A Decade of Disappointment: What’s the Way Forward for the Indian Economy?

Indian economy disappointment

The budget speech of 1991 by then finance minister of India Dr. Manmohan Singh is seen as a starting point or the most seminal moment in the history of economic reforms in India. That’s when people say India was put onto a new trajectory of growth rate from 3% what used to be called the Hindu rate of growth to something completely different. These ideas have dominated the Indian policy circle for three decades now and over the years resulted in the state actively undertaking a number of market-oriented reforms to strengthen public investment infrastructure, and the banking system and catalyzing private investments to position India as the world’s third-largest economy in GDP terms before the end of this decade.

Today the foreign portfolio managers are convinced and very optimistic about India with its stock market indices hitting upper circuit but a kind of clear sense of pessimism is seen more broadly among the ordinary citizens with the central banks’ consumer confidence index falling to a record low of 75 percent in June 2021 which didn’t happen overnight but it’s a decade long phenomenon when the economy suffered from the aborted structural transformation after three decades of very rapid growth and transformation i.e., from the 1980s to the 2010s.

Aborted Structural Transformation in the 2010s

Indian Economy was going fast before 2008 part of which was due to a huge increase in investments. During the boom years of the early 2000s, Indian firms invested heavily which was financed by bank loans but when the GFC hit the Indian economy, many large companies found it difficult to repay their debts. In response, with a lot of monetary and fiscal easing but without structural reforms, we saw the Indian economy grows and bounces back but was unable to recover its former growth dynamism which seems to have ebbed. As the growth slowed, in many development dimensions, the economy had stalled with female participation in the labor force reaching its lowest level since independence. After decades of improvement, progress in child care halted with diarrhoea, stunting, and Anemia cases shooting up along with the triple burden of malnutrition.

The average annual growth rates in the major macro indicators of the economy such as infrastructural investment, Exports, imports, credit, and asset growth basically collapsed with virtually no growth after 2011.  Premature de-industrialization with the share of manufacturing in the workforce which was already at a very low level of about 13% shrank to just 8% before COVID. And then came demonetization in 2016 with 86% of the currency declared invalid overnight with three economic objectives that were offered as the rationale behind demonetization—wiping out black money, eradicating fake currency notes, and creating a cashless economy. But as per the RBI data, more than 99 percent of that was invalidated came back into the banking system. It is doubtful whether the elaborate exercise was worth it. Adding difficulties to the lives of people then came COVID-19: A human/health tragedy with infection rates of about 70 percent and excess death per capita worse than average in G-20 nations ranging between 2.5 and 4.5 million. And the economy shrinking by more than 7%, the worst performer among major developing countries along with the share of the workforce in agriculture shooting up to more than 40%. And the most devastating of all, the pandemic has had setbacks in human capital formation in India. The Annual Status of Education Report (ASER) 2022 report shows that only 20.2% of Class III students can read a Class II text. In 2018, that figure had been 27.7%.

Tangible Infrastructural Transformation

Coming to the long-term view of infrastructure enhancement, the Indian state has taken great strides in delivering hardware infrastructure at scale over the last two decades across the governments starting from the Prime minister Atal Bihari Vajpayee government’s rural roads and other roads. Then we saw infrastructure, Direct benefit transfer, employment guarantee scheme, Public Distribution scheme that the UPA-1 started to current regimes Goods and Services Tax (GST), and Unified payment interface (UPI) all are examples of providing hardware infrastructure at scale. A lesser noticed but no less and even more important part of the economic bedrock is the government’s new welfare policy. It consists of providing people with essential private goods and services like cooking gas, Toilets, Electricity, piped water, Rural housing, Bank accounts, etc. The chart provided above speaks for itself about the achievements of the government’s new welfare policy.

At the same time, the government has taken several key policy initiatives and reforms to spur labor-intensive manufacturing goods export and increase investments in the country. Some of these include combining twenty-nine out of forty-four central labor laws into four labor codes, a reduction in corporate tax rate from 35% to 25% with new manufacturing firms securing a tax rate of just 15%, Asset monetization pipeline and India’s version of industrial policy i.e., Make in India; all of these aims to grow the private sector and to signal the government’s commitment to this objective. But even as some aspects of the policy framework have been streamlined, new, much large obstacles to private sector growth have been put in place. Since Make in India launched in 2014, the deadline for one of its key goals—to lift the share of manufacturing in GDP to 25%—has been pushed back three times, from 2020 to 2022 to 2025.

Foundational Bugs: Problems in policy framework

The issues in the government policy reform agenda begin with the loss of data integrity and access in the last few years and extend right through the policy inconsistency and its implementation.

Data integrity and its access have been seriously compromised over the last few years with GDP, Consumption data withheld, not released, employment data not released for a long time, and at the peak of COVID scientists repeatedly asked for the health data it collected, but little information was released making it difficult for people to have confidence that the government is basing policy on good information. Trust deficit with states in nearly every major economic issue from GST, agriculture, health, policy, power, and taxes to welfare schemes results that many initiatives being implemented poorly at the state level. Even when the reforms have been formulated and implemented adequately, many policies have been plagued by a lack of policy inconsistencies. On the one hand, the government enacts agricultural reforms to free up the market but at the first sight of scarcity, government re-imposes stock limits and export restrictions. There is a desperate need to increase taxes as India’s central tax/ GDP ratio has stagnated at about 9.5% in the last decade. In India, we see that exemption limits on personal income tax have been raised much faster than the per capita income with the government doubling the tax exemptions threshold in 2019, and in one stroke, 75 percent of the taxpayers (45 – 60 million) dropping out of the tax net.

Way Forward for the Indian Economy

For the Indian economy to achieve its full potential, the government needs a sweeping new approach in the policy-making process to policy reorientation towards lower trade barriers, amending labor laws, and greater integration into global supply chains via participation in the upstream production process. The country’s presidency of the G20 grouping this year could also boost investor confidence. We have a buoyant stock market but the question is how much of it is anticipating a solid economy and how much of this reflects as emerging market fund money fleeing China and coming to India or being temporarily stashed till Chinese developments become clearer. Thus, we need to be circumspect about the stock market figures. Coming to unicorns (startups with over a billion $ valuation) which are doing exceptionally well, it would be great if we could highlight how many are actually benefitting from the policy infrastructure and how many of them are funded by Indian VCs and not foreign VCs. Having done exceptionally well in the Ease of doing business Ranking of the world bank, we need to look at how we can make it simpler for businesses to start by not just making all the processes through a single window but reducing the number of administrative doors a budding entrepreneur needs to cross. Similarly, more could be done for the people at the bottom of the pyramid in terms of government expenditure without necessarily breaking the budget but transferring it from one side of the budget to the other. For instance, the reduction of corporate tax to 15% for new projects and the Production linked incentive (PLI) Payments account for around 5% of GDP over a five-year period but not actually helping in bringing the desired investment. Thus, India should zealously pursue structural policy reforms to make the transition from mediocrity to global leadership.


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About Sambhav Jain

Sambhav is a final year B.A. (H) Economics student at Shaheed Bhagat Singh College, University of Delhi. He is passionate about understanding how people make decisions regarding money. He is particularly interested in the intersection of behavioral economics and public policy and hopes to use his education to create positive change in the world. In his free time, he enjoys reading about economics and visiting historical monuments.

Sambhav Jain

Sambhav is a final year B.A. (H) Economics student at Shaheed Bhagat Singh College, University of Delhi. He is passionate about understanding how people make decisions regarding money. He is particularly interested in the intersection of behavioral economics and public policy and hopes to use his education to create positive change in the world. In his free time, he enjoys reading about economics and visiting historical monuments.

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