It is rapidly becoming conventional wisdom that the nine-per-cent-growth era is over. Its death has been accompanied by the usual stages of grief — denial, anger, bargaining, depression, and finally acceptance. Yet even those of us who firmly believe that economic growth – fuelled by steady investment and low inflation – should be the first priority of economic policy need not be completely dismayed by this slowdown. Why? First, because of the character and causes of the growth spurt of the mid-2000s; second, because it underlines the unique nature of India’s political economy; and third, because of the direction in which it will force our future economic policy.
Nobody is happy when an economy slows. But those who are excessively dismayed have, I suspect, learnt the wrong lessons from India’s experience over the past 10 years.
The “permanent” high-growth period between 2004 and 2009 was distinguished by one economic phenomenon, and one alone: unsustainably low input prices. In particular, of foreign funds and of natural resources.
To understand how cheap capital was for Indian companies between 2004 and 2009, just look at the “Baa spread”, the difference between returns on Moody’s Baa bond and US Treasury bills. This also measures the perceived risk of lending to major Indian companies, and many investors use it as a proxy for confidence in emerging markets. Between 2000 and 2004, the Baa spread touched six percentage points. Suddenly, around 2004, it started decreasing steadily, bottoming out at around 1.5 per cent. India’s liquidity crunch after Lehman’s fall was visible in the spread’s sudden upwards spike by seven percentage points to over 8.5 per cent. It now hovers around 3.5 per cent, well below the depths it reached in the golden age of liquidity — and few investors are confident it will descend below two per cent again. If anything, they think it lower than it could be.
Along with cheap capital, India puffed itself up on cheap resources. Of course, fuel was cheap; world oil prices stayed between $50 and $75 a barrel, compared to the $110 this year’s Budget allows for. But economic policy went beyond that, artificially keeping input prices low. Coal, for example, was mispriced through the handing out of coal mines to power or steel producers, in the fond hope that they would use it responsibly to aid India’s growth. Low-priced spectrum served as the foundation of the mobile phone boom that changed lives, and racked up growth numbers that made even Bimaru states look like stars when it came to GDP. Much of corporate India’s impressive performance in those years, thus, was thanks to government open-handedness.
That munificence will not return in a hurry; it seems India’s voters will not stand for it. Increasingly, resources will be priced according to demand, not as part of an effort to keep output prices low. And, of course, when a fair market for land finally develops, the age of cheap acquisition through co-opting state power, too, will end. Costs will never be as low as they were then.
Then there’s the question of consumption, investment and transfers, where India’s unique political economy is crucial. The decline in India’s growth is led by a sharp tapering-off in investment. Indeed, according to the numbers, the 2004-09 period’s off-the charts GDP growth was essentially thanks to a high investment component. The real object of all economic policy, growth in private consumption expenditure, was steady — but showed none of the dizzying heights that the overall Golden Age numbers reached. Indeed, in some more extractive parts of the country, a strange paradox emerged: high GDP numbers accompanied stagnant consumption growth. In Uttar Pradesh, apparently so well-performing, consumption growth averaged only a single percentage point a year during the Mayawati years.
Voters will not stand for this over a sustained period of time. They expect consumption and broad-based wealth to rise in tandem with growth, which they didn’t see as happening. China’s leaders can pull off sustained high investment levels, through their iron control of income distribution and wages; we cannot. Our economy and polity are both too free for that.
While the Indian state cannot directly control wages across sectors, it can, however, alter the terms of trade. To sustain transfers to the rural poor – using the MGNREGA, yes, but mostly the trickle-through effect of high minimum support prices for crops – the United Progressive Alliance has fundamentally altered the relative prices for urban and rural production. Home Minister P Chidambaram was ineptly trying to explain this when he pointed out that urban consumers get cheap ice-cream, so they shouldn’t complain if their rice costs marginally more.
Indeed, that’s part of the reason why high inflation should not cause us to panic completely, either. Prices are meant to be indicators of what’s happening in the economy. Inflation is problematic because it normally confuses those signals. But food prices are rising because of real, structural changes; monetary policy that’s too tight for fear of those structural changes misses the point. Today, it’s precisely a zero-tolerance-for-inflation attitude that’s muddying price signals. If inflation has crept up, it is because things are genuinely more expensive now as compared to the past — because fewer of their inputs are free.
So the rural agricultural worker has seen her income more than outpace her costs. The comfortably-off at the top of the pyramid complain noisily, but judging by consumer spending they aren’t doing all that badly, either. So who’s hit most by the slowdown? Andy Mukherjee, writing in these pages yesterday, spoke of an innovative indicator of living standards — the number of Big (Maharaja) Macs bought by one hour’s work at a McDonald’s. The “McWages Index”, as he put it, grew rapidly in India till 2007 — before slumping even more sharply than in America or China. It seems it’s the unskilled, aspirational urban working class that has been hit most.
So should the government’s reaction be to give in to Golden-Age nostalgia? It’s being peddled today by a loud chorus of those who haven’t internalised the structural changes behind the slowdown. They call for a miraculously immediate restoration of an earlier investment-friendly climate — although resource giveaways and regulatory blindness are now unfeasible. Foreign investors, who will never pour in cash the same way again anyway, now demand extra concessions — less action, for example, on curbing tax avoidance. A sensible government would ignore all this noise.
Instead, it should work to ensure its actions empower the urban working class. Shifting, identity-less, demanding, they aren’t easy to target through straightforward welfarist measures. Instead, expand civic amenities and wage employment; increase the accessibility of education. Oddly, these are the very measures that will also allow India to reach a healthier high-growth path than it aspired to earlier.
