To understand whether the current economic slowdown is
structural or cyclical; and whether the problem stems from the demand side of
the supply side, I must understand the meaning of this jargon. Not being an
economist, I would like to define this jargon from my own prism to suit my
layman understanding.
Structural economic slowdown, in my view, means that current
economic activity is the best that can be achieved within the current social,
legislative, political and economic context. To achieve higher growth that the
present level, material improvements (know as structural reforms in common
parlance) would be needed in all these spheres at policy, administration and
execution levels.
Cyclical economic slowdown on the hand means a temporary
disequilibrium between the forces of demand and supply resulting in demand
destruction.
A disproportionate change in demand usually occurs due to excess
liquidity, change in rates, changes in fiscal incentives, fear of unusual
supply changes in near future, etc. Such change in demand that is not matched
by proportionate change in supply invariably leads to changes in prices and
eliminates the demand from the marginal buyers or marginal producers.
Similarly, a disproportionate change in the supply may occur due
to excessive capacity building in anticipation of future demand; disruptions in
supply caused by natural events, legislative changes, geo-political conditions
or civil unrest etc.
The cyclical slowdown is reversed as the forces of demand and supply
return to the state of equilibrium through policy intervention and/or
rebalancing of market forces. Usually no material policy changes are needed to
manage the cyclical slowdown.
In my view, the slowdown witnessed in Indian economy is
structural and would need material improvements in social, political,
legislative and economic context of the country.
Damage to economic structure
In my view, the seeds of this slowdown were sown during the NDA
regime led by Atal Bihari Vajpayee (1998-2004). The tenure started with the big
blast (May 1998 nuclear test) and was punctuated by major initiatives like NELP
(hydrocarbon exploration), SEZ (key reforms in land, labor and tax laws in
select zones), NHDP (highways), PMGSY (rural roads), AAY (food security for poor),
SGRY (employment for rural poor), SSA (primary education for all), airports
privatization, port privatization, Electricity Act 2003, spread of mobile
telephoney, 100% FDI in core sectors, etc.
These initiatives excited the global investors at a time when
Indian IT professionals were making big impression on global technology
canvass. A supportive regime, Y2K problem, easy credit post LTCM and Asian
crisis (rates lowest since 1970s) and depressed commodity prices (inflation
lowest in decades) helped big investment initiatives.
The problem was that many of these programs were initiated
hurriedly without putting an adequate institutional mechanism in place, thus
leaving the scope for misuse (of discretionary powers by minister and
bureaucrats), litigation (ownership of natural resources), misappropriation (of
natural resources by scrupulous allottees), non-compliance (environment and
sustainability norms) and wide viability gaps (absence of immediate demand) and
thus planting the seeds of financial stress, economic slowdown, mistrust and
corruption. Subsequent UPA government watered and nourished these seeds well.
The advanced demand for infrastructure (as distinguished from
"need" for infrastructure) impacted sustainability of many large
businesses and eventually resulted in near collapse of PSBs and widespread
collateral damage to the entire supply chain.
In particular, the road and power sectors are still reeling
under the stress.
Damage to the social structure
It is clear that our society has defied the classic Maslow's
evolutionary pyramid. It is moving directly from sustenance to aspirational
consumption. The demand thus created is neither desirable nor sustainable.
I see that in rural and semi-urban areas, motor cycle has replaced
bicycle as a mandatory dowry item. These days, it is almost impossible to marry
your daughter if you cannot afford a motorcycle and smart phone in dowry. Many
old aged villagers argue that it is a collateral damage of better road and
telecommunication connectivity. The road and information highways have taken
the markets to people in remotest of the areas, but little efforts have been
invested in enhancing the skill and awareness level of the people.
Employability and earning potential has not improved commensurate with the
aspirations. The social structure is thus damaged.
Secondly, the youngest demography in the world is like a vast
reservoir of unexploited energy. If not channelized properly, it can destroy
the very core of our social fabric. The rising number of poorly educated,
inadequately skilled underemployed, unemployed and employed in disguise youth
is no strength for the economy. It is indeed a serious weakness.
On one hand, India is failing in her duties towards the
international community (see here); on
the other hand we seems to be fast running out of ideas for managing this vast
and invaluable resource for our economic good. Rise in petty crimes, instances
of civil unrest, deterioration in general compliance standards are just few
prominent consequences.
People are spending on motor bikes, smart phones, SUVs,
tractors, wedding & birthday celebrations, compromising on food, health,
education & training, and shelter needs.
This is raising three damaging trends in the socio-economic
milieu of the country:
(a) Even the people who are
better off in absolute monetary terms frustrated and cynical than ever.
(b) There is an increasing tendency to depend on
the State for meeting basic needs.
(c) The consequent financial stress is gnawing
into traditional Indian ethos, where defaulting on debt is considered one of
the greatest sin. These days it is not uncommon to see people not only
willfully defaulting on loans but also encouraging others to do so.
Distortions created by political structure
The pseudo socialist and quasi feudal nature of our democracy
often leads to wasteful expenditure. The policies and plans focused on winning
an elections rather than achieving sustainable economic growth and development
result in serious misallocation of capital and sub-optimal of resources.
We have seen politicians creating undue and totally
unsustainable demand for color televisions, smart phones, laptop computers etc.
by manipulating the process of democracy.
We need a political organization that fully assimilates the
aspirations of the people, addresses specific local problems, promotes mutual
trust & harmony, bars incompetence and knavery from public office, and
insures that the best is selected and prepared to rule for the common good.
The legislative problem
Since 1976, our governments have been constitutionally mandated
to be "Socialist". Any legislation or policy of the government must
pass the test of socialism before being implemented. This constitutional
commitment often conflicts with the ideas of free markets, global competition,
liberalization, etc. To avoid this conflict the governments mostly try to
include a multitude of safeguards any policy framework that is intended to promote
free markets and competitive enterprise.
Consequently, we find most of our economic legislations complex
and ambivalent, adding the element of unpredictability to the economic
decisions. Frequent revisions, roll back and totally avoidable litigations is
the outcome of this conflict.
We would need to address all these problems before our economy
can move to a higher orbit of growth.
I would like to share my thoughts on material improvements
(reforms) that may be considered to make structural corrections to the economy
next week.
