We must focus on building human capital

The macroeconomic winds are blowing favourably as we enter the New Year. The stock markets are at an all-time high. Share price indices are up nearly 60% from their lows of March. The stock market is supposed to be a harbinger of the economic times to come, and clearly it is indicating a strong revival. Liquidity in the banking system is more than ample. The interest rates are at multi-decadal lows.

The gap between Indian and Western policy rates is the lowest it has been in a long time, coupled with inflation rates above 6%. What this means is that for borrowers, the real interest rates are close to zero or negative. This should bring cheer to the government, which is the biggest borrower in the system, or to those contemplating taking a home loan, or those businesses planning to raise loans for expansion.

The September-ending quarter showed spectacular growth in corporate profits across many sectors. The lead indicator, called purchasing managers’ index, has been expressing bullish expansion for four months in row. If all this business confidence manifests in a robust rise in hiring and recruitment, and visible job creation, then that will give a boost to consumer confidence as well. Business and consumer confidence build on each other.

So, a positive virtuous cycle would be greatly welcome. The finance minister has promised a budget like never before, which hopefully is the signal of a big spending stimulus. Spending on infrastructure will benefit allied sectors like construction, and of course employment.

And yet, it is worth pointing out the grim side. Firstly, despite an anticipated sharp V-shaped recovery next year, the fact is that this year has been a recession. We are going to have a reduction in GDP and national income by about 8-10%. A sharp recovery next year, of say 10-12%, would still mean that over two years, the net income growth is barely above zero.

Secondly, due to measures like the harsh lockdown, and the earlier slowdown of four years, the growth potential of the economy has possibly slipped closer to 5%. So, any growth above that is sure to cause overheating. Hence, we will have to watch out for inflation, which can hurt household budgets and business sentiment. As such for the past 12 months, the consumer price index-based inflation rate has been above 6% (except for being marginally lower in March).

This is above the tolerable band of the RBI. Sooner or later, the RBI, which has been extremely accommodative in its monetary stance, will have to start tightening money supply, and that will affect growth adversely. Thirdly, there has been a lot of forbearance in tolerating credit indiscipline. So, after a prolonged moratorium, and restructuring of stressed loans, it is possible that the day of reckoning is not too far for India’s banking sector. Be prepared for a nasty spike in the bad loan ratio, which will necessitate substantial capital infusion by the government. Fourthly, and most importantly, there is the silent and deadly impact on education and health.

The Human Development Report 2020 out this week shows India’s rank as 131 out of 189 countries, a slip of two ranks in the past two years. Sri Lanka is at 72, China is at 85. More worryingly, only one-fifth of India’s labour force can be called ‘skilled’. That low percentage puts India in the same league as Sudan, Cameroon and Liberia. All our South Asian neighbours have a higher percentage. India also has 42% of its population in the vulnerable category, ie., just above the bare minimum poverty level of $1.9 a day. The pandemic, the loss of livelihoods or illness in the family can easily make that population fall back below the poverty line. The pandemic and lockdowns have severely affected the informal sector and small and micro enterprises.

The worst impact has been on children. The latest national family health survey (NFHS 2019-2020) shows high levels of child stunting and wasting. These are respectively lower height and weight for the child’s age. It reflects chronic undernutrition and malnutrition. The more worrying aspect is that either the stunting or underweight aspect has gone up in 14 out of 17 states in India.

This has happened even as access to sanitation and safe drinking water has improved. Clearly, this is the result of a slowing economy and loss of livelihoods. For instance, during the lockdown, since schools were closed, so were the mid-day meals. For many kids from poor or nearly poor households, that was the only meal they got during the whole day. There have also been spending cuts in child nutrition schemes due to fiscal compulsions.

The Covid-19 pandemic has affected the education of 290 million people across the country. The Annual Status of Education Report (ASER) states that nearly 5.3% of children in the 6-10 years age group have been pulled out of schools. Many children have been pulled into supporting their family’s livelihood. Similarly, even among school-going children, over 38% had no access to smartphones.

So, online schooling has bypassed a large section of students, partly because they had no access or could not afford digital access. Digital inequality has worsened, and is most visible in education. Similarly, in healthcare too, the high priority to Covid-19 treatment has meant that patients of diseases like HIV, cancer and renal disease who need regular access to hospitals have been denied treatment or have faced immense hardship.

Thus, while the economy may be on a revival path, the human capital base of the economy needs substantial rebuilding and investment. Both in children’s education and overall healthcare, governments at all levels have to increase their financial and resource commitment. Even if that means a higher fiscal deficit, it is worth noting that spending on human capital is an investment for the future. India’s public spending on both health and education is below global benchmarks, and their enhancement must be given high priority post-pandemic.

(The writer is an economist and Senior Fellow, Takshashila Institution)

(Syndicate: The Billion Press)