How sweet is India's spot?

The economy has a lot going for it, but a closer examination suggests some urgent policy priorities

In recent months, many foreign and domestic magazines, newspapers, and commentators have waxed eloquent about the “sweet spot” India is in with regard to both economic growth potential and the geopolitical context. A prime example was the June 17, 2023, issue of the London Economist, which devoted half a dozen full pages to these issues, as well as the cover. It might be useful to take stock of this viewpoint two months later.

There is no question that the Indian economy has quite a lot going for it at present. The recovery from the 6.6 per cent Covid-lockdown GDP slump of FY21 has been swift and robust in the succeeding two years at 9.1 per cent and 7.2 per cent, despite its unfortunately K-shaped character. After a decade of stagnation, goods exports surged in calendar 2021 and 2022, before slumping in the past few months, while service exports continued on their strong trajectory, despite the bearish recent results and forward guidance of our information technology (IT) majors.

The continuing spread of India’s remarkable digital public infrastructure has powered low-cost transactions across the country, including for the delivery of expanded government direct benefit programmes. Sharply increased government capex has noticeably strengthened physical infrastructure, especially roads, while some fiscal consolidation continues after the inevitable blowout of FY21. The Reserve Bank of India (RBI) has wisely maintained a restrictive monetary policy over the past 15 months, which, along with the correction in many commodity prices (not, alas, tomatoes!), has helped bring the Consumer Price Index inflation below 6 per cent. Balance sheets of banks and companies have improved greatly over the years (at high cost to the exchequer) and permit more lending/borrowing to fund investment. Even the latest available government annual and quarterly periodic labour force surveys (PLFS) for 2021-22 and January-March 2023 (urban areas only) show modest improvement over 2018-19, though still leaving levels for female labour participation rates, overall worker-population ratios (for ages above 15), and youth (15-29) unemployment rates much worse than East Asian developing countries.

Little wonder that both the government and the RBI are confidently projecting 6.5 per cent growth in FY24, and hinting that such growth will be the base case in the medium-term, indicating healthy per capita GDP growth of above 5 per cent. Incidentally, even this will be nowhere near enough to transform India into a developed country by 2047. As a recent paper in the July 2023 RBI Bulletin points out, according to the World Bank’s definitions of developed or high-income nations, this would require sustained growth at 7.6 per cent, while as per the implicit criteria of the IMF, the attainment of an “advanced economy” status would require an even higher growth rate of 9.1 per cent.

The trajectory of medium- and long-term growth in output and employment in future is inherently uncertain and depends on both India’s external environment and our own economic and social policies. The former is largely outside our control, while in the latter domain, there are many areas in which we need to do much better to enhance our chances for sustaining rapid growth. Let me outline some of the key ones, which could become significant constraints if not addressed adequately.

* Our fiscal deficits and government debt levels remain too high to achieve sustained high growth with low inflation. The combined government (Centre and states) deficit, at about 9 per cent of GDP in FY23 and a possible 8.5 per cent in FY24, are very high by our own historical standards and endanger macroeconomic stability if sustained, especially if the long-awaited private investment recovery were to gather force. True, the government debt/GDP ratio has come down from the 2021 peak of 90 per cent to around 80 per cent but this is much above the target level of 60 per cent recommended by the N K Singh report on fiscal responsibility a few years ago.

* Our foreign trade policies have weakened significantly in recent years, including the late stage retreat from joining the Regional Comprehensive Economic Partnership (RCEP) in 2019 after seven years of negotiation; the successive export-hurting increases in our Customs tariffs since 2016; and the ill-advised resurgence of import licensing restrictions recently imposed for laptops and other computers. These need to be rolled back and we should strive to join at least one of the two Asian mega-regional free trade agreements (FTAs) if we wish to become significant participants in global value chains. Without high and sustained export growth, strong growth of GDP and employment is unlikely in the medium and long term.

* We have to find a way of rapidly improving the low learning outcome levels in our government schools if we want to prosper in a skill-intensive world economy. Perhaps our well-developed digital public infrastructure can be leveraged to make these urgently needed improvements in education and human capabilities swiftly.

* The resurgence in private investment is long overdue. The “twin balance sheet problem” has been largely conquered. Further fiscal consolidation is necessary to foster low interest rates. We need to work on greater stability and transparency in our policy-and-regulatory frameworks to encourage more investment, especially in our poorer, populous states. For obvious reasons, social harmony, justice, and law and order are priorities both for themselves and for promoting domestic and foreign investment.

What about the sweetness of geopolitics? Adroit diplomacy has certainly played its part in allowing strengthening of our relations with the US and its major allies despite our neutrality in the Russo-Ukraine war. So has the size and growth of our $3.7 trillion economy, though we should not exaggerate this factor in the context of a $100-trillion plus world economy. The real sugar for India in geopolitics has been the spillover benefits of the growing hegemonic rivalry between superpowers US and China. Most reputable analysts think that these tensions are here to stay. But then, until 1970, they thought the same about the hostile relationship between these two nations. It all changed very suddenly in 1971 with the Nixon-Kissinger cosying up with Mao and Zhou Enlai against the Soviet Union. That sort of turnabout can happen again, however unlikely it may seem today. It might be unwise for us to discount that possibility completely. 

Moral: As in human relationships, don’t take sweetness for granted.

The writer is honorary professor at Icrier; formerly, India’s longest-serving chief economic advisor to the Government of India; and author of An Economist at Home and Abroad (Harper Collins 2021). The views are personal