After two years of being buffeted by the Covid pandemic and its fallout, the Indian economy is showing strong signs of resilience. Growth has returned rates above 7% and is expected to continue at this level for the next year or two. India is continuing to pursue the “formalisation” of the economy, and this push is helping some firms that might otherwise have remained stuck in old routines. At the upper end of the economy, the number of highly valued startups—often focused on or enabled by information technology—continues to increase. Foreign firms are bullish on India and the purchasing power of its consumers. The Centre is making progress on divestment, including the landmark sale of Air India and the sale of shares in the Life Insurance Corporation of India. There are signs that corporate balance sheets may be recovering, and this may help the financial sector recover as well. India has returned to being one of the fastest growing economies in the world, a status that had been lost well before the pandemic hit.
Despite all this good news, the “half empty” side of the picture may be of greater concern, requiring serious, immediate, and sustained policy attention. Inflation is certainly a problem. Inflation expectations were heightened even before Putin’s invasion of Ukraine, and the Reserve Bank of India has been faulted for acting too slowly, deviating from its inflation-fighting mandate to support the economic recovery. The US Federal Reserve also seems to have been caught in the same situation. One cannot help sympathise with both central banks, since the situation of repeated pandemic waves and supply shocks has been unpredictable. Another common problem is that both economies have been seeing a two-speed recovery, following an inequitable distribution of negative impacts from the pandemic and consequent disruptions. What is different is that the US economy is recovering very robustly overall, with historically low unemployment rates (though labor force participation has fallen, as it has in India). In India, employment growth remains anaemic, with longstanding weakness in employment growth made worse by the recent economic shocks.
India is also more likely to suffer lingering negative impacts on the education of its children and youth, and it is being hurt more by the spike in oil prices. In a nutshell, the structural weaknesses that were hampering India’s growth before the pandemic are likely to become more apparent once the initial bounceback from the pandemic has played out. It is not yet clear that India can achieve sustained growth of 7-8% for a decade, which ought to be a minimal goal. What needs to be done in the short and medium term?
One of the most critical obstacles to economic growth is access to cost-effective, reliable electric power. This sector is one of the relative failures of India’s economic reforms. Even now, electric power shortages are being addressed by increasing the use of coal-based generation, which has tremendous negative consequences in the longer run. By contrast, the Rockefeller Foundation is championing the idea of distributed renewable energy systems, using solar power. In India, it has created a subsidiary, Smart Power, which is investing $75 million in Bihar, Jharkhand and Uttar Pradesh. But this is a drop in the ocean compared to what is needed, and is an obvious example of where public investment can make a difference at the scale and speed that India needs.
Reliable electric power is also a prerequisite for access to the internet, the modern delivery mechanism for knowledge and information of all kinds, including basic education and skill upgrading. Investment in digital infrastructure that goes beyond 5G cellphones is also desperately needed, to provide bandwidth at levels that will permit accelerated and more inclusive growth.
Another area where creative thinking is needed, rather than business as usual, is on the inflation front. The most unequalising aspect of inflation is in the case of food. Yet India has a foodgrain procurement and distribution policy that is dysfunctional, and doing little or nothing to help reduce food inflation. Instead, it has helped create a situation where farmers in states like Punjab are using free or subsidised electricity to pump groundwater to grow rice in a region where it is not optimal. Scarce electric power is being used to fill warehouses faster than they can be emptied, and to turn the area into a desert.
There are other areas where policy rethinking is needed. None of them really have anything to do with the rhetoric of self-reliance. Instead, the guiding principle of economic policymaking in India needs to be making the best use of India’s resources, and doing so in an integrated manner. Investing in people means giving them effective access to knowledge, skills and the means of production. Investing in natural resources means reducing their depletion and degradation, as well as replenishing them where possible. The national objective function has to be appropriate, as a first step toward figuring out what to do and how to do it. In terms of the simple metaphor, what glass is being filled?.
The author is Professor of economics University of California, Santa Cruz