Event ReportsPublished on Mar 28, 2018
Where from here, Indian economy?

“Growth is extremely important, even from the point of view of social development. How do we get the economy back to a high growth path must be our immediate concern,” said Dr C. Rangarajan, former RBI Governor and later chairman of the Economic Advisory Council of Prime Minister Manmohan Singh.

He was delivering the keynote address at a seminar on “Where from here, Indian Economy?”, organised by Observer Research Foundation, Chennai Chapter, along with the Madras Management Association (MMA) and IIM-A Alumni Association, Chennai branch, on 2 March 2018.

Dr Rangarajan explained that the rate of growth of the economy was dependent on two factors -- investment and productivity of capital. India’s investment rate was 33.5 percent of the GDP in 2011-12. Today it is 28.5 percent of the GDP. According to Dr Rangarajan, the sharp decline in the investment rate was one of the reasons for the decline in the growth rate in the recent past.

Ultimately, he explained, investment was an act of faith. For this, India needed to create a climate and sentiment for investment in the country, which was related not only to economic factors but also several non-economic factors. It was important to introspect and try and understand why the investment rate had fallen and how to get back to the earlier rate, he said.

Assessing the performance of the Indian economy, Dr Rangarajan, explored three important aspects – growth, stability and distributional effects of growth.  Tracing the pace of growth, he noted an upward trend, 3.5 percent for three decades after independence, exceeding five percent in the eighties though it ended in ‘fiscal crisis’, the post-liberalisation period that saw a growth rate of 6.5 percent, and post-2000, when it averaged 8-9 percent.

The growth-rate fall in 2012-13 was a matter of concern, though compared favourably with the rest of the world. However, Dr Rangarajan noted that while there was an increase in the rate of growth, it was both below potential and requirement.

Stability related to balance of payments, price stability and fiscal deficit. The performance of the external sector, according to Dr Rangarajan, has been one of the success stories of liberalisation. Inflation was an area that needed serious focus and caution in the future. He felt the new monetary policy framework had brought about substantial reduction in the inflation rate, while admitting the low crude oil prices had also helped.

As for fiscal deficit, he advocated the FRBM mandate of three percent of the GDP as the Central Government’s deficit. Observing the distributional effects of growth, it was clear that development in terms of social indicators did not match the economic growth performance.

Farm distress

India needed reforms in agriculture, Dr Rangarajan said, explaining the distress in agriculture that many talked about was due to a fall in prices rather than a fall in production, which was being caused by a small increase in production. His suggestion was that the government should intervene and procure the excessive supply over normal, leaving the market mechanism to correct itself and bring prices back to the appropriate levels.

Looking back, Dr Rangarajan said the reforms of 1991 had been in the right direction and that India needed to continue with similar reforms into the future. Reforms would improve efficiency and these included reforms in the FDI, insurance code and GST among others. GST was seen as an important step forward.

He felt that all other countries where similar fundamental changes in tax had been introduced faced difficulties for the first few years, and therefore the current tensions in India were seen as natural. Dr Rangarajan ended by saying, however, “Reforms are not an end in themselves, not even growth is an end in itself, but growth triggered by reforms must be shared by all. But equity and efficiency should not be posed as opposing considerations.”

Lop-sided, unsustainable growth

Dr. S. Narayan, former Economic Advisor to Prime Minister Atal Behari Vajapyee, however, took the view that growth in India had not delivered equity.  He felt some policies of economic development in the past had failed and therefore it was imperative to look at them. If after more than two decades of reforms, growth meant 300 millionaires and 300 million living in extreme poverty, there was something lop-sided about India’s high growth rate.

Further, growth has not been sustainable. Pollution levels were increasing drastically and it appeared to be an elephant in the room. Dr. Narayan was concerned that there was no strategy for achieving sustainable development. He questioned the lack of a sustainability advisory council and asked a pertinent question: “Why must all advisories be only economic?”

Looking to the future, Dr. Narayan identified energy as an area of major concern. Even going by moderate estimates, he felt, India’s energy needs would grow between 2.5-3 times from now. Import of coal and oil would both go up. The main problem with energy security was that the country was currently importing nearly 80 percent of all its primary energy needs. How we plan to meet this is a question that needs to be urgently addressed. Dr. Narayan lamented this appeared to be another elephant in the room in the debates about India’s development.

Second ‘green revolution’

Dr. Narayan said “the distress in agriculture is because the market was not clearing uniformly across the country.” According to him, a fall in prices was not the only problem. There were other things that had not been addressed, such as freedom of movement, storage facilities, and open auctions where price discovery takes place. Without addressing these, the government could not simply rely on the market.

Providing agro-processing zones would also be crucial in the future. The failures in agricultural development, according to Dr. Narayan, were mainly due to a lack of follow through on the goals of the ‘Green Revolution’. He felt India needed a ‘second green revolution’, which would come through revolution in logistics, technology and connectivity.

Dr Narayan was dismayed by the shift in project-lending from development finance institutions to commercial banking. Institutions such as IDBI and ICICI, he pointed out, had gathered expertise over the years on project-risks and long-term financing, Project-lending was now left to the banking sector where due-diligence was not being undertaken, especially owing to lack of expertise and wrong priorities.

He also criticised tax exemptions given to the IT sector, saying it was expected to be employment-oriented and for educating people. But here he asked a crucial question: “How is that a worker in a BPO selling insurance on phone more valuable than a person who is making an aircraft part for HAL?”

Dr Narayan concluded by saying that the policies since 1991 had affected the structure of the economy in a way that seemed lop-sided. He believed that the time had come to relook at these policies and to ask important questions. India could not walk away from questions of inequality, development, education and welfare. Comparing India to Bangladesh, which was considered a basket case in 1991, Dr. Narayan said, today it scored better than India on several parameters including welfare, sanitation, population, contraception, women’s health. This shows that India had certainly got some policies wrong. However, he ended by saying, “Certainly we can correct it, because if we know we are wrong then we can correct it.”

‘Unsustainable, unethical’

Assessing the issue of Indian economy, Peter Rimmel (Konrad Adenauer Foundation, India Office) said certain major achievements had been made  -- economic development had regained momentum; the 30-point jump in the World Bank ease of doing business index, upgrade of sovereign credit rating by Moody’s were among these. He also pointed out that India had pushed through certain necessary but tough reforms such as GST and demonetisation.

However, other challenges remained: on the anti-corruption index by Transparency International (TI), India was not placed favourably. According to ILO, half of India’s young labourers were wage labourers. The major challenge for the future would be job-creation and skills development. India needed to invest in human development. Quoting Nobel laureate, Amartya Sen, Mr. Rimmel, emphasised that economic development without investment in uuman development is unsustainable and unethical.

K .C. John (IIM-A AA), who contextualised the seminar-theme, asked five important questions: “What kind of growth will promote social democracy? Can India double her GDP in the next next years? How should India carry out structural transformation that yields sustainable expansion of economy? What should be the road map for sustainable financial system?”

‘Minski moment’

Prof Heribert Dieter (German Institute for International and Security Affairs) was most concerned about financial stability and wondered whether we were in a ‘Minski moment’ which was characterised by a willingness of market participants to engage in very risky endeavours, where all investments were inaccurately seen as beneficial. Responding to Dr. Rangarajan’s criticism about the fall in investment rate in India, he argued, seeing it in a slightly different way, low investment by itself was not a bad thing. Investment financed by fragile money was much worse than lower rates of investment.

Reviewing the Asian financial crisis and others around the world, one could see these were often triggered by too much borrowing from abroad and investment financed by foreign capital. Responding to Dr. Narayan’s point about India’s growing energy needs, Prof Dieter speculated whether India was ideally placed to have electric two wheelers powered by solar power. This would be both pollution-free and not dependent on coal imports.

Looking beyond the Indian economy, at the global issues and challenges which were intricately linked to India’s concerns, Prof Dieter felt strongly we needed to focus on financial stability, and ask ourselves: “Where are we standing at this point in the global political economy? Has risk increased? Is the financial system better regulated and better managed?”

N Sathiya Moorthy, Director, Chennai Chapter of the Observer Research Foundation, gave the background over the choice of the title and its timing, while Gp Captain R Vijayakumar (retd), Executive Director, MMA, proposed vote of thanks. Ms Kavitha D Chittur, MMA president, chaired the session.

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

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