Time for tough questions on the Indian economy

More than half a century after the economist-philosopher E F Schumacher talked of “economics as if people mattered”, India is caught in an economic story that is increasingly about numbers bigger than the people they are meant to serve.

As 2023 drew to a close, Prime Minister Narendra Modi reiterated in Parliament that India will soon become the third largest global economy.

The Union Minister of State in the PMO Dr Jitendra Singh repeated the promise, projecting India as the world’s 3rd largest economy during Modi’s 3rd term as PM, and marching on to become the No. 1 economy by 2047.

The claims of a march to global superstardom come, ironically, not at a good time, even when looked at from a numbers-only perspective.

To begin, in the near term, growth is down and inflation is up. GDP growth was 9 per cent in 2022-23 H1, fell to 8.2 per cent in 2023-24 and further slipped to 6 per cent in 2024-25 H1. GVA (Gross Value Added), which is growth on the supply side, was 6.2 per cent in 2024-25 H1, down from the 8 per cent-mark in the same period for the previous two years.

Inflation (CPI-combined) crossed the targeted upper threshold of 6 per cent in October 2024, with food inflation at an alarming 9.69 per cent. Food inflation this close to double digits was at a 14-month high. CPI inflation came down to 5.48 per cent in November 2024, with continued high food inflation at 8.2 per cent.

Largely, inflation has been on a higher trajectory since 2020, above the mandated upper target of 6 per cent for as many as 25 months in the last four years.

It is plain that the economy has had a bumpy ride in the year gone by, with many red and yellow warning lights. The hope being expressed is that the ride will pick up pace, an optimism reflected in the statement of the newly-appointed RBI Governor Sanjay Malhotra: “…prospects for the Indian economy are expected to improve after the slowdown in the pace of economic activity in the first half of 2024-25.”

How do you “improve”? Here comes the clamour for a rate cut as a panacea, but since food inflation is alarmingly high, a rate cut must come by ignoring this fact. Yet, food inflation hits the poor the most, so this approach translates to ignoring the poor while keeping the engine going along the lines of failed trickle-down theories. As the illustrious former RBI Deputy Governor, the late Savak Tarapore once remarked: “(High) food inflation just cannot be wished away as a supply side problem… it gnaws into the vitals of large tracts of the population.” In November, Minister for Commerce and Industry Piyush Goyal said it was “absolutely flawed theory” to consider food inflation when deciding on bank interest rates. The call for excluding food inflation while working the central bank’s inflation targeting framework rather than expressing alarm at galloping food inflation ignores the simple wisdom that the common man suffers first from food inflation, not from core inflation.

Is the growth equitable?

Keeping to first principles, lower rates should push credit delivery, drive increased investment, see more projects take off and deliver growth – the sign of a nation on the move. Yet, these first principles don’t translate to practice when the signals going out are contrary to the idea of growth that is fair, balanced and equitable. Regulatory frameworks must work for all sides and all parties. Good governance is a prerequisite for good growth. But the Indian economic story has been marked by weak governance and strong signals emanating from the top that all business houses are not created equal.

The continued inaction on allegations against the house of the Adanis, the loss of moral authority of the premier regulator the SEBI, with the Chair personally embroiled in connected allegations, the political donations that came through the opacity of electoral bonds, since struck down by the Supreme Court, the selective use of the investigative agencies, and the willingness to use strong-arm tactics to silence critics are all part of a philosophy of command and control. These signals sit at odds with the idea of free market entrepreneurship and investing.

Not far from the headlines of laudatory mentions on growth is the story of a per capita income that keeps the majority of Indians away from the benefits of the claimed growth success. Coupled with a pervasive joblessness that shows up in events that are eye-popping, like the stampedes when lakhs queue up for a limited number of vacancies, it speaks of a nation divided, its businesses subdued, its citizens reduced to searching for non-existent jobs.

Economists will tell you that good growth and price stability are the two pillars of a robust economy. These work on the backbone of financial stability. In this context, note the accolades being claimed over the headline statement that bank non-performing assets (NPAs) have been brought down in the system. It is indeed true that NPAs in the banking system have fallen. To quote the official statement titled ‘Public Sector Banks: A Resurgent Force’: “The Gross NPA ratio of Public Sector Banks (PSBs) has witnessed a remarkable improvement, declining to 3.12% in September 2024 from a peak of 14.58 per cent in March 2018. This significant reduction reflects the success of targeted interventions aimed at addressing stress within the banking system.” But how has this reduction been achieved?

There is an increased tendency to clean the books with write-offs. For example, reduction in Gross NPAs during 2023-24 for all public sector banks was ~Rs 1.73 lakh crore, of which as much as ~Rs 1.13 lakh cr were plain write-offs. This tendency will need some probing if financial stability is not to be reduced to a joke. This is a cautionary tale as we step into the new year. Governance and economic management cannot be reduced to headline grabbing for long.

(The writer is a journalist and faculty member at SPJIMR;
Syndicate: The Billion Press)