As India heads to the polls in a couple of months, it is again a season of electoral promises and economic forecasts, a white paper and a back variant and the daily dose of accusations of incompetence that political parties tend to level against each other at such times.
The question before the proverbial voter on the street is not of the profound kind like “what is truth?” posed in the iconic 17th century Francis Bacon essay but something more basic around what to make of the cacophony on the Indian economic indicators, what to expect and where to hinge hopes on in the coming months and years? We asked Dr D Subbarao, economist and a former governor of the Reserve Bank of India on his reading of the Indian economy and on what to expect.
Private investments & growth drivers
He began by saying that while it is comforting that the economy is growing fast, what is of concern is that it is firing on a single cylinder – government investment. “For sure, the government is investing in infrastructure which is a positive because it helps the economy’s long term growth potential. But given the fiscal deficit target of 4.5 percent of GDP to be attained by 2025/26, this level of public investment will become difficult to sustain. On the other hand, other growth drivers are all subdued.
Private investment is yet to pick up, consumption is still muted and export demand is slack.” According to him, to sustain growth of 6.5 percent to 7.0 percent year on year, the economy has to fire on all cylinders. When asked about the choices before the government, he said the only way the government can maintain this level of public investment is by curtailing other expenditure which is difficult, at any rate in the short run, or by continuing to borrow at a high level which will pit it against the FRBM (Fiscal Responsibility and Budget Management) targets.
Signals on consumption trends
On the prospects of private investment picking up, he said the current capacity utilization of the economy is around 75 percent, roughly the point at which additional investment will be triggered. He said it’s possible that investors are waiting for elections to be over before they start implementing their plans.
Subbarao said that what private investors will mainly look for is a signal that consumption is on a durable upward trend. This however is the nub. Various surveys suggest that even as the economy is growing rapidly, the benefits of growth are not flowing to the bottom income segments of the population.
As a consequence, we are forfeiting what is potentially our most important growth driver – increased consumption by the bottom half of the population. If their incomes go up, they will spend more which will spur production and jobs which in turn will spur further growth.
Beyond welfare programmes
“At the moment, the government is supporting the bottom half through an extensive welfare programme including free rations but that is no substitute for regular jobs and incomes, which apparently is not happening.”
The opportunity cost of freebies
A worrying trend according to Subbarao is the growing trend of political parties across board to woo voters with freebies. Freebies have an opportunity cost. The money spent on them could be spent on education, health or infrastructure which will lay the foundation for long term production and productivity. In an ideal world, voters will be aware of these opportunity costs and question politicians on the trade-offs. But in the less-than-ideal world we live in where political credibility is low, it’s rational for people to vote for freebies on the reasoning that a bird in hand is worth more than two in the bush.
The core & the non-core Inflation
On inflation, Subbarao says, “while core inflation (headline inflation minus food and fuel) is down and around 3.6 per cent, headline inflation is still above the Reserve Bank of India (RBI) target. While the core demand is responsive to RBI’s monetary tightening, food and fuel demand is in elastic and this is the last thing that people cut back on when their budgets get tight.
It’s the volatility in the prices of the non-core that is fuelling inflation at the moment.” According to average inflation in India has declined from 9-10 percent to 4-6 percent. This means that the generation of millennials has grown up in an era of low inflation and any spurt will likely trigger high inflation expectations in them.
Growth forecasts
On the growth front, the forecasts and some of the broad number on the Indian economy by global agencies do give reason for hope. After all, in the World Economic Outlook Update released in January, the International Monetary Fund says, the growth in India is projected to remain strong at 6.5 percent in both 2024 and 2025, with an upgrade from October of 0.2 percentage point for both years, reflecting resilience in domestic demand. The activity in Indian factories is up with the manufacturing output hitting a four-month high in January, according to an index compiled by the G&P Global.
Medium to long-term
According to Subbarao, it’s important to be realistic about our growth prospects. For sure, it’s quite likely that the economy will clock growth of 6-7 percent for the next 2-3 years but it’s unrealistic to believe that we can sustain that rate of growth in the medium to long term under the ‘business as usual’ case.
Linkages to global growth
Referring to the aspiration set by the prime minister that India become a developed country by the time of the Independence Centenary in 2047, Subbarao says, “some back of the envelope calculations show that to achieve the per capita income level of a developed country (about $26000 in current US dollar terms), the economy has to grow at 7.6% on a trot over the next two decades.” We will have to achieve this, he says, “in the face of headwinds such as climate change, artificial intelligence which might erode our comparative advantage, waves of deglobalization, varying demographic transitions around the world and growing geopolitical tensions.” Given that India’s growth prospects will be linked to global growth, he says, “it’s futile to believe that India can be an ‘island of growth’ in a declining world.”
Boats on a rising tide
Dr Subbarao makes a telling concluding point: “Let us be clear about one thing which is that everybody is better off today than they were a decade ago. As they say, a rising tide lifts all boats, but what we’ve seen is that it has lifted some boats more than the others and that is neither desirable nor tenable.” That is a thought for the political parties to mull over as they head into what will likely be a shrill election campaign.