As the post-pandemic fallout and geopolitical uncertainty slows down global economies and sanctions against some nations, energy crisis and inflation are adding to the troubles, India is projected to be decoupled from world economy and fare better. To check if this belief really holds water, in the latest episode of Checks & Balances, Geetanjali Minhas of Governance Now spoke to top economic minds.

Watch the video:


Economist Prof. Arun Kumar said that the cold war between the two capitalist blocks for territories and resources is leading to disruption of trade, finance and technology. Like the rest of the world, India is already in recession. This will not spur anticipated growth. There is no clarity on future and there is not much to be optimistic as India is not decoupled from world economy. There are global supply bottlenecks that require strong fiscal interventions.

On the question of the RBI, financial agencies and analysts projecting a 6%-7% growth rate for Indian economy, Prof. Kumar said a negative forecast by financial agencies will cause financial markets to decline. The RBI projection of a 7.2% GDP growth in 2023 does not take into account the decline in unorganized sector, he said.

“Our GDP levels are the same as in 2019 while other counties’ GDP levels are higher than what they had in 2019. Even before the pandemic, our growth rate had been falling Q after Q from 8% to 3.1%. Our consumption and investment are low. The RBI data show consumer sentiment is still not recovered to the January 2020 levels. The ratio of investment to GDP ratio was 36% in 2012-13, it dropped to 30% and has stayed there. The 7% growth rate that the RBI talks about is only of the organized sector and not of Indian economy. We are roughly at -1% growth and not 7% growth,” he said.

Prof Kumar said that huge forex reserves India built up during Covid were the result of rising Indian stock markets as the rate of returns of the organized sector had gone up because the unorganized sector was doing badly. “It has no correlation with consumption and demand or the strength of Indian economy. Reserves help in balance of payments and do not mean the economy is doing well. With declining exports, CAD [current account deficit] too is widening.”

Prof Kumar said specially in India, with 94% workers in unorganized sector, these people are not able to bargain for their wages and even 4% inflation is very high.

Citing data from recently released  Peoples Commission Report that he authored, Prof Kumar said 24 million people in the age group of 15-29 years who come to the job market are  able to get only half a million jobs and less than 2% get organized sector jobs. The rest are forced into the unorganized sector or compelled to stop looking for jobs. Compared to 1991, when labour participation rate was 58%, in 2022 it is only 45%, which means 19 crore people  have stopped looking  for jobs as they given up.

Explaining further he said, there is disguised employment, underemployment, disguised unemployment and those who have stopped looking for work. These are 27.8 crore people who need jobs. If they are provided with some basic jobs, India’s GDP will go up by 15%. With high degree of automation 80% investments go to the organized sector and with 60% working in unorganized sector jobs are not being created here.     

He said employment must be generated in the micro and small sector. “The micro sector is 97.5% of MSME; it needs to be corporatized. The problem is we lump micro with MSME. All policy benefits of MSME go to the medium scale sector and not the small and micro sector. The larger sector has only 6000 units, small and medium are 6 lakh units and micro has 6 crore units. With young people unable to find jobs and getting into crime we are seeing a demographic disaster. Digitization is further killing the unorganized sector as education levels of young people are very poor. There needs to be urban employment and strengthen rural employment guarantee.”

He said that policy needs to be aimed at raising demand through the micro and agriculture sector. “Instead, we have only tried to help the business community. These supply side policies work in the long run and not in the short run because investment revives in the long run and not the short run. ‘Atmanirbhar Bharat’ and tax cuts were supply side packages which are not going to work when demand is short.

“Black economy, according to my estimate, is 60% of GDP. If this segment was to be taxed, tax to GDP ratio will go up from 17% to 41%. And there will be enough money for employment generation, health, education,” he said.

Lord Meghnad Desai, London-based economist and Padma Bhushan awardee, said that if the Russia-Ukraine war does not stop it will lead to a bigger war with Taiwan and other nations pulled in.

“We will have serious stagflation across the world and no county will escape. If China seriously slows down and the US slows down, globally there will be massive recession. India has Russian oil for now, [but] India should not be complacent.”

“India is world’s fifth largest economy. It is 150th in per capita income. In India 20% are very rich, 40% are ok and 40% are very poor...very small percentage of women is in labour market. Beware! It’s a long haul and it’s going to be very difficult economic cycle this time,” he cautioned.

Lord Desai said that India must have an urban ‘MNREGA’ scheme on the lines of the MNREGA. “In a poor country the government has to do something to give succour to the poor. These sorts of measures are going to come up. India is a strong democracy. People will demand justice irrespective of who is in power. The choice in India will be: Who is to be looked after? In time of trouble India should become more of a welfare state.

“India has to get into a consistent growth programme for 5-10 years. It has never grown for 10 years except for one episode. I have a lot of respect for [finance minister] Nirmala Sitharaman. [Prime minister] Narendra Modi, since 2014, has always looked after bank accounts of poor… the will is there... The question is when the budgetary terms come, can the government say we will give the poor higher priority than we have done so far… for 200-300 million people in that condition... that is the challenge for the government of India. ….that can only be done by…. Narendra Modi,” said the renowned economist.

Observing that the Indian inflation is dependent on the global inflation, he said it is not going to die down. India is an inflation-prone country and there is no fiscal discipline in India at the state level. “Indian finance numbers are so mysterious that one can never be sure if the government is spending money or not. As elections come closer, the government wants to have fiscal laxity, whatever it may say in public. There may be all types of leakages, some of the advantages may be to the poor voters, but I am not as sanguine about India’s inflationary position as other people.”

On ‘swadeshi’ policies, he said India needs to be cautious rather than boastful. “Policies need to be pro-poor and not swadeshi…look after vulnerable people without neglecting growth, especially over the next 10 years because… the poor in India are very poor.”   

He added that India’s growth is about digitization, e-commerce and services. It has become a very efficient fin tech hub. The world is investing money in India as it is a huge market. “India is a services economy and should not worry about being a manufacturing economy.

“In India 20% are rich. That is 200-300 million people…  four times the size of the UK. It is a huge market. A lot of dollar investments coming are coming to India and may continue. It may slightly escape recession... That’s the only bright sunshine spot, I see,” he said.

Gopal Agarwal, BJP national spokesperson on economic affairs, said that despite the global recession at present India is an outlier. While Europe and the US are facing severe inflation, energy crisis, in India the government and the RBI are working together to control inflation and are confident of keeping it under 6%.

Outlining the measures being taken by the Modi government to strengthen the economy, he said the wholesale price index (WPI) has come down drastically to 8%-8.5%. The government has opened defence manufacturing for domestic producers. As many as 65% of defence production has been reserved for domestic producers, tenders under Rs 200 crore are reserved for domestic manufacturers and the productivity-linked incentive (PLI) scheme is favouring the manufacturing sector. The PM’s new logistic policy is at par with global standards while taking care of domestic needs. The government is investing hugely in chip manufacturing and 5G and looking at free trade agreements (FTAs) with Europe and developed countries in other regions. It is particularly working with farmer producers at the farm level.

“India is now increasingly focusing on green hydrogen and energy to reduce carbon emissions. The government’s initiative of reliance on alternative sources of energy will not pose energy challenge in future. We have sufficient power, water, renewable and green energy. Our target is to increase contribution of the manufacturing sector to GDP from current 15%-16% to 25%, which will solve the employment problem in the long term,” he said.

He said the government’s post-Covid fiscal stimulus package targeted the bottom end of population through MNREGA, Ayushman Bharat, Pradhan Mantri Kisan Samman Nidhi, free food for the poor, free vaccination, Ujwala Yojana schemes and DBT. That has kept the inflation under control and India is the fastest growing economy in the world.

To address the challenge of employability of the huge unorganized workforce, Agarwal said the government in 2014-15 started universality of provident fund (PF) scheme for construction labourers. Through GST and other reforms, the government wants to convert the unorganized sector into an organized one and the number of people registering for PF and Employee State Insurance Corporation (ESIC) schemes has increased drastically. Labour reforms being undertaken through labour codes will bring the unorganized sector into the organized economy. He said that well-meaning people should come together for a common narrative of reforms in the unorganized sector, adding that amendments to the agriculture laws had to be withdrawn due to “vested interests”. He said the states ruled by the opposition are not following fiscal discipline for political benefits and they need to be much more disciplined while announcing freebies as doles disturb fiscal discipline                  

He added that though India is a successful service economy, employment has become a challenge as earlier policies did not support manufacturing. He called for strengthening of the MSME sector.

On “swadeshi” policies, he said that for the BJP, “swadeshi” does not mean India will be a closed economy. “Our focus is to strengthen the value chain domestically so that we have integrated a cluster of domestic manufacturing, multi-nodal logistic hub etc.”
 
The BJP spokesperson said that global recession can be an opportunity for India. “Globally, the sentiment for India is very positive and the world wants to invest in India because of democracy, a stable government, transparent systems, the big market, and stable fiscal policies.”