Reflect: Unmet aspirations

Written by rajesh shukla | Rajesh Shukla | Updated: Sep 17 2013, 10:53am hrs
With growth slowing, the number of aspirers who will move to middle class status will fall dramatically

That the next few years are extremely crucial for the Indian economy hardly bears mentioning. Given the state of the economy, the extent of indecisiveness plaguing the system and the unstable, convoluted political environment, it is not easy to predict how the coming years will unfold. One can only guess which way the winds will blow during this tumultuous period. Although one can argue that there is a unanimous consensus across the board that the slowdown in growth must be arrested, it is quite likely that, in the immediate future, political compulsions will dominate over sensible growth-oriented policy decisions. Inaction or worse fiscally profligate populist measures heighten the risk of us being stuck at what is now been referred to as the new normal of 5% to 6% growth.

Politics will, to a large extent, play a crucial role in determining how the next few years will play out. With the threat of elections looming large, a scandal-plagued UPA is desperately trying to change the narrative. The recent efforts to kick-start the reform process and bringing food security ordinance can be seen in this respect. While reforms, however contentious, are welcome, much more needs to be done to undo the damage that has been caused to the India growth story over the past few years. Reforms, especially those aimed at factor markets, land and labour, and more so governance and fixing accountability, need to be among the top priority.

So, assuming that the current government will complete its full term and that elections will be held in 2014, how will the immediate future unfold Will household consumption, which forms the backbone of the Indian economy, remain stable or will households cut back in these times of uncertainty Intuitively, slower growth coupled with an uncertain political climate implies lower levels of corporate investment, which will adversely impacts job creation and income growth. This implies that the extent of incremental increase in the purchasing power of households will be limited. Additionally, by reducing the opportunities available, lower growth will limit the ability of households to move up the distribution. The number of households who, for example, could have moved from the ranks of the aspirers to the ranks of the middle class will be adversely affected.

The other factor that will impact household demand is interest rates. The reluctance of RBI to lower interest rates even during such a severe slowdown implies that inflation continues to pose a serious threat. If inflation does not moderate, which is less likely, then there is a reasonable chance that monetary policy will continue to be restrictive and will adversely impact aggregate demand. If, however, inflation does fall and there is credible action on part of the government to reduce its fiscal deficit, then there might be enough room for RBI to lower rates and provide a boost to the economy.

The other issue, although it needs to be examined in the broader context of the political economy, is that of cash transfers. While the policy to move to cash-transfers-based subsidy regime based on the UID platform is being touted as a game-changer, the move, while offering hope, should not be seen as a panacea for all inefficient delivery mechanism. Additionally, one must also bear in mind that, by all accounts, the forthcoming budget will be loaded with populist measures, which could effectively lead to more transfers to households.

However, while we focus on the short-term, one mustnt forget the reforms needed to provide a concrete foundation for maintaining our long-term growth trajectory. Central to the prospects of the India growth story is the much talked about demographic dividend. Population, which was considered to be the bane of our existence in times of scarcity, has transformed into a boon, waiting to be mined. However, statements such as India will provide the world its labour force gloss over the fact that the absence of reforms could prevent us from realising this dividend. While it is a certainty that Indias economically active working population will get younger, whether we reap the benefit needs to be seen. An unskilled labour force unable to compete globally, coupled with restrictive policies on land acquisition and labour contracts, threatens to erase the gains that can accrue from this dividend. While policies directed towards skill development and enhancing the opportunities available for good quality education are needed to be at the forefront of the reform agenda, one must not forget that they need to be implemented in tandem with policies to liberalise factor markets.

In order to maintain economics for sustainability and quality life, social justice and ethical values must be reintegrated into Indian consumer economics, thus restoring a sense of balance into the economic system that ensures that Indian communities will benefit and thrive. India, today, stands at a crucial juncture, where economics is inextricably intertwined to politics. The risks of policy inaction have never been greater. One hopes that the political leadership musters the courage to implement tough decisions that are essential for us to achieve our potential.

The author is professor, Institute for Human Development