Vimarsha: India-Slowing Down an Under-Heated Economy a talk with Dr. Bibek Debroy

Ajit Doval, Director, VIF and Dr. Bibek Debroy, Eminent Economist

Dr. Bibek Debroy, an eminent economist and member of VIF’s (Vivekananda International Foundation) Executive Council, delivered a perceptive talk, titled ‘India-Slowing Down an Under Heated Economy’ on December 30th, 2011 as part of the Foundation’s Vimarsha series of lectures. An august gathering, comprising former civil and military officials, scholars and diplomats attended.

Mr. Ajit Doval, Director VIF, introduced the speaker and the subject. His penetrating remarks set the tone for the talk and the ensuing discussion. He pondered about the success of India’s growth story in the context of potential bottlenecks. Rising inflation, devaluation of the Indian Rupee, volatility in the equity market, and a sharp fall in the industrial output were telltale signs of distress in the Indian economy. Moreover, ongoing economic crisis in Europe was unlikely to leave India totally unscathed and this necessitated course correction measures in the country. The Director however reposed his faith in strong political and economic fundamentals of the country, hoping that India will eventually emerge much stronger. He further opined that the title of Dr. Debroy’s talk exuded both pessimism as well optimism. While the slowing down of India’s economy was naturally a matter of serious concern, an under-heated economy meant India still had a great potential to grow.

Dr. Bibek Debroy began the talk in a somewhat reflective mood, likening the present state of India’s economy to the prevailing damp and foggy weather. Continuing in the same vein, he said that there was no perceptible silver lining in the clouds, though the impact of global developments would be relatively limited for India. Presenting his diagnosis for the ills which have afflicted India’s economy over the past few years, Dr. Debroy indicated that the problem had very little to do with what was happening globally, and more to do with what was not happening internally. To that extent, he said that economic recession was being used by the UPA government as a red-herring to deflect the people’s attention from the real issues.

There is growing sense of skepticism, especially in other countries, about the future prospects of India’s economy. The dream that one saw with BRIC (Brazil, Russia, India and China) a few years ago is almost over, in so far as India is concerned. The situation is really pretty dismal for India, evidenced by the fact that the GDP growth rate is currently pegged at 6.9 percent which is much lower than the expected growth rate of 9 percent. While expectations about India reaching a higher growth trajectory still persist in some quarters, especially the government, the fact remains that the country is settling down to a 6.5 percent annual growth rate for the next couple of years. Dr. Debroy reminded the audience that India had achieved consistently an annual growth rate of about 9 percent until a few years ago, and there was even speculation that it could reach the two digit growth rate trajectory. Dr. Debroy reminded the audience that GDP is not just about numbers. He wryly observed that at a 10 percent growth rate India was creating 15 million new jobs each year, a 6.5 percent growth rate would result in the creation of only 10 million jobs annually. Job losses of such magnitude would inevitably have a major negative impact on the country.

In a perceptive analysis, Dr. Debroy, drawing attention to the RBI’s assessment that the external sector was today contributing about 3% of India’s GDP, noted that this implied that the country’s present growth rate of about 7% translated into a 4% growth rate which had prevailed in the period prior to the liberalization when the contribution of trade to GDP was negligible.

Criticizing the government for failing to enact the second wave of reforms, Dr. Debroy said that PPP, usually associated with Purchasing Power Parity, was being viewed increasingly in terms of Permanent Policy Paralysis! Government sought to account for its failure to push through important reform legislation by hiding behind the smokescreen of coalition politics. This paralysis had driven the Indian corporate sector which was sitting on huge cash reserves to invest not in India but abroad. Thus in 2010-2011 Indians invested as much as $44 billion abroad as against only $18 billion in the previous year.

Dr. Debroy pointed out the recent apparent decline in inflation was not due to government policies but was simply a factor of the current inflation rate being measured against the year ago high inflation rates.

He mentioned that apart from the government’s legislative inactivity the sorry state of the economy was also due to its executive decisions. For instance, environment and forest clearances critical for development of infrastructure had become avenues for rent seeking and bribery. Furthermore, ‘sanctity of contract’ so necessary for meaningful business activities had been abandoned as there was no finality to many of these contracts.

Dr. Debroy went on to suggest that regrettably some of the measures undertaken by the government, notably the MGNREGS (Mahatma Gandhi National Rural Employment Guarantee Schemes) and the Land Acquisition Bill were having an extremely deleterious effect on the economy. The latter would kill the land market and mining activities in the country. The blame for a sharp increase in labour prices in recent times could be squarely put on the MGNREGS. The scheme was not leading to any productive activities. It was hard to believe that a government which had so much economic expertise available to it simply failed to anticipate the effect MGNREGS would have on food price inflation. It was amazing that the government despite sitting on a wealth of economic expertise simply had no idea as to what was required to kick-start the economy. The government had chosen to ignore the recommendations of various Administrative Reform Commissions which would made possible effective delivery of services and allowed important legislation relating to pension reform, FDI in retail etc to gather dust – legislation which could have unshackled the economy.

The policies of the government appeared to be increasingly led by electoral politics rather than economic prudence. While the economic situation of India today was reminiscent of the late sixties or the early seventies, especially in terms of government intervention, it was worrying that hardly anyone, including from the economic fraternity, was contesting the economic policies of the UPA government. What India should be aspiring for was not 9 percent but 12 percent economic growth rate. For a country like India with such huge untapped potential, it could easily be dubbed an under-heated economy.

Dr. Debroy’s stimulating presentation elicited a volley of questions from the audience. A few of those questions related to the impact of Right to Information Act on decision-making, the role of judiciary in environment and forest clearances, the proposed land acquisition bill, the interventionist role of the Reserve Bank of India in stemming further depreciation of the Indian rupee, the outward flow of Indian capital etc. The speaker sought to clarify that more often than not the judiciary intervenes because of bad legislation. To a pointed question whether the outward FDI should be seen as a positive development, he replied that normally he would not be bothered whether capital flowed in or out, but if the outflow of capital suddenly shoots up from USD 18 billion to USD 44 billion the next year, it should be seen as a worrying trend. He further suggested that Indian capital was moving out not because of ‘pull’ factor but because of ‘push’ factor.

Report prepared by Mr. Sanjay Kumar