The year 2020 has been a challenging one for the entire world due to the raging pandemic. It is far from over with the discovery of the new strain of Covid-19 and restrictions being reimposed months after countries had lifted them. This poses several interesting questions that our policymakers are likely to face over the coming months as countries deal with a pandemic, its economic implications and the logistics of rolling out a public vaccination drive.
There is no doubt that there exists significant uncertainty with far too many unknowns over the course of the coming months. However, what we do know is that the worst of the crisis is possibly behind us and this should be viewed as an opportunity to undertake the reset that India needs for the decade ahead. It is worth highlighting that India’s economic growth in the 1980s and 1990s averaged 5.5%.
The real departure happened between 2001-10, when India’s growth rate accelerated and the nation achieved an average annual growth rate of 7.4% while between 2011-19, it was 6.76%. Of course, these values change considerably when we include or exclude the values at either of the margins as averages tend to be sensitive to outliers, but the fundamental point is that 7.4% has indeed been the best achieved average annual rate.
This is important because while there are far too many unknowns for our policymakers to confront, we must recognise the importance of sustaining a 7.4% growth rate beyond a decade. That is, we need to break out of the 6-6.5% growth rate and move towards 7-8% annual average over the coming decade. The best social security for India and its vulnerable population would be a higher growth rate. However, achieving this growth is far too complicated—the government cannot dictate its desire to grow at 8% and voila, the economy grows at that rate.
As a matter of fact, there is significant evidence that economic growth is increasingly dependent on a diverse set of factors, some of which are often outside the control of the sovereign. That is, a slower global growth or a push for protectionism by certain countries generates a negative externality. However, despite the limitations, policymakers, political or non-political, continue to convince others about their prowess to lead us towards faster economic growth or a lower level of inflation.
Consider the inability of central bankers to push inflation in advanced economies over the last few decades and the continuous debate about factors that may have caused this great moderation in inflation. It shows that conventional wisdom may not necessarily be true, or worse, that our conventional and unconventional tools no longer have the desired impact on the real economy that is driven more by technological advancements, productivity gains and capital flows.
Do not take me wrong, advancements, productivity gains and capital flows all depend on domestic economic policies, but they cannot be controlled like conventional monetary and fiscal tools. The fiscal and monetary policy tools are of use in the short run but they cannot be a substitute for productivity enhancements that are critical for sustaining a higher growth rate.
It is only natural to therefore wonder whether India can achieve a growth rate closer to 7.4% over the next couple of years. There is a recognition that the impact of the pandemic on the economy is not as bad as was originally anticipated. There will be some permanent income loss, but economic activity has been normalising faster than originally anticipated. However, is the new normal a growth rate of 6-6.5% or is it 7-7.5%? The answer to this depends on multiple factors and unfortunately, only time would reveal the same.
My money is on the latter as India would manage to accelerate its potential rate of growth as an outcome of its approach in designing the economic response package to the pandemic. The recent shift in India’s economic policies becomes important as we must recognise that most countries undertook agricultural reforms as a precursor to industrial reforms. In India, agricultural reforms have happened three decades later.
Thus, we had a very small set of surplus labour and land that shifted away from agriculture, limiting the productivity growth both in the primary and the secondary sector of the economy. More importantly, with a substantial proportion of our population still dependent on agriculture, there was a ceiling on the standard of living and incomes of this group, which was sizeable. Consequently, there was a ceiling on their upward mobility that would have restricted the expansion of the middle class in the country. The reforms undertaken in the early 1990s, late 1990s and early 2000s led to a booming middle class that was at the forefront of the expansion in domestic demand.
Indeed, we may see countries restrict trade over the coming decade and there may be several exogenous factors that may influence economic growth, but strong domestic reforms combined with a further expansion of India’s middle class should help push up the potential growth rate. Add to this the improved productivity levels as more factors of production shift away from agriculture to manufacturing, along with some supply chains shifting to India, integrating it with the global value chains.
It is a safe bet to state that India meets all the preconditions to ensure a sustained growth take-off once we recover the lost economic activity. Whether India will manage to achieve that potential or not is of course a matter left for analysts, forecasters and speculators to explore but my bet is that it will certainly surprise many in the years to come.
karan bhasin (karanbhasin95@gmail.com)
New Delhi-based economist