The Truth About the Indian Economy's Performance And Employment

The truth about 'The India Economy story'

Indian Rupees Poor Performance

• The Indian rupee has been doing very poorly (especially in comparison to the stated target of our political leaders to strengthen it) and inflation, at 7.41%, is high, but these are global problems. 
• Virtually all currencies are losing out against the U.S. dollar, and inflation right now is a global phenomenon.

Poor Performance in employment generation

• India's unemployment rate is high. In October, it stood at 7.8%. However, what is worrying is youth unemployment.
• According to International Labour Organization (ILO) data, collated and presented by the World Bank, India’s youth unemployment (among people aged 15 to 24 years who are looking for work), 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%).

The recent growth of the Indian economy 

•  2020-­21: India’s growth was minus 6.6%, which placed the country in the bottom half of the global growth chart. 
•  2021-­22: GDP growth was 8.7%, which was among the highest in the world. This is good but we must offset the fact that much of this is the growth of climbing out of the pit into which we had fallen the previous year. 
•  2022-­23: International Monetary Fund has cut India’s growth forecast to 6.1%.

There are two special worries related to this: -

• Most of India's growth is occurring at the top end, with a few corporations raking in a disproportionate share of profits, and unemployment is so high, likely, large segments of the population are witnessing negative growth. 
• India's performance has been sliding compared to its past performance.

A short history of the Indian economy 

• About four decades after Independence, India saw sluggish growth but India’s growth picked up in the early 1990s, following the reform of 1991­93. 
• From 2003, it rose again, and India joined the ranks of the Asian super performers.
• From 2005 to 2008, it was acclaimed globally for being at top of most charts. For three consecutive years, India grew at, respectively, 9.3%, 9.2% and 10.2%. 
• India stood out during the Global Recession. In fact, from 2003 to 2011, barring one year, the start of the Great Recession in 2008­09, India was at top of most global rankings in terms of growth performance.
• It must be pointed out that in recent years, the official Indian estimates for these years have been revised downwards. The latest Economic Survey has cut these growth rates to 7.9%, 8.0%, and 8.0%.

Troubled Times 

• What makes India’s growth story worrying is that the slowdown began much before the COVID­19 pandemic. 
• It began in 2016, after which, for four consecutive years, the growth rate each year was lower than in the previous year. Growth in 2016­17 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.

What went right & wrong?

• India needed to make it easier for bankrupt firms to close down and move on. Without this, business was sluggish. It was good to see the new Insolvency and Bankruptcy Code the nation adopted in 2016. On the other hand, the demonetisation of  2016 was a big mistake.

India’s investment rate 

• One reason behind India's poor growth performance over the last six years is the Investment rate (a fraction of the national income that is spent on investment — roads, bridges, factories, even human capital). 
• For long years, India used to have a low investment rate, and, in keeping with textbook economics, India had slow growth.
• The 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%. India was, for the first time, looking like an East Asian super performer; and it was growing faster than the super performers. 
• The investment rate remained just short of 40% for six years and then began to fall. By 2019-­20, it had dropped to 32.2%. 
• Drivers of the investment rate: -
• It has many drivers. Monetary policy matters, as does fiscal policy.
• Arguably, trust is a major driver of investment. As the level of trust erodes in a society, investment tends to fall.
• The rise of political polarisation and the policy of divide and rule erode societal trust and this is reducing the investment rate. 
• The falling investment rate is adversely impacting growth and hurting job creation.

Strong base 

• There is no reason why such a vast expanse of the economy should be languishing, with so many people witnessing a contraction in their incomes given India’s strong fundamentals and abundance of talent.

Solution: a policy refocus is needed 

• We do need to shift the policy focus from a few wealthy corporations to the larger segments of the population — small businesses, farmers and ordinary labourers.
• There is a need for fiscal policy interventions to transfer income from the super­rich to these segments. There is ample space for this since inequality in India has risen disproportionately over the last few years. 
• Even though a divided society is easier to rule, we have to pull back from this and create an ethos of inclusion and trust, the erosion of which is slowing down investment and adversely impacting job creation and growth.