Rhyme & Reason: India isn’t said to be a bright spot in the global economy for nothing
India’s claim to ‘bright spot’ fame at the moment is juxtaposed with growth estimate cuts and forecast of weaker growth in the next fiscal year starting April 1. “The growth rates are much higher than what you have for the EMDEs as a group (and for any other country or regional grouping around the world), which is why we have said that India is a relative bright spot. We should not downplay this achievement,” Krishna Srinivasan, director of the ..
Time and again, ministers, policymakers, top analysts, rating agencies and even multilateral banks have hailed India as a bright spot in the post-pandemic global economy that is still stifled by geopolitical tensions, inflationary pressure and high interest rates.
In fact, Nouriel Roubini, a professor emeritus of Stern School of Business, New York University — who earned the nickname “Dr Doom” after famously predicting the 2008 US subprime crisis, too voiced optimism about India ..
India has had a lot going for it in the past decade – the demographic boom, the unleashing of productivity gains, the immense inflow of growth focused capital and a competitive and progressive regulatory landscape coupled with predictable policy standards that made India overweight in comparison to its developing peers, said Utkarsh Sinha, managing director of boutique investment bank firm Bexley Advisors.
Ironically though, India’s claim to ‘bright spot’ fame at the moment is juxtaposed with growth estimate cuts and forecast of weaker growth in the next fiscal year starting April 1.
The International Monetary Fund believes the emerging markets and developing economies are expected to account for around 80 per cent of the global growth this year and the next. Of this, India alone is expected to contribute over 15 per cent.
These growth rates are much higher than what you have for the EMDEs as a group (and for any other country or regional grouping around the world), which is why we have said that India is a relative bright spot. We should not downplay this achievement,” Krishna Srinivasan, director of the Asia and Pacific Department at IMF, said in a media round table.
To further dispel the doubts, one has to go beyond the numbers to understand the strength of the country that is now the world’s fifth largest economy, Srinivasan said.
Following the tragic delta wave of the Covid-19 pandemic, India responded strongly by vaccinating a large swathe of the population in a short period of time.
This has helped the economy recover faster than it would have otherwise. In this process, India has leveraged very well its digital public infrastructure, both to support the economy and to protect the poor and vulnerable, notably through direct fiscal transfers that have been both more effective and reduced leakages of precious resources, he said.
“I would also flag another bright aspect. This pertains to commitment to fiscal consolidation, as reflected in the recent budget, which appropriately places a focus on growth through greater spending on capex and infrastructure and didn’t fall prey to populism ahead of elections next year.”
Fiscal prudence over appeasement
India’s Budget for the next fiscal year is the last full budget before general elections in 2024. So, experts believe this Budget was an opportunity to announce populist measures, which however would have thwarted India’s resolution to stick to fiscal glidepath.
New Delhi largely abstained from populist measures, and Prime Minister Narendra Modi has in recent months criticised state governments for offering freebies to lure voters.
“We welcome the FY2023/24 budget’s tightening fiscal stance and continued focus on infrastructure. Clearer guidance over India’s medium-term fiscal consolidation plan can help enhance policy space and facilitate private sector growth. There are sound fiscal consolidation policies both on revenue and expenditure that can be implemented,” IMF said.
Self-reliance & dreams of new factory of the world
Typically, India’s economy has boomed aided by the services sector taking off in a big way thanks to the IT/ITeS space. Manufacturing was given a short shrift in a country of over billion people and a ballooning youth population looking desperately for jobs. Now, India is looking to attract the supply chain away from China and emerge as the new factory for the world.
Over the past decade, India’s services sector has been the most important driver of GDP growth, accounting for around 50 percent of real GDP, while the manufacturing sector accounts for about 16 percent, IMF notes.
“So what we see is that there is a great opportunity for India to further unleash this potential in the manufacturing sector,” Srinivasan said, adding that together with the positive demographic dividend facing India– adding about 15 million working-age population every year— the manufacturing sector could potentially help absorb large-scale employment and lift prospects for growth over the medium term.
To realize this potential, it would be important to continue to make progress on India’s reform agenda, the IMF official said. This entails securing an open and competitive business environment, including to foreign direct investment, which would help raise private investment, accelerate business creation, and improve competition.
Ensuring reliable, affordable, and greener sources of energy and transportation will also be critical. And finally, labor market and education reforms, including vocational training, to help improve worker productivity, contribute to higher accumulation of human capital, and ensure the Indian workforce has the skills needed by these new businesses, Srinivasan said.
The pandemic package debate
When the Covid’s first wave locked down the nation and rendered millions jobless in India alone, Prime Minister Narendra Modi in May 2020 had announced a stimulus package of Rs 20 lakh crore, or which he said was nearly 10 per cent of GDP, to deal with the economic fallout.
However, many prominent analysts quipped that the actual size would be as low as 1% of GDP and lacked addressing immediate concerns of the economy. Also, the central bank was left to do most of the heavy lifting that went on to slash rates to an historic low.
“About half of the package amount covers fiscal measures that had previously been announced and also include the estimated economic impact of monetary stimulus from the Reserve Bank of India (RBI),” Fitch Solutions said in a note back then.
Srinivasan said it is difficult to quantify the support to the GDP. In response to the pandemic, we saw different countries give different amounts of policy support depending on the policy space that they have. Moreover, the policy support was not just through fiscal policy, as the authorities also used monetary policy by cutting interest rates and providing liquidity measures to support banks, corporates, and households.
Therefore, it is hard to quantify the overall support in terms of GDP when you take into consideration monetary, financial, and fiscal policy tools, he told ET Online.
In terms of the specific measures, some were more targeted than others. For example, on the fiscal front, funds to purchase gas cooking cylinders were targeted to women from low-income households, whereas the fertilizer subsidy could be better targeted, Srinivasan said.
Health of healthcare infrastructure
The life-threatening second wave of the pandemic was said to have exposed potholes of India’s healthcare infrastructure, which was choked by lakhs running to the hospitals and many ended up in crematoriums. The overwhelmed Indian health infrastructure struggled with oxygen supply, shortage of manpower, hospital beds or even drugs.
In seven months, the next wave hit the nation. However, in that duration New Delhi and states ramped up health infrastructure, trained personnel in operating ventilators and oxygen generation plants. New Delhi had set up an administrative machinery to coordinate with states. While oxygen shortage proved fatal in the second wave, the government formed an Empowered Group to address oxygen availability.
However, the pandemic had overwhelmed health infrastructures across all countries at different points in time. In hindsight, no country got it perfectly right for the pandemic response and there are lessons to be drawn to better prepare a country for future shocks, Srinivasan said.
IMF refers to India as a relative bright spot in terms of the economic performance it has displayed coming out of the pandemic notwithstanding several challenges, including weakening global growth, high commodity prices, and tightening global financial conditions.
“In particular, India has experienced rapid growth recovery and made impressive progress on digitalization, which has allowed it to distribute economic support swiftly to a broad share of the population even in remote areas and which has potential to deliver strong productivity growth over many years to come,” he said.
The India Stack combination of digital ID, payments and data exchange is an impressive example of how digital public infrastructure can bring society-wide transformation, Srinivasan said.
“We’ve seen how this infrastructure helped vulnerable members of the community by giving them easier access to government benefits and empowering them to engage with the formal economy more closely. For the private sector, the focus on interoperability made it easy to utilize the core functionality of India Stack, fostering innovation, particularly for financial services. For the government, India Stack has supported strong government revenue collection and improved public expenditure efficiency ..
IMF is looking forward to seeing how India will use DPIs to transform agriculture, health, education, and e-commerce to support inclusive growth. There’s a lot that other countries can learn from India’s journey.
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