We live in a strange world where the President of communist China speaks eloquently on the virtues of free trade and globalisation and the President of capitalist United States speaks derisively of trade agreements, WTO, free trade, climate change and the Paris Accord!
"After several years of downgrades to India's medium-term growth outlook, we believe upgrades are now likely.
A few days ago, the Chief Economic Adviser said “India may record a current account surplus in 2020-21”. He also pointed out that in Q1 (April-June 2020) “we had a surplus of USD 19.8 billion and even if we do not see that kind of performance in subsequent quarters, we would still likely have a current account surplus”.
The CEA has described the phenomenon as ‘under heating’. It means that demand has collapsed and the so-called stimulus packages (paltry and poorly targeted) of the government have failed to revive demand — at least, so far. Here is a good metric of demand: the Plant Load Factor of thermal plants, according to the power minister, is expected to touch only 56.5 % in 2021-22. Despite ‘under heating’, retail inflation has risen to 7.61 % and food inflation to 11.07 %, placing a cruel burden on the poor.
The silver lining is agriculture. We had a bumper rabi crop (2020) of 148 million tonnes of food grain and the estimate of the kharif crop (2020) is 144 million tonnes. Tractor sales are estimated to grow by 9 % this year. According to FMCG companies, rural demand is better than urban demand. Yet, rural wage growth rate has been muted.
Therefore, the picture is mixed, with more grey than green, but that should not distort our macro economic assessment. The overall economy is in bad shape, policy making is confused, and the claims of a revival are exaggerated. The real benchmarks are jobs and wages/income.
According to the CMIE (since government numbers are no longer available), the current unemployment rate is 6.68%. Read that along with the labour participation rate which is a dismal 41% and the female labour participation rate which is 25%. Only 11 out of 100 employed are women; but of 11 jobs lost, four are women’s. Between September 2019 and 2020, about 11-12 million people dropped out of the labour force.
Bias towards rich
‘Under-heating’ of the economy is as bad as ‘over-heating’. When over-heating happens, there is inflation, interest rates are increased to dampen demand, firms are encouraged to step up production and, if there are well-functioning markets and corrective measures are taken, the equilibrium between demand and supply is restored. What do we do when there is ‘under heating’? This is a new challenge for India and one that the present government seems incapable of tackling. The reason is its inclination to pamper corporates rather than help the poor. If I may give one example, a ` 1,45,000 crore bonanza in the form of tax cuts was given to the corporates. That money ought to have been given to the poor in the form of free rations or cash transfers. Corporates used the windfall to de-leverage and shore up their cash holdings. They did not invest. If the poor had got the money, they would not have starved — as they did for many days in the week for nearly three months. They would have bought food, milk, medicines and other essential goods and services and boosted overall demand.
The current account is in surplus because exports exceed imports, though both are less compared to the benchmarks of the past. The effect of low trade volumes, a current account surplus and an appreciating rupee can be devastating on the economy. The first casualty will be jobs. The invisible macro economic effect will be that scarce capital of India will be invested abroad.
Imagine a developing country, that is desperately in need of capital, actually exporting its capital to other countries to be invested there! American businesses must be laughing all the way to the bank.
Self-reliance or autarky
I sincerely hope that the proponents of Atmanirbhar did not intend these outcomes. If Atmanirbhar means a degree of self-reliance, we must welcome it. But if Atmanirbhar, in policy and practice, will mean protectionism, anti-free trade, high tariffs, autarky, return of licences and controls, and arbitrary and discretionary rules, that will be the surest road to disaster. I fervently hope that Mr Modi will not out-Trump Mr Trump.
We live in a strange world where the President of communist China speaks eloquently on the virtues of free trade and globalisation and the President of capitalist United States speaks derisively of trade agreements, WTO, free trade, climate change and the Paris Accord! Is the world being turned topsy-turvy?
It took India 30 years to break out of what the economist Prof Raj Krishna dubbed the ‘Hindu rate of growth’, although I believe that Hindu kings of yore like the Chola rulers and the Maurya rulers were visionaries, outward looking and expanded the economic reach of India to as far as China, Indonesia and Rome. They were true globalists, and raised India’s share of the world’s GDP to 25 %. In those imperial days — when we did not have trained economists — India embraced free trade, captured new markets and increased the wealth of the many nationalities within India. I shudder to think that we may be turning our back on that rich legacy and adopting policies that will return us to an era of low growth.
Oxford Economics has warned us that in the next five years India may witness an average growth rate of 4.5%. It is a wake-up call.