Building for a growth recovery

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July 20, 2021 5:10 AM

Integrating into the global economy can provide economies of scale and spur innovation

The gigantic Sagarmala programme, consisting of hundreds of projects costing trillions of rupees, is a good example of the difficulties going forward.The gigantic Sagarmala programme, consisting of hundreds of projects costing trillions of rupees, is a good example of the difficulties going forward.

At the recent NCAER-Brookings India Policy Forum (IPF), held virtually because of the pandemic, controlling the pandemic and recovering from its impacts loomed large. However, an important perspective on the Indian economy’s trajectory was presented that transcended the pandemic. Roughly, India’s growth in the first decade of the millennium was driven by an investment boom, supported by an increase in domestic savings.

Export growth in this period was also robust. Thereafter, growth was driven more by domestic demand, which was already starting to fade when demonetisation, changes in indirect taxes, and the pandemic all hit in sequence. This was at a time when credit growth slowed dramatically, because of problems with the quality of credit extended during the investment boom. Export growth also collapsed during this period. This narrative matches the account of India’s financial intermediation problems I gave in my last column.

The important lesson of this analytical narrative is that a growth recovery will require an investment recovery. Household demand is very unlikely to lead the economic recovery, given uncertainties with respect to health shocks and employment. Of course, the private sector also faces uncertainties that will inhibit new investment. Hence, there is a strong case for public investment, especially in infrastructure, to lead India’s future economic growth. There are several obstacles to this strategy. One, of course, is the state of the country’s public finances.

At the IPF, the case was made for a stepped-up program of sales of public assets, especially public enterprises. The current government has already gone further in this direction than any previous one, but it is still well short of targets. Interestingly, this has proved to be the most difficult reform to achieve, because of political interests as well as the complexity of such asset sales.

An alternative approach that was discussed at the IPF put more weight on encouraging private investment in infrastructure. Public private partnerships are already a part of India’s approach to infrastructure investment, and if they can be structured and monitored effectively, then this may be better than an approach where the government bears all the costs and risks, even as the private sector influences the choice of projects and reaps the rewards.

The technical and political economy challenges for large infrastructure projects are enormous: this is an area that contributed to India’s financial sector problems, and learning from the past will be important. In this case, the kinds of technology platforms that can improve financial intermediation for private sector investment are not so relevant.

The gigantic Sagarmala programme, consisting of hundreds of projects costing trillions of rupees, is a good example of the difficulties going forward. The programme is designed to create a port infrastructure that can support more effective engagement in international trade for India. The idea was mooted in 2003, but only got off the ground in 2016.

A global consultancy firm produced a report running into hundreds of pages, with enormous detail on design of the projects. But at the end, it has not always been clear whether the projects were chosen or prioritised to fit into a coherent strategy of integration into global and regional production networks—this being an essential precondition to stepping up international trade, and exports in particular. Of course, there are problems of slow implementation, and concerns about political favouritism for certain states or businesses.

But the real problem may be a lack of strategic intent and direction. When the pandemic hit in March 2020, the government announced that it was considering revisiting the entire programme, and hiring another global consultant, because of changes in world conditions. But there did not seem to be any clear explanation of why the changes required a comprehensive re-evaluation, nor was there any public analysis of the outcomes to-date of the programme and its many components.

The discussion at the IPF suggested that India’s failure to capitalise on possibilities for integrating into the global economy has been an important reason for faltering growth, independent of the pandemic. The situation now is one of disruption, but also opportunities, as existing supply chains are being re-evaluated, and the over-reliance on India’s giant neighbour is being questioned.

Integrating into the global economy can provide economies of scale and spur innovation. At the IPF, a slowdown in productivity growth was also identified as a barrier to sustained economic expansion. All of these factors suggest a clear strategic direction for economic policy to restore and sustain rapid growth.

Professor of economics. University of California, Santa Cruz

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