Too Big To Fail
India’s economy is now a global heavy-weight; it must stay nimble
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Independence Day is a good excuse for some economic chest-thumping. We should be proud that India is a free-enterprise democracy. Imagine the world’s burden if we were a basket case of 1.35 billion poor people. We may complain about inequality and the disproportionate number of billionaires, but it is possible to rise from rags to riches.
Our national discourse is too political, and we revel in grandstanding and point-scoring, but oddly enough, we are finally starting to seem like a grown-up economy where broad policies endure across political divides. The International Monetary Fund (IMF) paints a benign portrait in its just-published annual evaluation of the Indian economy.
It sees Gross Domestic Product (GDP) growing by an average 7.75 per cent over the medium term to 2023-24, which could be when Prime Minister Narendra Modi completes a second term if re-elected. Among other projections for the next five years:
- The size of India’s economy will expand from $2.77 trillion this year to $4.48 trillion
- Consumer price index inflation will average 4.5 per cent
- The fiscal deficit will decline gradually to 2.9 per cent of GDP
- Net foreign direct investment (FDI) is projected to rise from $38.7 billion in 2018-19 to $76.2 billion in 2023-24
The IMF suggested that FDI could rise even faster if India took steps to increase the ease of doing business. Whichever government takes power in 2019, it will have the luxury, unlike the situation the Bharatiya Janata Party faced in 2014, of riding on comparatively greater financial stability and steadier growth.
One of the biggest steps towards liberalisation will be the reform of India’s outdated labour laws. Organization of Economic Cooperation and Development (OECD) data show that India has among the most rigid labour laws in the world, only slightly better than Portugal and Indonesia. Ranil Salgado, the IMF’s mission chief for India, said flexible labour laws will trigger greater job creation in the productive formal sector, and increase women’s participation in the labour force. World Bank data show that India has the worst ratio of women participating in the labour force among BRICS countries: China leads with nearly 60 per cent. The government argues that a recent move to extend fixed-term labour contracts to all sectors will start to give employers much more flexibility.
Despite the positive report card, the IMF also cited World Bank data that says India’s per-capita income of about $2,000 is far below its BRICS peers; here, Russia tops the chart.
These indicators are important because India is poised to overtake China as the world’s most populous country in 2022. How is this going to pan out in India’s teeming cities where more and more rural youth will migrate in search of jobs and better lives?
The Economist Intelligence Unit (EIU) has just published its annual Global Liveability Index, and it shows that New Delhi and Mumbai are at 112th and 117th places among 140 major cities worldwide. We have a long way to go in controlling pollution, tackling congestion and making our cities vibrant hubs of education, culture and innovation.
What challenges lie ahead for the government? Domestically, a major test is managing our foodgrain surplus – including by loosening curbs on exports – so that our farmers finally start to see a rise in real incomes. This will include ensuring proper price discovery through digitisation and carrying out a drastic reform of the mandi system.
Health and education need to loom larger on policymakers’ radar. The Kasturirangan Committee drafting a New Education Policy has had its term extended three times, and a draft is promised by end-August. The Ayushman Bharat-National Health Protection Mission, which promises insurance to half a billion people, is about to be launched.
Infrastructure spending needs speeding up; private investment needs to roar back into full throttle; the twin balance sheet crisis squeezing both banks and businesses needs to be resolved. The Insolvency and Bankruptcy Code (IBC) has to be made to work so that stressed assets can be either sold to new owners, or dissolved so that creditors can get relief even if they have to take substantial haircuts.
The IMF underlined the need to enhance the ease of doing business in India, saying: “Despite recent simplification efforts, business regulations remain very complex, litigation lengthy, and corruption and bureaucracy reportedly major obstacles for doing business. Further steps could include contract enforcement and judicial reform. In addition, measures to reduce administrative and regulatory burdens, improve governance, shorten regulatory approval timelines, and widen implementation of single-window clearance can support foreign and domestic investments.”
On the external front, India is sure to be hurt by a global trade war. Its current-account deficit, predicted at 2.6 per cent of GDP this year, needs to be trimmed by boosting exports. Rising oil and commodity prices are already taking their toll. On its part, India is at risk of being labelled protectionist by the World Trade Organization for raising import tariffs on about 400 items over the past two years. The government argues that its import tariffs are in line with peer countries and it believes strongly in multilateral, rules-based global trade.
But the rupee has now hit a historic low of 70 to the U.S. dollar. As if on cue, data for July just published showed the merchandise trade deficit for the month at $18.02 billion, and the overall trade deficit for April-July at $43.77 billion.
It is not just trade that India needs to worry about. Foreign portfolio and institutional investors, drawn by higher U.S. interest rates and spooked by global volatility, have pulled over $5.5 billion from Indian markets since January.
Despite these challenges, India’s economy is now big enough for New Delhi to play a more decisive role in global growth and influence policy-making. The government is committed to fiscal prudence, and the Reserve Bank of India has kept a weather eye on inflation. We just have to strap ourselves in, and not miss the red lights.