Nothing else, except a short public memory, can explain the agitation around growth (GNI constant terms) slipping from 6.8 per cent last year to an expected 5 per cent this fiscal – a year on year reduction of around 26.5 per cent in the growth rate.
Another red line we have crossed is that the growth rate has declined consistently over the last three years from 8.2 per cent in FY 2017 to 7.2 per cent in FY 2018, 6.8 per cent in FY 2019 and now to an anticipated (including by the Reserve Bank of India) 5 percent in FY 2020 ending March 31.
What can we read in the tea leaves of economic growth?
Hawk eyed observers of India’s growth story, with an elephantine memory, will know that India’s annual growth chart has been as jagged as the imprint of a shark’s teeth with large variations year on year unlike the Chinese growth trajectory which, till recently, was smooth as artificial silk.
Significant annual variations illustrate low resilience to cope with negative shocks like an increase in oil prices, weather a drought or sit out a cyclical market slowdown or a high dependence on exogenous fiscal inflows to finance investment.
The good news is that our “shark toothy” imprint has diluted over time. The economy has matured and become more resilient. Moving to a higher growth level post 1992 – an average of 6.7 per cent per year as compared to an average of 4.1 per cent per year earlier has also enhanced our capacity to absorb shocks.
Since annual variations are endemic in our growth record it is useful instead to focus on episodes where the growth rate fell consistently for two to three years.
Since 1952 there were six episodes of growth decelerating for two consecutive years of which five were in the pre- 1992 period and just one post 1992. Growth deceleration over a continuous three years is less frequent – just one each in the pre-1992 and post periods. So, six episodes of consecutive growth deceleration in the pre-1992 period versus just two episodes in the post 1992 period.
The first episode of deceleration in FY 1955 and 1956 was due to a significant fall in agricultural production. 1956 also saw formulation of the Industrial Policy Resolution which throttled the development of private industry through a licensing maze for the next nearly four decades. It favored incumbent license holders rather than competitive innovators and raised the transaction cost of business till it was defanged in the 1992 economic liberalization.
The second episode of consecutive growth deceleration in FY 1962 and 1963 was related to the cost and tension of the infamous war with China, which ended in a humiliating defeat for India and the loosening of Prime Minister Nehru leadership as he slipped into a defensive haze, partly caused by ill health.
The third episode (incidentally also the first one lasting three years) was from FY 1971 to 1973. This coincided with the fiscal strain due to the war to support the liberation of Bangladesh from Pakistan; the cost of hosting 0.6 million Bangladeshi refugees who fled to India and the cost of looking after 0.9 million surrendered Pakistani troops. A near coincident increase in the price of oil from $20 to $60 per barrel due to the Yom Kippur war further reduced fiscal space in India.
The fourth episode dates to FY 1979 and 1980 when loose coalitions of the Janata party, which had ousted the Indira Gandhi government in 1977, tried to find their feet. Internecine battles led to a change in the leadership with Prime Minister Morarji Desai being displaced by Charan Singh within this short . A sharp increase in the price of oil from $55 to $100 a barrel due to the cutback in oil production in Iran, during the revolution, complicated fiscal management in India. The fifth deceleration was in FY 1987 and 1988 under the Rajiv Gandhi government which had ridden into office in 1985 with a massive majority. But only tentative reforms followed liberalizing import licensing and boosting exports, including through a supportive exchange rate policy. The growth benefits lost steam quickly because they were the outcome of expanded domestic demand fueled by external debt inflows, which by 1990 had become unsustainable. Finally, like the UPA 2 the Bofors Gun purchase scandal diverted the government’s attention away from economic development.
The sixth deceleration followed soon after in FY 1990 and 1991 during the tumultuous but short period that V.P. Singh was Prime Minister followed by the equally short Chandrashekhar government. Short lived governments with a focus on social policy and political gamesmanship led to a grave economic crisis by 1991 necessitating the first economic liberalization under Prime Minister Narasimha Rao.
Since 1992 we have had just two episodes of consecutive growth deceleration. The first was in FY 2012 and 2013 during the waning days of the UPA 2. The fiscal cost of the easy money policy used to battle the global financial crisis of 2008 slowed the economy in subsequent years. Ever greening of bank loans gone bad displaced new investments, thereby constraining a growth revival. UPA 2, like Rajiv Gandhi, spent its time battling one scam after another and got distracted from pursuing Economic Liberalization 2.0 thereby ending its final years on a downturn.
The second episode relates to what we are facing today since FY2018. Oddly none of the shackles which constrained earlier governments exist today. The BJP was voted back in 2019 with a clear majority like Rajiv Gandhi. This is no unwieldy coalition government like UPA 1. It is a highly centralized machine. It rules fifteen out of twenty-eight states.
It is dispiriting that the praiseworthy features of the Modi administration – the coming of age of a new meritocratic political elite; energy and drive in international diplomacy and the courage to think big and take risks – get buried under the more mundane, pressing issues of unmet aspirations – jobs, low income levels, low productivity and fraying social cohesion. The more things change the more they remain the same. Is this endemic to democracy or is it just us?
This commentary originally appeared in The Times of India.
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Sanjeev S. Ahluwalia has core skills in institutional analysis, energy and economic regulation and public financial management backed by eight years of project management experience ...
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