If we have to list the reasons for the loss of growth momentum in our economy in the past decade or so, the following three would be amongst the top reasons:
1. Credit euphoria preceding the global financial crisis and the subsequent meltdown
The credit euphoria preceding the global financial crisis and the subsequent meltdown severely damaged India’s financial system. The banking system was crippled with enormous amount of bad assets; many key infrastructure projects were either abandoned or suffered inordinate delays; employment generation capabilities were impaired; private savings began to decline structurally; and overall investments also slowed down.
It has taken almost a decade for the Indian banking system to clean its books and return to the path of growth, stability and profitability. Private savings and investments though still have a lot to catch up.
2. Disruption through policy changes without adequate mitigation strategy
At least two major policy decisions were taken in the past decade that disrupted the status quo materially, viz., demonetization of high denomination currency notes constituting over 80% of the currency in circulation; and implementation of nationwide Goods and Services Tax that subsumed a number of indirect taxes. These two changes had a significant impact on the unorganized segment of the economy. Numerous cottage, marginal and small enterprises that were outside the main industrial value chain of the economy lost out to their larger organized peers. It was almost a repeat of the 1991 liberalization that made many protected and patronized businesses unviable. Incidentally, no lessons were drawn from the painful transition during the 1990s.
The structure of the Indian economy has changed significantly since the early 1990s when the first round of transformative economic reforms was implemented. The share of agriculture & allied services has reduced from over 33% in 1990-91 to less than 17% now; whereas the share of industry has grown from 24% in 1990-91 to over 28% and the share of services has grown from 43% to 55%. However, unlike the economic transitions in the now developed economies, our planners have failed to ensure a proper transition of agriculture labor to the industry and services.
The public sector that was a major employment provider to urban labor started to downsize post economic crisis in 1998-99. The share of industry in the economy did not improve much in the past two decades. With technological advancement the employment elasticity of industrial growth also diminished materially. The task of employment generation for unskilled and semi-skilled labor was thus left mostly to the construction sector. As this sector suffered the most in the post GFC meltdown, it was for the unorganized cottage and marginal enterprises to support the lower middle class and poor households. The decision to implement demonetization and GST had no explicit provision to support this sector.
Consequently, the reliance of the poor and lower middle class on fiscal support (food, health, education, travel etc.) has increased materially impacting private consumption and overall growth.
3. Disruptions due to the pandemic
The outbreak of global pandemic (Covid-19) in early 2020, disrupted the economic activity world over. Most of the countries were locked. The global supply chains were disrupted. The labor displacements and travel restrictions have been debilitating. The process of normalization is continuing, but it is far from complete.
Domestic economy witnessed huge displacement and reverse migration of labor; loss of livelihood for millions; loss of opportunity for millions as digital apartheid pushed them out from the education and skill building ecosystem; rise in wealth and income inequality; and lower productivity due to restrictions. Besides, the broken supply chains ensured higher inflation in almost everything.
Arguably, all these reasons are transient in nature and the economy should be able to revert to the path of stable growth in due course. However, the two key considerations here are – (i) How fast could we complete the transition to the new order; and (ii) how could we minimize the damage to the socio-economic structure of the country. The more we delay completing the transition, the deeper and wider the pain will spread. And if we fail to take mitigating steps to minimize the pain, the damage to the growth ecosystem could be structural, impeding the growth efforts for decades.
Also, this must be understood in the context of the fast maturing demographic profile (see Gorillas in the Room) and worsening inequalities (see Economy – Uneven recovery to pre-pandemic levels, accelerators missing).
