View: Much of the precarious state of India’s current economy is because of a growing trust deficit – The Economic Times

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Synopsis–The whole world is suffering, India cannot be an exception. But once we look at the data, it is clear that India has not just slowed down, it has lost rank.

As the year draws to a close, and the world sees a glimmer of hope in the Covid vaccines, all countries have begun work to get their economies back to some kind of normalcy. India’s economy is doing badly. This is a puzzle, because the nation has many fundamental strengths, and has also made some good policy moves, such as the implementation of the Insolvency and Bankruptcy Code (IBC), 2016, and taking various steps to ease business processes. Why then has the economy stalled?

For anybody who cares about India, it is essential to examine the statistics. At first sight, it seems as though the Covid-19 pandemic is the cause. The whole world is suffering, India cannot be an exception. But once we look at the data, it is clear that India has not just slowed down, it has lost rank.

Slowing down

In July-September, the third quarter of this calendar year, we have GDP data for 63 countries (not all countries collect quarterly GDP data). Of these, 51 countries are growing faster than India. Only 11 are trailing us.

We have not seen a scenario like this in the last 30 years. India’s growth first picked up in 1993, soon after the big reforms. Then in 2003, it picked up further, and India was among the three fastest growing nations in the world for several years from 2005. How did we drop from top 1% of the world to the bottom 20% in terms of growth?

Some of this was caused by the nature of the lockdown. When India locked down from March 25, this was widely described as the strictest lockdown in the world. But it soon became clear that this policy had been adopted with no supporting plans for the poor and for migrant workers. This led anywhere from 23 to 40 million poor workers to spill out on to the streets, walking hundreds of miles home, which was the very opposite of a lockdown. This great unlocking had a large negative impact.

In India, it is often pointed out how the number of Covid deaths per million population is about 10 times higher in the US than in India. This is true. But this is true for virtually all nations in America and Europe compared to Africa and Asia. This has little to do with policy. It is now realised that Asia and Africa have higher natural immunity to this virus. So, we need within-region comparisons to understand the effects of policy.

Regionally, India’s record is poor. India’s score of 106 Covid deaths per 1 million population is the absolute highest among all the countries of South Asia, South-East Asia and East Asia. The next worst performing country is the Philippines with 82 deaths per million. Bangladesh is at 44, Pakistan 43, China 3, all the way to countries like Vietnam and Taiwan with less than 1 death per million. This is a direct outcome of the lockdown failure.

This effect will, however, wear off after a while. India’s long-run worry comes from the realisation that India’s growth slowdown did not start with the pandemic. In 2016-17, India had a GDP growth of 8.2%. After that, each year’s growth rate has been lower than the previous year’s, all the way up to 2020-21. A five-year downward stepwell of growth has never before happened in independent India.

Given that the nation’s big corporations and some financial indicators are doing well, who is paying the price of the downward stepwell? The new data released last week by the National Family Health Survey (NFHS) for 17 Indian states and five union territories are revealing.

Children have, on average, lost weight and height, controlled for age, over the last 5 years. We have not seen a reversal in these critical malnutrition indicators since 1998. Since malnutrition is not a problem of the well-off, this shows that the urban poor and the farmers are suffering disproportionately because of the economic slide over the last five years.

Grow again

All this is tragic because India has deep strengths. Since the early 1990s India has been a global leader in the information technology (IT) sector. Its pharmaceutical, higher education and research sectors also have immense potential. So, what should be done?

First, too little professionalism is going into policymaking in India. To treat the use of statistics on GDP, inequality and malnutrition as ‘anti-national’ and to look away is a mistake.

Second, in the coming Union budget, the finance minister needs to draw on the enormous amount of talent in India to design a big fiscal stimulus to the economy. This should be entirely focused on direct support to the urban poor, the unemployed, small businesses and agriculturists, cutting all non-essential expenditures. Even then the fiscal deficit will rise. That is only to be expected in a crisis. We should have a plan of rolling it back over the next two years.

Thereafter, all effort should focus on raising the nation’s investment rate and boosting the country’s creative sectors — research, higher education, science and technology. But I empathise with the finance minister here. Much of this is beyond her reach. Investment, especially creative investment, in a nation depends on something that goes beyond fiscal and monetary policy. It depends on trust. From laboratory tests to cross-country studies, there is a growing literature showing the relation between trust and growth.

In India, the rise of divisiveness and hate, and the marginalisation of minority religious groups and backward castes is not only doing damage the moral fibre of the nation, it is eating into our economic strengths. We owe it to the nation to correct this.

The writer is Carl Marks Professor at Cornell University, US. He was senior vice president and chief economist, World Bank and chief economic advisor to GoI.

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