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BW Businessworld

The Fragility Of The Economy Is Both A Cause And Effect

The economy depends as much on politics as on economic policies. Apathy and fractiousness in policy-making hurt confidence in the economy.

Photo Credit :

1586930144_hDULji_2020_04_15T054832Z_1_LYNXNPEG3E0A0_RTROPTP_4_CHINA_ECONOMY.JPG

Milton Friedman articulates it best "Only a crisis - actual or perceived - produces real change.”

Over the last 70 years we have built an economy with neither a foundation nor a roof. It is unstable, precarious, brittle and even rickety. Our policy makers monitored when they should have nurtured; licenced when they should have fostered.

Misled and in denial

We are the third largest economy in PPP terms. A world beating growth rate, sound economy, demographic indicators, and healthy democracy concealed the fragility of our economy. 

The Indian economy that has been the envy of the world is on its knees and suddenly at risk.

Our success has also been our biggest failure.

The economy suffers macroeconomic imbalances and structural fragilities, making it susceptible to any disruptions, exacerbating imbalances, acute and long-lasting socioeconomic implications. 

Fragile, even broken

Our social framework is frail and worsening. The fragility of the economy is both a cause and effect. As a result we are a deprived society and need a robust and holistic policy framework to secure the foundations for stable, inclusive and sustainable development.

Post the reforms our growth, led and equally driven by a clutch of ‘new age’ entrepreneurs created enterprises (mostly services) of scale and value. The government ‘allowed’ them to be entrepreneurial.

The pre-reforms days the state ‘interfered’ for most (but) equally supported the few, ‘enabling those few to ‘bank and, licence’ business models. And create wealth. In a socialist milieu it was acceptable, rewarded and admired even. 

Rarely attended, often dismissed

In spite of unprecedented growth the we have, perhaps the worst socioeconomic indicators - income disparity, gloomy Human Development Index, indifferent health. Nearly 25 % Indians are deprived and denied; living below the poverty levels and continue to ‘stand and wait’ outside the ‘inclusive’ purview.  

Their next generation may not fare better.

The pandemic has exposed several fault lines. Our economy is characterised by resource deficit, lower productivity, exiguous technology adoption, missing middle, cronyism and several other ills.

Let sleeping dogs lie

However this is the symptom. The cause is the foundation we built and the roof we provided. This has rarely been acknowledged, never addressed.

Farming is not sustainable, not because our farmers can’t ‘weather’ the challenges, but because the ecosystem is unsurmountable and a huge headwind.

Half of our workforce processes and creates less than a seventh of our GDP, earning a fifth of what others do, and growing at a third. The infrastructure is non-existent, farm size too small and reducing. However you slice and dice the data they remain dismal and very gloomy. 

Investment in rural infrastructure, agricultural ecosystem and equitable land acquisition is paramount to create sustainable and equitable growth, yielding a 15 multiplier.

Then there is a case of the 400 million ‘unorganised, unionised’ and underemployed workforce; ‘working’ the economy, paid 70% of the minimum wages, have no benefits and exploited. The policymakers have accepted, and the beneficiaries’ pride this as ‘working model’ that makes them competitive. 

Entrepreneurship is the last resort. A Crux study across 17 states says it well. The ‘dice is loaded’ against the job creators i.e. MSME. They employ 120 million; contribute 45% of the exports, 30% to the GDP. They lack credit, market, technology and (because of) are inefficient. Inspector raj chokes them. The government policies help the big business, making smaller ones less competitive and perpetuating them to remain small (avg. less than 5 per unit). Less than 1% makes it to the big league. 

This tells a telling tale.

The missing middle

The corporate sector faces regulatory hurdles and policy upheavals. Businesses don’t like Government going back on its promises (retrospective taxation, cancelling contracts are common) when the dispensation changes. There is more collateral damage. 

The corporate sector must symbiotically partner the MSME and other stakeholders to build and enhance the ecosystem. However the MSME lack the much required support; in effect reducing competiveness, subtracting value and hurting growth.

Big corporates are neither the big employer (recruiting a fifth per Rupee invested) nor are they productive (amongst the lowest in the world). Large & depredating infrastructure, unskilled workforce, lack of capital and lack of technical expertise lowers it further. 

Need support, deserve more

A good proportion of our large companies are debt laden and precariously leveraged. Under pressure they impede, triggering a vicious cycle of increasing NPA, credit ‘trimming’, and choking the economy. Crux research insights 20% of the largest 500 companies are unable to service debt and fixed cost even for 60 days in the absence of earning. 

Even our largest organisations are pygmies on the global scale.

We have a ‘mixed economy’ that most people describe as ‘profit in the private pocket and loss in the public’. The public sector will not deliver because they can’t. They suffer a structural frailty. The ‘owner’ i.e. the government neither has the expertise nor the motivation to lead their growth. And believes it is a treasure till.

Over 90% of the large PSUs are struggling and on public largeness. Most ‘return’ are below any yardstick, and are bailed out regularly. At this rate most will close down sinking public money. Eventually.

Myopic approach and indifferent policymaking has caused a depreciating economic ecosystem has hindered competiveness Government’s response to global trade affairs is mostly inadequate, often timid. Infrastructure is the big elephant in the room. The corporates deserve more; amongst them, fostering innovation, upskilling, and global scale infrastructure etc. 

Delhi knows best’ failing us

In developing economies, the government partners industry.

However, our government either plays the role of the regulator at best, a monitor and often the inspector. 

The economy depends as much on politics as on economic policies.  Apathy and fractiousness in policy-making hurt confidence in the economy.

Over the last 70 years the centralised planning strategy has not address the inherent challenge; benefits of increasing economic integration have not been equitably shared between or within the states.

Economic landscape is craggy

Numbers conceal more, revealing little. Four states contribute about 40% to the GDP and are ‘balanced’ economies. The rest, especially the bottom 15 struggle even under the sun and will sink in a crisis.  

In the current uncertain environment, any unexpected developments or sudden shift will trigger an economic erosion and social disorder weakening us further and deepening concerns on the longer-term sustainability.

The fact is that when a crisis is particularly severe or unusual or both staying the same is simply not an option. 

Change as an imperative

The pandemic is a defining event. A catastrophe of this size and scale has accelerated an incoherent shift and laid bare profound, longstanding vulnerabilities in the economic system.

We need a new paradigm. Sacrifices may need to be made, decisive policy actions that address a holistic and sustainable approach needed, to secure the future. 

This can’t be addressed by, tinkering, fiddling, dismantling and even ‘unleashing the animal spirit’. Overhauling the obsolete and obstructive will be necessary. Not sufficient.

We have tried and often put the rail back on track. But we now need to lay new tracks. More is needed, and holistically.

Politicians often don’t look beyond a term; focus less on impact and sustainability, eye more on substantial input and ‘quick’ outcome. Over the decades the policymaking has been top–down, and implementation predicated around several wrong, and often dodgy assumptions.

The cost of social disorder is staggering. It threatens internal peace, loss of public conviction in institutions & democracy.

Policy architect and builders

Our policy framework must consist of policy architect and builders, both in equal measure, analytical thinkers & instigators of constructive social outcome and intuitive doers & implementation entrepreneurs.

While the PM begins to  ‘build from the start’ a robust  and event proof economy, the larger goal should be to keep the momentum, fuel  growth, capitalise on the demographic dividend and propel India in the league of developed nations.

Sadly, leadership alone will not do it. The PM must don the dual role of a surgeon and a builder. To ‘operate’, keeping the vitals running, and to concretise a foundation. He must use both the scalpel and the mixer aptly and judiciously.

It will require courage, skill, and wisdom in equal measure. 

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


Tags assigned to this article:
economic growth economy COVID-19

Dr. Vikas Singh

The author is a senior economist, columnist, author and a votary of inclusive development

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