another generalised shock, since the Donald Trump presidency in the US, of a receding of globalisation, and fall in the volume of world trade. This negative sentiment can hurt exporting nations like India, which depends on strong exports to aid domestic growth. India also took some “shock” decisions, like walking out of a free trade agreement called RCEP at the last moment in November 2019.

The resilience of the economy is a measure of how well the economy was able to cope with these negative shocks. The short answer is “quite well”. In earlier times, each of these shocks would have caused the economy to flounder. But now, there is sufficient resilience, in the form of diversification of economic activity, safety buffers in terms of stock of food or forex, and well-funded welfare schemes that do not allow the economy to go off the rails. An example of the latter is the free food scheme that has been running for more than two years and has protected a large section of India’s public from food inflation and ensured food security. This has prevented an income and jobs crisis (caused by the pandemic) from becoming a food crisis. The contrast with neighbouring Sri Lanka and Pakistan is quite stark and displays the relative lack of resilience in their respective economies. Resilience is not built overnight but is the effect of cumulative economic policies. On this count certainly, the Indian economy has come a long way. Though there is no cause for complacency, the dark clouds of war and inflation do have this silver lining.

(The writer is a noted economist)