After a barrage of bad news on the economy, global ratings agency Standard and Poor’s earlier this week had some positive news for the Indian economy. It retained India’s sovereign ratings at ‘BBB-’ for the thirteenth consecutive time.
Another agency, Fitch, said that India will grow at a whopping 9.5 per cent in fiscal 2021-22, of course, before contracting 5 per cent in this fiscal year.
By now there is a near consensus among economists, rating agencies, and the various global multilateral agencies that the Indian economy will contract this fiscal after four decades. What makes matters more difficult for India is that the economy was on a pretty weak wicket even before the pandemic hit.
This is in direct contrast to the situation that prevailed in 2008, when the global financial crisis hit economies across the world. Then, India was in the midst of a boom that started in 2003, growing at an average 8 per cent per annum. For emerging economies like India, China and other South-East Asian countries, the global financial crisis remained largely on the financial side and did not hit the ‘real economy’. So a heavy dose of fiscal stimulus got India out of that crisis.
The flip side was that from 2013 India had to deal with runaway inflation as a result of the huge, unsustainable fiscal deficits. The fact that global crude oil prices also peaked during that time did not help.
Anaemic demand
Most analysts said that going in for a huge stimulus at that time was justified but not winding it up on time and returning to the path of fiscal consolidation was what cost the economy heavily. The economic woes that started in late 2012 played no small part in the defeat of the UPA-II regime and the ascent of the BJP.
But the crisis at hand today is of an altogether different dimension. As noted earlier, the economy has been hit by anaemic demand for a long time now. Growth had been sliding for several quarters even before the pandemic struck. Investment has been sluggish for several years now and unemployment is at an all-time high.
After the NDA came back to power in the summer of 2019, with the BJP bagging 303 seats in the Lok Sabha on its own, hopes were high that the Modi 2.0 government would get cracking on lifting the economy out of the doldrums. But what we saw was a curious apathy from the government over the economy, compounded by its focus on implementing its political agenda — Triple Talaq Bill, scrapping of Article 370 and the passage of the hugely controversial Citizenship Amendment Act.
The economy got scant attention from the government. Soon after winning the Nobel Prize for economics, Abhijit Banerjee was asked what should be done to revive the Indian economy — his answer was to pray and pray more. That there was a serious deficiency in demand in the economy over the last one year was common knowledge. Banerjee, in an interview soon after the Nobel Prize announcement, stressed the urgency to work on policies for getting money into the hands of the ‘aam aadmi’.
Focus mainly on supply side
The government’s ₹20-lakh-crore ‘Atmanirbhar Bharat’ package to deal with the pandemic’s impact works out to only 1 per cent of the GDP by most neutral estimates. The common complaint about the package is that it does not deal with the demand side of the problem. The focus is largely on the supply side, with the onus placed on PSU banks to lend more to reboot the economy. The package for MSMEs has to be seen in this context.
PSU banks have been groaning under bad loans and governance issues for the past several years. Though most banks are flush with funds for some time now their reluctance to lend is understandable.
The government — both at the Centre and at the State levels — has been working hard to ‘sell’ India as an ideal destination for global companies looking to relocate from China and emerge as an important player in the global supply chain. How this will play out in the near and medium term will be interesting.
For all the bad press it has been getting over the last few weeks, China surely must be working behind the scenes to convince global majors deeply invested in China to stay put.
For now, India must focus more on the domestic economy for revival. Going ‘vocal on local’ is the new buzzword in a world that has been turning inward for some time now.
The pandemic was an ‘exogenous’ shock, over which the government had little control. But it is the continuing apathy towards the economy that is costing us dear now.