Context

• The article reflects upon performance of Indian economy over last few years and expresses concerns over the worrying slowdown that began much before the COVID-19 pandemic.

Evolution of India’s economic yarn

• LPG reforms: After sluggish growth for about four decades after Independence, India’s growth picked up in the early 1990s, following the liberalisation, privatisation and globalisation reforms of 1991-93.
• Early 2000s: Episodes of boom and bust over the past two decades portray 2003-08 as the sharpest and longest expansionary phase when the economy expanded at an average of 7.9 per cent unprecedented in its recorded history, with India joining the ranks of the Asian super performers.
  • From 2005 to 2008, it was being acclaimed globally for being on top of most charts. For three consecutive years, India grew at, respectively, 9.3%, 9.2% and 10.2%.
  • Also from 2003 to 2011, India was on top of most global rankings in terms of growth performance.
  • With the onset of global financial crisis (GFC) between mid-2007 and early 2009, GDP growth had plummeted to 3.1 per cent in 2008-09, followed by a sharp but short revival during 2009-11 owing to coordinated fiscal and monetary policy actions.
• Recent decade: The 2009-11 revival could not be sustained, giving way to another phase of slowdown between 2011-14.
• Pre-pandemic scenario: Following a consumption-led brief boom during 2014-17, a cyclical downturn had set in the Indian economy from 2017-18.

Critical worry

• India’s growth story is concerning owing to the fact that the slowdown began much before the COVID-19 pandemic.
  • It began in 2016, after which, for four consecutive years, the growth rate each year was lower than in the previous year.
  • For instance, growth in 2016-17 was 8.3%. After that it was, respectively, 6.9%, 6.6%, 4.8%, and minus 6.6%. This downward spiral stretching over four years has never happened before in India since its independence in 1947.

Mixed growth story

• No real headway: In 2021-22, India’s GDP growth was 8.7%, which was among the highest in the world. But the fact that much of this is the growth of climbing out of the pit into which we had fallen the previous year is worrying.
  • For instance, in 2020-21, India’s growth was minus 6.6%, which placed the country in the bottom half of the global growth chart.
• Future risks: For 2022-23, the International Monetary Fund has cut India’s growth forecast to 6.1%. There are two special worries related to this:
  • Diverging trend: Firstly, most of India’s growth is occurring at the top end, with only a few corporations raking in a disproportionate share of profits. Also the unemployment is so high, it is likely that large segments of the population are actually witnessing negative growth.
  • Poor growth track: The second worry is about how India’s performance has been sliding compared to its own past performance and not so much about India’s dropping rank in the world.

No exclusive concerns

• Dismal rupee performance: The Indian rupee has been doing very poorly and has lost 8% this year, and nearly 2.6% in September alone, breaching the 82 INR against the US dollar mark. But it is still one of those more stable currencies when compared to others.

• Inflation: India’s retail inflation, which is measured by the Consumer Price Index (CPI), accelerated to a five-month high of 7.41% in Sept. 2022.
• Global anxiety: Though sliding rupee and high inflation is concerning, but these are global problems. Virtually all currencies are losing out against the U.S. dollar, and inflation right now is a global phenomenon.
  • For instance, while the rupee has lost 9.8 percent in calendar year 2022, it has remained much more stable compared to the Japanese Yen, which is down 22.6% against the USD year to date.
  • Others like the South Korean Won are down 17.1%, while the pound sterling is down 16.6%. The Euro is down 14.2%.
  • Inflation has soared globally as supply chains still healing from the coronavirus pandemic were hit again by Russia's invasion of Ukraine, forcing consumers to rein in purchases.

Dismal performance

• Unemployment: India is doing poorly in employment generation and more specifically youth unemployment is perverse. In October 2022, India’s unemployment rate stood at high 7.8%.
  • According to International Labour Organization (ILO) data, India’s youth unemployment, that is, from among people aged 15 to 24 years who are looking for work, the percent that does not find any, stands at 28.3%.
  • This places India in the cluster of troubled West Asian nations such as Iran (27.2%), Egypt (24.3%) and Syria (26.2%), and in a much worse state than most Asian countries such as Indonesia (16%), Malaysia (15.6%), and Bangladesh (14.7%).

• Poor policy interventions: Over the last seven years, there have been good and bad moves. For instance, to make it easier for bankrupt firms to close down and move on, new Insolvency and Bankruptcy Code was adopted in 2016.
  • While, on the other hand, the demonetisation of 2016 was a big mistake
• India’s investment rate: One of the main reasons behind India’s poor growth performance over the last six years that has been largely overlooked is poor investment rate. This falling investment rate is adversely impacting growth and hurting job creation.
  • Investment rate: is the fraction of the national income that is spent on investment in roads, bridges, factories, even human capital and is one of the most important drivers of economic growth.
  • Trends: India’s investment rate began a slow rise and crossed the 30% mark for the first time in 2004-05. By 2007-08, it had reached 39.1% and remained just short of 40% for six years and then began to fall. By 2019-20, it had fallen to 32.2%.

Needed, a policy refocus

• Given India’s strong fundamentals and abundance of talent, it needs to shift the policy focus from a few rich corporations to the larger segments of population -small businesses, farmers and ordinary labourers.
• Also fiscal policy interventions is needed to transfer income from the super-rich to these segments since inequality in India has risen disproportionately over the last few years.
• Also an atmosphere with ethos of inclusion and trust is needed, the erosion of which might be slowing down investment and adversely impacting job creation and growth.