The growth conundrums

Nikhil Gupta's book offers and insightful exploration of the potential of the Indian economy and the problems facing it

The Eight Percent Solution: A Strategy for India’s Growth

Author: Nikhil Gupta

Publisher:  Bloomsbury

Pages:  400

Price: Rs 699

Every now and then, books of the “Macro Economics 123 Retold” genre appear, where a practitioner recounts macroeconomics in layman terms and hopes to leave a personal stamp with two or three unique prescriptions for overcoming prevailing ills. The main benefit of these books has been to spread, in ways that academic textbooks can never do, essential knowledge about macroeconomics amongst its practitioners or those impacted by macroeconomic policies, even if they lack a formal grounding in the subject. The Eight Percent Solution belongs here but reflects a far greater grip of the essentials.

The author analyses the four key important sectors of the economy — households, corporations, the government and the external sector — their strengths and weaknesses and what needs to be done about their shortcomings in the quest to reach a sustained 8 per cent growth rate. It takes the reader along with its lucid analysis and engaging narration of how these sectors interact in an economy.

The book points out that Indian household savings have been dwindling over the years and consumption is increasing. The Indian household’s debt-income ratio is deceptively strong but when one looks at the debt service cover, it is alarmingly high given the short average maturities and high interest rates. The book lays out statistics to argue that listed corporations catch most of attention, garner an undue proportion of credit, but deliver just about one-fourth of the share of gross value added (GVA) in an economy, while the unlisted and unincorporated sectors deliver the bulk of employment and GVA.

The recent euphoria about corporations deleveraging is worrisome since any prolonged deleveraging has historically pulled down the growth rates subsequently. In 13 out of 20 episodes in emerging economies of deleveraging over seven-plus years, growth rates have been pulled down significantly after the deleveraging ended. India is going through such a phase now and it does not augur well for the future. 

The government is burdened with committed and non-discretionary payments such as pensions, defence, and so on, and its compulsive spending on social interventions, such as farm loan waivers, direct transfers and employment guarantee schemes dilute productivity. Although recent trends are encouraging due to the rising proportion of capital expenditure, the government’s ability for sustaining long-term growth is limited. The vulnerabilities of free trade, currency, and the connected world have also been illustrated well.

Despite a masterly recount of the structure and dynamics of the four sectors, the author’s strategy to achieve 8 per cent growth on a sustainable basis is sketchy and unconvincing. The strategy as summarised by the author comprises the following: (i) The household sector should become more responsible; (ii) the government should consolidate its finances in the least disruptive manner; (iii) policymakers should not encourage household borrowings over corporate borrowings; and (iv) the corporate sector needs to align its interest with that of the nation. This strategy sounds limp and betrays the analysis that precedes it. There is no synthesis towards 8 per cent growth.

The author makes no pretence about his opinion on free trade (most developed economies have practised protectionism during their growth phase), socialistic pursuits such as the Mahatma Gandhi National Rural Employment Guarantee Act and the please-all subsidy culture, and democracy and its dilutive effect on decision-making and coordination. This is refreshing.  The author has made good use of his tutelage with both the former chief statistician and a former member of PM’s advisory council. The discussion of financialisation reflects his long association with stock markets as chief economist with a leading broking firm. 

The author, however, seems to have missed the dynamics behind India’s tepid reception towards investments in real estate and growing consumption. Real estate price inflation has fallen sharply in recent years. The total returns fall in the five to seven per cent range and the prospects, given the large unsold stock, are weak. People are more mobile and increasingly prefer living in rented premises than buying one. Meanwhile, every middle-class household sends its children to the West for higher education with a one-way ticket, incurring huge expenses counted as consumption. There is no epidemic of defaults on related loans. These are rational decisions at the individual level and cannot be questioned. The key socio-economic risk is the brain drain. The author’s worries about the high debt service cover would be addressed in the future as the tenure of loans, which is low in India now but is lengthening.    

Given the stated remit of the book, not discussing monetary policy especially inflation targeting is a notable omission.

The book argues for a “healing decade”, when the Indian economy should pause and consolidate and rectify the defects mentioned for each of the four segments. This looks both politically naïve and extremely risk-averse. India has made significant progress on financial inclusion, digitisation, formalisation, fiscal consolidation, forex reserves, banking stability, as much as Covid-19 would allow, in the last few years, and to pause at this stage would be wasting precious time besides testing people’s patience.

Despite the lack of synthesis for 8 per cent growth, this book is a recommended read. People in the banking industry, investment professionals, the growing class of economists in industry, industry professionals in finance and strategy, administrators who suddenly find themselves in economic functions will find valuable lessons on how economies function.

The reviewer is author of Making Growth Happen in India (Sage Publications)