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Issue Brief: 05/2022
The following is an address by Shri. MR Sivaraman IAS (Retd.) delivered at the Defence Services Staff College, Wellington dated Feb 22, 2022, on the topic “India’s Current Economic Situation & Prospects for the Future”.
While the whole world is coming out of one of its worst periods in history India is trying to be a beacon light in making the obstacle and challenges to its economic system into opportunities. Unlike most democracies in the world India with its kaleidoscopic variety of peoples, religions, languages and cultures is unique. Any judgement on the performance of this country has to be in this background.
So how have we performed? India’s performance from a growth perspective has been impressive.
GVA GROSS VALUE ADDED
That gives an impressive average growth rate of 7.1% for the 20 years.
If we look at growth from another angle of PPP Dollars then in these 20 years it is 5.2% for India and 6.2% for China. China had a PPP GDP OF 24 trillion dollars in 2020 as against India’s 8.972 trillion dollars.
Another indicator of a nation’s increasing prosperity is its growth in real per capita output. The IMF gives the following growth rates in 2017 dollars.
2003/12 2013 2014 2015 2016 2017 2018 2019 2020
INDIA 6.3 5.1 6.2 6.8 7.1 5.7 5.4 2.9 –8 (5.7)
CHINA 9.9 7.1 6.7 6.5 6.2 6.4 6.3 5.6 2 (7)
China’s integration with the world economy started in the late nineteen seventies (1978) under the leadership of Deng Xiaoping. India’s very haltingly only in 1991 by force of circumstances of a foreign exchange crisis. For all-purpose China is centrally controlled and directed and its regional governments could competitively attract huge inflow of foreign investments due to their being able to give vast tracts of land and many other concessions to investors. Investors had unrestricted access to cheap labour without any labour problem.
It is ruled by one party and hence one economic policy with one underlying political philosophy. India has multiple parties ruling in different states and having a different outlook on many economic and political issues acting as major constraints on economically relevant issues on availability of land, environmental approvals, local government approvals for supply of water and energy and different labour laws. Those are problems that cannot be wished away in the democratic structure of India, of Parliament, State legislatures, district panchayats, tahsil Panchayats, and gram panchayats all elected bodies with defined powers under the constitution. Besides, there are urban local bodies.
Historically the sub-national governments in China enjoyed a high degree of autonomy because of the size and complexity of the country. Chinese provinces, Municipalities and other regional and sub-regional units of administration enjoy full powers to attract investment to their regions. China significantly is the most decentralised as far as government expenditure is concerned with general govt expenditure of 85% being incurred by local govts. In India of the aggregate central and state expenditure after accounting for central transfer to states in 2021/22 was estimated at Rs 71.13 lac crores of which the states accounted for 42.95 lac crores and the centre 28.18 lac crores which is just 30.6% of the GDP. Many countries spend close to 50% of GDP.
GOI through the NITI Aayog is spurring competition amongst the states by publishing comparative figures about their performance in economic and social sectors.
This is pushing states to attract investments from major international players.
The problems confronting the government in accelerating growth are many.
Savings has declined to 30.9 in 2020 as a percentage of the GDP as against 36.9% in 2011.as against China’s 45.9 in 2020 (WB DATA). Our savings are supplemented by external flows in the form of ECB by commercial undertakings, Govt borrowing from the Multilateral institutions and FDI inflows. It is domestic savings that matters for a stable rate of growth as others are uncertain. Our future growth is contingent on our savings growth. This is dependent on corporate profits, savings of households and savings of government. Income levels in the household sector has been affected by the pandemic and hopefully it will pick up soon. Government has to fill the gap in investments through CAPEX by the government. Government cannot invest in many sectors where only the private sector can do. Government investments will mostly be on infrastructure that would indirectly boost demand for industrial products both through consumer demand and demand for capital goods. The states are also encouraged to increase their capital expenditure. As large govt. expenditures will generate incomes it will have a combined multiplier effect. The government has to make substantial outlays for defence expenditure due to compulsions.
Even now the defence expenditure of India including defence pensions is only 1.98% of estimated GDP for the year 2022.If we take the data of Stockholm International Peace Research Institute USA 3.7% BRAZIL 1.4 % CHINA1.7 % INDIA 2.9%. These statistics are not a reliable indicator of the level of military expenditure including ours. But it is an acknowledged fact that India requires a much greater outlay on modernisation of our defence forces.
One cannot dismiss defence expenditure as not contributing to development. The more the country indigenises its weapons system the more will be the employment generation and other multiplier effects. Several recent initiatives culminating in thousands of crores of orders on Indian companies herald a new beginning. We have to accelerate this programme both in the interest of the country’s economic growth and also to eliminate the risk and uncertainties involved in depending on foreign suppliers. Your contribution on accelerating this process as future decision-makers in the armed forces is vital for the current and future generations of Indians. I watched the Tejas being built in its prototype form and today we are proud of it.
We are on the threshold of rolling out the prototype of the Advanced Medium Combat Aircraft. What we lack now is an indigenous engine for our aircraft. We should get there soon. The order for TEJAS is expected to generate 5000 additional employment opportunities so will the Rs 10000 cr order for guns on the L&T. TATA’s have been given Rs. 22000 worth of orders for the IAF Other major orders for Armoured vehicles radar systems etc have also been placed with Indian companies. These are examples of military purchases that would stimulate employment and growth.
A factor that interferes with our development process are the periodical elections. The EC incurs over Rs.4000 crores on one election to the Lok Sabha and one state election will cost several hundred crores. If the polls are held simultaneously as was being done earlier the savings will be several thousand crores and this could be directed toward economically productive sectors. Further the elections disrupt development projects albeit temporarily as every announcement could be treated as election-related. Government officers go overboard and stop even normal expenditures. In spite of the recommendations by the law commission to hold simultaneous elections, we have not travelled any distance on that. The Chinese also have many layers of units of government like provinces, autonomous cities, municipalities, autonomous regions and so on up to the village committee office bearers for which elections do take place but being a single-party system, they are concluded swiftly. This is the difference between the Chinese system of Governance and ours. Political parties are indifferent to the major electoral reform that could save thousands of crores.
The obstacle which India increasingly faces with many other countries is the devastating impact of natural disasters causing human and material losses. According to the WMO (World Meteorological Organisation State of the Climate in Asia 2020) India lost $87billion in 2020 with China’s losses being $238 billion. Resources get rediverted to recovery and rehabilitation of affected people and rebuilding of destroyed assets. Although every year separate budget provisions are made more often the expenditure far exceeds the provisions. Various remedies like climate proofing of crops are being tried to prevent food shortage during a drought year. States will have to undertake elaborate exercises to prevent flood losses by providing drainages in cities towns and villages.
A major challenge that is almost ignored by academicians and national level leaders is the growing disparity in development in different states of the country. Goa has a per capita income of Rs 5.2 lacs against Bihar’s meagre Rs 50733 in 2019/20. Look at the population of Bihar and that of Tamilnadu the former had a population of 12.4 crs as against 8.4 crs of the latter. This population in Bihar is in 94000 sq. Kms as against 134000 sq. km of TN with a per capita income of Rs 2.5 lacs. The state of Odisha faced stiff resistance from tribals and a whole alumina plant in Jharsuguda has now to depend on imported bauxite ore. The people did not allow a South Korean Company POSCO to set up a 90K cr steel plant in Paradip. In many parts of India, we see a conflict emerging between people and projects some of which may be genuine and some may be sponsored. These are more common in states that have a sizeable tribal population. However, Odisha has been active in inviting small projects that will help in its growth.MP has now become a granary of India with several of its mighty dams completed and irrigating huge tracts of land.
Bihar is in a position to attract industries in the future as many initiatives like having one engineering college, one polytechnic and one ITI for each district are under implementation.
No state in the NE will attract any major industry for obvious reasons of inadequate infrastructure facilities and terrain problems apart from the continuing unrest in parts of the NE.
The government of India and the state governments are now trying to develop a software industry in the NE. There is one STP in Guwahati with its centres in other NE states and another in Nagaland. The literacy level is over 85% in these states and they are proficient in English. There is scope for thousands of youth getting employed in this sector in newer areas such as AI and machine learning. Some of the software companies of India have in one single complex having more than 65000 employees. The government of India is trying to provide good linkage to all the NE states. The software giants should be encouraged to set up their centres in these states. The GOI have plans for major dams in Arunachal also but there is stiff opposition to it from the locals. The development of tourism has to face obstacles such as the requirement of inner line permit to enter some states.
India has to meet with periodical set back to investment on account of internal disturbances like terrorist attacks and uncertainties. They are rare nevertheless have to be accounted for.
A common factor for globalised economies is the disturbances in the international financial system and the contagion affecting us is now more with our economy being open and our financial system integrated with the global financial system. The rising oil prices will upset many calculations that have gone into investment proposals. The increased outgo in FE on account of oil imports may impact our rupee-dollar exchange rate having many ramifications. If the rupee depreciates then it increases the rupee equivalent amounts of interest and repayment obligations of firms that have borrowed in the overseas market. Their balance sheets come under pressure with a host of problems. Our oil imports were about $99.7 bn in 2020/21 has already crossed $136 bn till Dec 2021 accounting for over 30% of total imports. Government proposes to progressively increase the methanol admixture in gasoline to 20%. The switchover to alternative forms of energy is more urgent than ever.
A feature of the Indian economy that is worrisome is the falling labour participation rate
As per CMIE, the LPR was 47% in March 2017 and it has fallen sharply to about 40% in just four years, the bulk of the decline had already happened before the pandemic.
Countries like Indonesia, Philippines, Vietnam etc. have over 60% employable people actively looking for jobs. In India roughly about one billion people are employable but only 400 million or 40% are actually in jobs. Even Pakistan and Bangladesh have over 47% of the employable in jobs actively. India ranks with Somalia in this respect. In china it ranged around 66.8%
So why do Indian policymakers and economists refuse to analyse this phenomenon? I have not seen any economic survey in recent years mentioning this prominently in the first chapter capturing the overall outlook for the economy.
One explanation given for low LPR is that the employment rate among the women is very low, especially in big Hindi belt states like Uttar Pradesh and Bihar where reportedly 90% of women remain unemployed. No one has a very credible explanation for this which suppresses the potential in India for rapid growth. Whether too many things being given free by many states have made people indolent and not desirous of seeking work needs to be enquired into. At the same time the state of Tamilnadu known for its freebies also has the lowest poverty rate in the country and excels in many socio-economic indicators. In the UK in the late 18 century when the poor laws were in operation the poor were given everything free. This created a huge labour problem during the industrial revolution till the poor laws were abolished. An explanation could be the illiteracy amongst women and the socio-cultural habits of keeping women at home has over the years has not developed a culture to seek employment. Bihar has an LPR of 28 against 54 for HP and 53 for Sikkim. TN has a little over 45 but strangely Goa that has the highest per capita GDP and high literacy it is around 38.
The government of India launched a National Rural Livelihood Mission in 2011 through the setting up of Self -Help Groups of women in the rural areas to encourage them to start various household enterprises through which they can augment their income. In India SHG represents a unique approach to financial intermediation. The approach combines access to low cost financial services with a process of self-management and development for the women who are SHG members. They are formed and supported usually by the NGOs and government agencies.
This has had its impact and women are now increasingly participating in income earning activities. I quote from a WB impact study “Since 2012, NRLM has mobilized more than 59 million women from poor rural households into SHGs. The majority of these women belong to Scheduled Castes, Scheduled Tribes and other vulnerable households.” This is a positive trend and requires to be encouraged with vigour.
Our forex reserves at over $630bn is at a very comfortable level. But that cannot be accepted at face value as these are not trade surpluses but mostly dollars received through FDI, FII, ECB and NRI remittances. Of this FDI cannot go out easily but the rest can go at the first sign of a crisis in the financial system there will be a flight to safety. Sitting in the Board room of the IMF we directors watched the huge reserves of South Korea draining out and IMF had to step in to arrest the flow. China’s strength is its huge reservoir of forex reserves all accumulated through trade surpluses amounting to over 3.5 trillion dollars. China has a trade surplus every month in excess of $70 bn.US sanctions if any has improved its trade surplus.
India’s trade with China has grown irrespective of the hostilities and confrontation at the border. Further interest rates which were at zero level in most developed countries have started rising so the differential with our interest rates will narrow encouraging the FIIs to move out of the Indian market. The interest rate increase will impact stock market prices and discourage new IPOs. This will impact exchange rates and forex reserves.
India expects to cross $400 bn in exports during the year 2021/22 if this momentum is maintained then soon we should be able to balance our trade which has a huge deficit since decades. (in bn $ 2020 8.31 2019 72.57 2018 100.38 2017 83.76)
The oil bill alone is over 25% of our imports.
There is a constant vigil on all these developments by the ministries of finance industry and commerce. The RBI watches closely the day-to-day development in the international financial system and takes corrective action on the exchange and monetary front.
The pandemic has reaped havoc in our country as we had lockdowns which some countries like the US did not resort to as we did. But they paid a price. We have to forget the past but learn from mistakes and move on.
We expect a growth of over 9.2% in the current year. The budget assumes a nominal growth of 11% next year which is on the downside. On account of the imponderables that I listed above it is better to be conservative than optimistic.
The budget has ambitious objectives of pump priming the economy with a huge capital expenditure outlay of nearly Rs 10 Lac crores. To this if we add another 6 lac crs in the state govt budgets and spending is not delayed we could expect economic activities to surge in most sectors except the services sector dominated by the travel and tourism industries. International tourism to India fell by 76.9% in 2021 as against a fall in international travel globally by 70%. Unless international travel is opened tourism will suffer and that employs a large number. This also affects the hotel and restaurant industry. This will be an area of concern. Visa fee waiver has been announced for the first 5 lac tourists to India up to March 2022.This will have to be extended and supplemented by visa on arrival to most country tourists. mention tourist guides and curio shops
The production linked incentives to 14 industries has opened possibilities of attracting foreign investors as well as domestic players to venture into hi tech areas. The reports are very encouraging and results are showing in record exports of cell phones from India. Electronic exports as a whole increased by 49% at $ 11bn between April -Dec2021 of which mobile phones constituted the bulk. Other sectors that have received approvals in the area of automobiles, batteries, chemicals and Pharmaceuticals may take time to mature.FM is hopeful that this will create 6 million additional jobs and Rs30 lac cr addition to production in the next 5 years. The decision to make 400 high speed trains in India in the next three years will transform railways in many ways.
I want to touch on some emerging problems this country will have to face in the coming years on account of destructive technologies supplanting current ones and displacing a huge number of people. While new technologies may create new opportunities and jobs they will go to only highly skilled people. The nation must have master plan for this transformation. The auto industry will undergo a transformational change with EVs replacing ICE vehicles, The ICE vehicles have 2000 plus moving parts whereas an EV has just 20. That is why it is said that the ICE car is a dead man walking. What happens to thousands of auto ancillaries and the hundreds of thousands employed in this sector. No plan has been thought of till now to find alternative employment and investment opportunities for those who are displaced from this sector. There are many thousands employed in the coal mines and in the thermal power sector. As we start implementing our promises to reduce emission our thermal power plants would get decommissioned to be replaced by alternative sources of energy from solar and wind sources. These sources employ relatively less people. So Govt has to plan to employ those who come out of closed mines and thermal power plants. The Indian Bureau of Mines had issued detailed guidelines in regard mine closures which included compensation payments and rehabilitation of those who get affected. The National Foundation of India set up by the former FM of India CS and two others has brought out a report on Socio Economic Impact of Coal Transition in India as late as Nov 2021 that brings out the implications and steps to be taken as India starts closing coal mines where millions of workers are employed directly and indirectly. This is a serious matter and the report says that very little was done in the case of 123 mines that closed operations since 2008.
The impact of such destructive developments in technology, use of alternative sources of energy and environmental changes on our growth prospects require a holistic approach and not piecemeal. The state governments and the central government have to work together symbiotically as it affects the future of our people.
I would now like to walk you through India’s economic relations with its neighbours. The world has recognised India as a first responder in all cases of natural disasters in its neighbouring countries. In the last 16 years India has rendered assistance 25 times to all its neighbouring countries including Pakistan in 2008 during its great floods. This has been acknowledged internationally. India has FTA’s with Bhutan, Sri lanka and Nepal. India has proposed Comprehensive Economic Partnership Agreement to Bangladesh. There is already an existing SAFTA under which concessional rates of duties have been exchanged amongst members. In the budget for the year 2022/23 there is a provision of Rs 6182 crores as development assistance to several countries including to Eurasian countries. Bhutan gets a lion’s share of Rs 2266 crs and Mauritius Rs 900 crs. India has built large hydel power stations in Bhutan and also buys power from them. (India from an aid receiver to an aid giver).
The fact cannot be ignored that India is a dominant partner in trade with these countries for obvious reasons and inevitably has trade surpluses with all of them. One problem that confronts India in having FTAs is the trade diversion by some of the exporters of the partner countries. They divert imported cheap products from other countries after some repacking and export them to India. These when stopped irk these countries. India recently commissioned an oil pipeline to Nepal making easy access for their oil supplies through India. Recently India provided assistance to Sri Lanka during their payment crisis. India also got an agreement with SL to develop the Oil tanks in Trincomalle.
Our relations with neighbours gyrate between friendship and some hostility occasionally. This is inevitable owing to strong socio-cultural relations they have with India which at times conflict with political and economic aspirations of their governments. During high tides diplomacy has to play it well to ensure the continuance of mutuality of interests. As large neighbour it would be India that may have to give way on many occasions so long as its security interests are not jeopardised.
What are my suggestions in regard to India’s future that will be the period in which you will be on the high seats of power in your organisations.
1. India has to aim at an average rate of growth of 7.5% per annum which would double India’s GDP in 9.5 years.
For this to happen private investment and government investment have to go hand in hand.
As states have a major role to play, all matters relating to investment should be decentralised to enable states to attract investments both within and from outside the country.
States should vest all their local bodies with the powers given to them under Article 74 of the Constitution and allow them to levy all the taxes cesses and levies for which they have the powers. Create a powerful independent audit system that is not the Local Fund Audit of the govt and local bodies should adopt commercial book keeping and their auditors should be chartered accountants. A group of panchayats could be audited by one firm.
5. Central government should focus attention on bridging the regional disparities in incomes.
States which are very far behind in per capita income requires support to accelerate growth to at least 10% per annum. Widening disparities may create avoidable regional tensions.
The central government should focus on increasing expenditure on education and health so that the states and the centre put together to reach 6% of GDP in respect of both the sectors which is not even 3% now.
8. Vocational education requires more attention and the curriculum of the existing Polytechnics and ITIs must be revamped to suit the new industrial architecture based on AI machine learning robotics and alternative energy. Partnership with industry is a sine qua non for revamping courses training schedules and absorption of the trained. Students who go in for casual arts courses as they could not get admission into their courses could get attracted toward vocational education if they are promised jobs after successful completion of the course. Armed forces under their respective procurement wings could have a unit only to look for quality purchases from the MSMES and even guide them in developing products and services for their use.
9.The vacancies in government jobs including PSUs are around 6 million estimated by the most of which are accounted for in teaching and police jobs. Govt. of India should first fill up their vacant posts (9.10 lac posts vacant in the central got). Only 2 states account for more than 20% of these vacancies and states must be pressurised to fill them up first before freebies. A myth has been created by the media that Indian govt jobs are too many. It is not true. As per the ILO India’s public sector workers as a percentage of total work force was just 3.8% as against 28% of China France 28% and the USA 13.3 %. Even a country like Bhutan has 28%. As mentioned earlier even in this a million posts are vacant. We keep hearing the poorly informed media talking of excess staffing in government. The vacancies in the HC IS 404 of the total 1074 judges and in the subordinate judiciary it is over 5000.Unless the Government of India and the states together remedy this major dent in our governance system, delivery of public goods will be inefficient, untimely and prone to corrupt practices like speed money being demanded to expedite govt. approvals. Our judicial system comes under fire for lack of speed and one of the causes is the large number of vacancies and judicial procedures. This has to undergo a change as speedy enforcement of contracts which is essential for stable and progressive commercial activities will be a drag on growth.
Why does this happen? It is simply because the ministries are unable to fill them up for want of resources.
As stated earlier many issues have national dimensions. For a unified approach, the government of India in consultation with the states should in my view set up councils of states and the centre like the GST Council a constitutional body. The crucial areas are industry, education, health, agriculture and exports. Federalism will only get strengthened by consensual decision making on issues that concern the whole country and its future.
(Shri. M. R. Sivaraman IAS (Retd.), Former Revenue Secretary GOI, ED IMF and Adviser UN SC CTC; Distinguished Member, C3S. Views expressed are personal.)