Our current year's budget was presented in July and expected to build on the 8.2% growth in GDP of the previous year. But we did expect the growth in the current year to be lower, as RBI too had estimated it to settle at around 7.2%.
Reality check: RBI has now reworked that growth target down to 6.6%. Yet, our economic challenges are, in fact, far more complex than the expected slowdown during the current year.
What are our current long-term challenges?
Our challenges, given the stage of our development, COVID's terrible impact on almost everyone's life and our underperformance of nearly a decade are tenfold:
1. A sluggish, uncertain growth in personal consumption is resulting in lack of incentives for the private sector to invest ahead of demand.
2. There is low youth labour force participation, when compared with other large economies like Brazil, Mexico and Indonesia, with stagnant or declining real wages even for white-collar professionals.
3. The poor quality of urban life is not only impacting our productivity but also our well-being.
4. The household savings rate that averaged above 22.5% between 1999 and 2013 is below 20% since then, impacting our ability to invest in our future.
5. We are also a country with low household wealth, implying that our households have a limited ability to take risks either in financial markets or bear the risks associated with entrepreneurship.
6. Consistently higher food-price and healthcare-cost inflation, particularly since the COVID years, has reduced our discretionary spending power.
7. There is declining interest in higher education as reflected in the decline in the number of available seats and enrolment levels in AICTE registered engineering and management schools from its peak in 2014-15.
8. While the export of services is helping manage the current account balance, the trade deficit continues to be high. Consequently, our dependence on short-term investment flows (speculative, in most cases) continues to be high.
9. If our economic growth continues on the present trajectory, we are not likely to remain the most attractive FDI destination for long, thereby putting pressure on INR exchange rate.
10. Inadequate capacity for public services is resulting in poor quality of services.
Despite the fact that the above-mentioned challenges are known to everyone, the economic policy choices have lacked imagination.
The focus has been on fiscal consolidation and lowering of taxes for large corporations even when we knew that it would not accelerate investment or employment growth. Not being able to raise tax rate for passive income and speculative gains and no or limited tax-relief for middle income families have also not helped.
Additionally, formation of private sector monopolies in key infrastructure sectors has been encouraged. Then there have been the ill-designed production-linked incentive schemes, centralisation of resource mobilisation through poorly defined GST, limited scope for states to raise tax and non-tax revenue, etc.
Consequently, we have a situation where the GDP to tax ratio continues to be low and so does the government expenditure to GDP ratio.
Being in denial is never a solution
The questions that our political and economic leadership must ask are:
1. Is it even remotely possible for the households to accelerate their earnings growth, if the large businesses don't generate employment or generate low-quality contractual employment?
2. Can labour productivity ever increase if there is a persistent deterioration in the quality of the air and people are spending an increasing amount of time navigating traffic?
3. Will our middle-income households ever have the ability to invest in their future (education, housing, domestic appliances and services, etc.) if average transportation and communication is 16-17%, food around 30% and healthcare costs at over 5% of personal consumption expenditure?
4. Will large businesses, driven by quarterly performance, be willing to build capacity ahead of demand or invest in building people’s capability that can, in turn, help drive investment in R&D, given that the growth in personal consumption expenditure is sluggish and discretionary spend is limited?
5. Can election-timed welfare schemes do much to enhance household ability to become a globally competitive workforce and, thereby, contributing to business productivity and innovation?
6. Given that the real growth in household earnings itself is low, how far would a reduction in interest rates help drive credit-led household consumption or investment growth?
7. How far can the Indian banks and non-bank finance firms drive credit-led consumption and investment growth, given that they have only recently recovered from the damage done to their balance sheet during the global financial crisis?
Barring a few years, our post-Global Financial Crisis and post-COVID economic performance has been below our potential as well as the required rate of growth. At the same time, anecdotal as well as research evidence, including the government data, suggests that our average family is in no position to help us accelerate growth. Hence, the answer to most of the above-mentioned questions is likely to be a no or a maybe.
Our stock market, though, suggests that all is well.
Our equity market has often been euphoric about our growth during the last few years, resulting in logic-defying expansion in price-earning multiples. Our market seems to be driven by mechanical rules, where we don't seem to worry about the source of growth in prices. To wit, an increase in stock price driven by higher economic growth or lower cost of capital means the same thing to a financial investor.
We keep clamouring for lower interest rates, while peddling the "fastest growing major economy" narrative. In other words, we don't care much if the growth rate is low, as long as we can keep getting the RBI to lower policy rates. You cannot have the world's fastest growing major economy clamouring for lower rates all the time.
The fact then tis that the fastest growing major economy is not doing much for an average family.
Solution: Government must solve problems that are intractable for an average family and small businesses
The solution is in solving the youth employment problem, i.e., providing meaningful work at a fair living wage. MSMEs cannot do that, as they have a very limited ability to take risks. Self-employment or entrepreneurship too is not a solution, as a majority of our families don't even have savings that are adequate to deal with a health emergency.
Public provision of education and healthcare services
We need the government to stop worrying about fiscal consolidation for another 2-3 years and focus on the provision of healthcare (primary as well as tertiary) and education (school as well as higher) in public sector. Both these sectors are employment intensive, have low gestation period, do not need large capital and contribute to long-term growth in productivity and value-addition.
As seen in the Table 1 below, the employment level in education services in 2023 were still below the peak employment level of 2019. It is often argued that digitalisation of education will reduce the number of people required in education, but the recent experience with Byju's and other EdTech companies suggests that we still need to depend on good old ways of teaching our young.
Labour as well as capital productivity (a crude measure of productivity for sectors that define a society's future) in education is higher than in healthcare as well as other service sector activities. Once we account for externalities, the positive impact is much larger.
Most advanced economies treat education as a public service. In India, we treat education as a private good and have been under-investing for years and have largely made it unaffordable for most people. It is time that we rethink our economic strategy and start investing in school as well as higher education.
Investing in teachers is an ideal first step
An ideal student-to-teacher ratio for a school is 15:1 to 20:1, whereas it ranges above 25:1 for primary and higher secondary levels and just below 20 for upper primary and secondary levels for our schools. We are understaffed in most higher education institutions too. A drive to reduce the teacher-student ratio itself can provide meaningful work for a large number of our unemployed or partially employed youth. We will, of course, need to invest in training and educating teachers as a first step.
Public provision of insurance is only a partial solution
The government has also absolved itself from the responsibility of providing healthcare service, which is treated as a public service in most advanced and middle-income countries. This is, once more, a choice that makes no economic or social sense at our stage of development.
Private provision of healthcare, which is largely focused on expensive tertiary care in urban areas, is expensive to the extent that even the upper middle-income families struggle to finance such costs. The recent effort to provide insurance coverage is a half-hearted effort, more to make people believe that the government cares.
Public investment in healthcare, like education, has significant positive externalities.
Education as well as healthcare provide employment to semi-skilled (e.g., housekeeping, security) and skilled (para-medical staff, counsellors, administrators, etc.) workers as well as highly trained and educated professionals (teachers, doctors, managers, etc.). We increase our chances of reaping the demographic dividend, if we are able to accelerate public investment in these services.
In addition of public provision of these services, we need the private sector providers to improve the quality of their services by adding quality staff and infrastructure. Our regulators have allowed the cost of education and healthcare to shoot up without ensuring a corresponding increase in quality, as is evident from numerous reports that outline the ways in which the system has been gamed.
Invest in projects that aid productivity and improve quality of life
We know that we have been under-investing in infrastructure for nearly two decades, largely because we were expecting the private sector to finance infrastructure. This even when we knew that the private sector neither had the required risk-capital nor the ability to plan and executive complex projects. Consequently, the banking system was being saddled with large NPAs (Non-Performing Assets). NHAI too struggled when the private sector was not able to finance these projects on BOOT (Build, Own, Operate, Transfer) basis.
We now have a situation where national highways as well as railways are being financed by the central government. As for railways, we are investing in a bullet train project or modernising railway stations or building modern looking trains when the focus should have been on railway tracks and safety. Exclusive freight corridors are a far better investment than running a bullet train for an exclusive section of the society.
Our national highways offer an expensive proposition for road transport (passenger as well as goods), given the level of user fee (toll) and the fact that toll plazas themselves cause congestion and result in the slowing down of traffic. Not to forget the struggle that we all experience the moment we get off the highway and enter our cities.
Urban congestion is the biggest driver of poor quality of life and loss of productivity and we don't even pay attention.
We often see reports saying that our fuel consumption, an indicator of economic growth, is growing faster than in the past and will drive future global demand for energy.
But we don't even ask ourselves a simple question:
What proportion of this fuel consumption is simply wasteful as vehicles are driving at 10-15 kilometres per hour in the city or idling at toll booths and traffic signals for millions of hours daily?
A simple personal test itself tells us that the fuel consumption at a low speed (10-15 kilometres per hour) is two or three times as much as when driving at 50 kilometres per hour.
We not only waste imported fuel, but also cause immense damage to our life through pollution. We are the third most polluted country, and more than 40 of our cities rank among the Top 50 most polluted cities in the world.
The fault in EV subsidies
In this context, it is important that the government minimises EV subsidies at this stage and spends the same money on decongesting our cities, given that a large proportion of our electricity is still produced using coal.
We also run the risk of generating demand for EV vehicles through consumer subsidies without creating the required production and charging capability within our country. In such a situation, we will only increase our import dependence, as was the case with the solar energy mission.
In summary, we must review our resource allocation strategy, given that our resource mobilisation is being constrained by lack of growth in household earnings and the government is excessively focused on managing the fiscal deficit.
We can accelerate growth through private (household and business) consumption and investment. This can only happen if the government helps the households enhance their ability to earn and save and reduces the amount of non-discretionary expenditure that we are forced to incur on education and healthcare. We need the government to spend on improving the quality of life and not on highway and railway projects that are highly expensive partial solutions or solutions to problems that can be solved years later.
