The Indian economy is being showered with praise today for being the fastest-growing one. In some ways, this is a story of relative perceptions. By comparison with the EU, Japan and even China, India’s GDP growth is better. (We will not discuss the “jugglery” in calculations last year that pushed up the number by at least 1%). Remember, our “better performance” is hardly two years old. China outperformed the rest of the world for two decades.
China thrived by being open to FDI. India has placed many sector-specific restrictions on such investment, and has frequently changing tax terms. The recent changes are only marginal. It is only in recent years that China’s stock markets have been open to foreign investors. By contrast, India’s has been open for many years and foreign investment has long been a major swing impact on Indian stock prices. The “Mauritius route” has allowed capital gains to be made in India that are free of tax.
China has also been a regimented economy, with hidden subsidies for exports, with state-owned enterprises and provincial governments being major investors. For provincial governments and public enterprises, borrowing funds has been easy, and they (and the lending financial institutions) are now staggering under heavy debt burdens. India has also, for years, been a regimented economy (Licence Raj), and even today, requires many approvals before one can invest, or set up manufacturing and produce.
Indian state governments carry large debts. These are now augmented by the UDAY scheme to reduce state-owned power sector debts. UDAY permits converting power sector debts into state government bonds. This will diminish their ability to borrow in future and to invest in agriculture and infrastructure.
State-owned enterprises in India, like in China, have been accustomed to operate in an environment that favoured them in relation to others. This has changed now and many PSEs are either inefficient or unprofitable or sick, and are in unsustainable debt. Sadly, this is also the case with the private corporate sector that is carrying huge and unsustainable borrowings that it is unable to service and repay. These non-performing assets are mainly with nationalised banks, most of whose balance-sheets are, thus, much weakened.
China, however, has built vast infrastructure (roads and highways, power plants, housing, public transportation, etc) despite such debts. India has been very slow in this regard, with unmet deadlines, poor quality, massive corruption leading to heavily padded costs. China has also suffered from corruption but appears to be cracking down on it, unlike India.
China’s exports have fallen, as have its imports. This has caused economic turmoil in exporting countries (Canada and Australia in particular, and a drastic fall in the exchange value of the Chinese currency). All currencies in the world have been affected as a result—as has the rupee, which has fallen to record levels. China has foreign exchange reserves that are many multiples of India’s. It should be able to protect its currency. India may just have to react to global developments. The falling rupee and the absence of a full framework of economic policy changes have spooked foreign investors in India’s debt instruments. This will adversely hit India’s economic development.
Exports were China’s growth engine. Subsidies helped its phenomenal exports. Its status for long, as an assembler for global brands, gave it access to technology and a strong export experience. China’s foreign exchange reserves are invested mainly American treasury bonds, giving the US a reason to prevent further falls in its currency. A fixed link to the dollar had also helped exports. All this has started unravelling, with the decline in the economies of the European Union, Russia and the Middle East, the growing need to control debts, falling imports that adversely affected the economies of China’s export markets, a falling currency and a collapse of stock markets.
In these respects, India is actually in a worse position. Exports have dropped, but the balance of payments has improved because of collapsing prices of imports—especially oil and other commodities. It has also helped domestic inflation to appear under control. However, in reality, the poor are paying much more for their food. India has no agricultural policy to speak of, except to support the urban poor with cheap food grains. A complex and inefficient web of rising support prices for grains, physical procurement, storage, transport, and distribution of rations to the deserving (half of which is said to end up in the markets). The policy contradicts changing food habits, with rising demand for pulses, sugar, vegetables, fruits, and falling demand for grains. Prices of in-demand products have been shooting up, while the government stocks of food grains pile up and rot. Agriculture has received poor investment in irrigation, water storage, warehouses and cold stores, etc. Indian agriculture, too, has low productivity in comparison to much of Asia.
Manufacturing in India has not improved. Nor has employment in manufacturing and industry. The Pay Commission recommendations and OROP have enhanced employee earnings, which has led to some improvement in the consumer durables segment. But, the overall situation is unsatisfactory. The absence of a single tax rate for the same product over different states has limited trade. Restrictive labour laws, multiple inspections and red tape, with corruption at all levels, have stiffed efficient production and kept prices high.
India cannot celebrate the decline of China. Given its size and capability, China may over some years, correct itself. Meanwhile, its slowdown is now depressing many economies. This has affected Indian exports adversely, too.
India has to make a clean break with its economic policies, legislation and procedures of the past. The Modi government has shown no signs of comprehending this need. It has instead appeared to do “more of the same”, namely invest in urban infrastructure,welfare programmes, and cosmetic changes in tax procedures. A revamped agricultural policy that encourages production of items in demand, a manufacturing policy that attracts foreign and domestic investment to all sectors, employment and production, infrastructure investment both in urban and rural India, transparency in government, ruthlessness and speed in penalising the corrupt, making government-owned enterprises autonomous or private, making regulation of enterprises much stronger and independent, introduction of a GST, labour law reforms, enabling easier land acquisition with fair compensation—there are many actions that the Budget must introduce and quickly.
It appears as if this government is mainly thinking of ramping up infrastructure investment, leading in due course to a resumption of inflation. It has no conception of the interrelated nature and needs for economic policies for growth with little inflation.
The author is former director general, NCAER, and was the first chairman of the CERC