Rural investment is the best way to revive economy, says Pronab Sen

At a time when slowdown is the only narrative, top economists and thinkers offer their views on how to revive the economy. In the first part of a series, Pronab Sen, economist and former chief statistician of India, advocates higher investment in rural projects as the best solution.

The slowdown is the result of a lot of events. Part of it is cyclical, but there is a major structural element to it. There is also a data element as well. You have two factors: The cyclical slowdown, part of which began around 2013-14; and the structural elements that crop up are demonetisation and the goods and services tax (GST). What we are looking at today is a situation where demand, which had gone up in the economy, was fairly concentrated in households whose employment and income were generated directly and indirectly by the formal sector.

The informal sector had been in trouble after demonetisation. And what had happened is that we saw growth go up because of the GDP data capturing the formal sector and not the informal. What you had post-demonetisation was a fairly extensive phase where there was a shift in demand from the informal to the formal sector, leading to an unnatural boost.

What we are seeing now is in a sense a return to normalcy. The informal sector is starting to crawl back, and taking back some of the space it had given up after demonetisation. This process would have been smoother had the GST not happened immediately afterwards. In a situation of this kind, the formal sector is giving up part of this unnatural gain back to the informal sector. This is again getting reflected in the data, with the formal sector going down.

There are two ways the slowdown can be dealt with. If you are talking about the formal sector, then there is one set of actions. If you are talking about the economy at large, then there is another set of actions. In all this, one thing the government has not been able to factor in is that unemployment is up. And not just now, it has been up since 2016, as an aftermath of demonetisation and then the GST. If unemployment is up, we know wages are also stagnant, apart from upper reaches of Corporate India. That wage stagnation and unemployment are things we should be focusing on, not the GDP data, because that is just a statistical artifact.

My sense is that the recovery process has already started. The government can now act to accelerate it. There has been talk of investment-led growth in the Economic Survey. The point is that the only source of investment that is truly autonomous is public investment. All other investment depends upon the perception on what is happening to demand.

In terms of reviving domestic demand, you need to focus on improving the earnings and livelihoods of lower-income groups — the ones where unemployment has become significantly high. Focusing on corporate investment by announcing mega projects is not going to solve that. The government’s focus has to be on investments which are local, which use local resources, which use smaller companies.

If you take the road sector, for example, shift from highways to rural roads. Shift from mega power plants to local solar farms that serve rural areas. Shift from high-rise buildings to low-cost housing. The government has been doing a fair amount of that. But the attitude now is that these things are done to keep the poor happy. What I am suggesting is that this will be the best way to revive growth.

Next in series: Sajjid Z Chinoy, chief India economist at JP Morgan