Event ReportsPublished on Jan 15, 2019
The state of the Indian economy is intricately intertwined with the rest of the world.
Economy volatile and unpredictable: Former PM Advisor

“There is muted positivity about the economy at the moment,” observed Dr. S. Narayan, ex-Revenue Secretary, Government of India and Economic Advisor to Prime Minister Atal Behari Vajpayee. Initiating a discussion on “Indian economy in an election year” at Observer Research Foundation, Chennai, on 5 January, he said, “It is important to try and understand why this is so.”

According to Dr. Narayan, the overall economic situation in the country was both confusing and worrying. However, the state of the Indian economy was intricately intertwined with the rest of the world. It was impossible to examine India without looking at developments elsewhere. A few decades ago, while the focus was purely on the US, now China has emerged as an important player in global political economy. Looking at economic indicators and official statements coming out from China, Dr. Narayan said, “China is usually very optimistic about its economic prospects, but perhaps the first time there seems to be caution in their outlook.”

Looking at Chinese investments, particularly in Africa, it is clear that they want to send out a message they are a big power, Dr. Narayan said. Since 2005, Chinese companies have invested close to $66.4bn. According to Ernst & Young’s Connectivity Redefined report, China has invested in 293 projects in Africa, including transportation in Ethiopia, port development in Mombasa, oil exploration in Angola, and sugar factories in Uganda. These investments are located strategically where they have an advantage, noted Dr. Narayan.

The US economy too was similarly confusing, the speaker said. The impact of the trade war with China, Dr. Narayan believed, was questionable, particularly given the uncertainty surrounding how long it would last. While President Donald Trump’s tax-cuts have helped local manufacturing, most analyses showed that the benefits would be short- lived, and the US economy would face a recession by the end of the year. Moving to other parts of the world, broadly speaking the EU was experiencing muted growth while the Russian economy seemed to be doing well, he observed.

Good and bad

Bringing the focus back to India, Dr. Narayan said the prospects were both good and bad, unfortunately they were tied together. The recent fall in oil prices was a good thing for India. If oil prices were to remain at $70 a barrel, the Indian rupee would remain stable. Inward remittances were at an all-time high, estimated at $80 bn, a 16 percent leap from last year's $69 billion. However, exports were not increasing. IT majors had reported a fall in export orders from the US.

The Indian economy is said to be the fastest growing major economy in the world with a GDP growth of seven percent. Here again, Dr. Narayan highlighted the importance of taking a closer look at details, which highlight both the problems as well as the prospects for India’s growth. Small business seemed to be in distress while services were growing.

In this context, Dr. Narayan felt that the travel and tourism sector would see growth as internal travel had increased by 25 percent in the last 18 months. While real estate prices had fallen, the construction industry, in terms of 600 medium-size residential buildings, was doing well. External orders in the IT sector were impacted on by digitisation while internal orders were consistent. Tax-avoidance, however, remains a major problem.

State-level solutions

When analysing the domestic economy, it was customary to paint it all with a broad brush. Dr. Narayan questioned this practice, pointing out that significant changes had taken place in each sector over the last 15 years. These sectors had grown state wise in different ways. Citing farm sector as an example, Dr. Narayan explained that while distress was common to most States, individual challenges were different. In Uttar Pradesh, the largest State in the country with the single highest number of Lok Sabha seats, sugar cane prices had fallen as the mills were not being fully operational owing to excessive production in the previous year. As a result, sugar cane was left uncut, and the fields are not prepared for the seasonal paddy-wheat sowing. In neighbouring Madhya Pradesh, on the other hand, government policies related to better cultivation and increasing area of irrigation have created a surplus in wheat production but without an associated marketing mechanism.

It was also the case that GenNext from traditional farming communities were no longer interested in agriculture as they don’t see a future in it, noted Dr. Narayan. This trend ultimately will lead to large scale urban migration which in turn will raise a whole host of infrastructure challenges related to water, sewage, roads and so on. City and State governments need to be pro-active and focus on urban management.

The solutions to the problems of the future are not at the national-level or with the Centre. The role of the central government as an initiator of economic development is decreasing, noted Dr. Narayan. However, it is unclear whether State governments have given this issue adequate attention, regretted Dr. Narayan. In this context, he questioned the capacity of the government to bring about economic growth, but felt that the Indian economy would grow despite government.

Employment scene

In the nation’s most urbanised State, namely, Tamil Nadu, for instance, corruption continues to be a problem for economic progress. Education and employment remain a challenge. The quality of education, especially at the university-level is extremely poor. However, concomitantly training centres are doing extremely well. In terms of employment, Dr. Narayan explained that it should be analysed at three levels — educated employment, informal employment and casual employment.

The challenges of casual employment are what need to be urgently addressed. “Will 60 percent of the population that are in casual employment find themselves still delivering pizzas 10 years from now?” he asked in this regard. Instead of focusing on ‘ease of doing business’ indicators, the government should be more focused on giving this 60 percent a better quality of life.

There appears to be a degree of volatility in the immediate future, and a lack of predictability as far as the Indian economy is concerned, which is linked directly to both political and economic uncertainty in other parts of the world, concluded Dr. Narayan.

This report was prepared by Dr. Vinitha Revi, Research Associate, Observer Research Foundation, Chennai.

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