A blueprint on economic revival is to be submitted to the Indian prime minister Narendra Modi, or so reports the Business Standard newspaper. This comes on the back of the slowest economic growth since Modi took over as the prime minister in May 2014.
For the period between April and June 2017, the Indian gross domestic product (GDP, a reflection of the size of the economy) grew by just 5.7 per cent. Between January and March 2016, the GDP had grown by 9.1 per cent. The last time the economy grew by less than 6 per cent (at 5.3 per cent) was between January and March 2014, when Manmohan Singh was the prime minister.
Also, the GDP growth of 5.7 per cent was achieved with the government spending more than what it usually does. The non-government part of the GDP, which forms roughly around 90 per cent of the economy, grew by a meagre 4.3 per cent.
The industry as a whole grew by 1.6 per cent, with manufacturing and construction growing by 1.2 per cent and 2 per cent, respectively.
We live in a world where any rate of economic growth greater than 2 per cent is considered to be good. But what is true for the West, isn’t really necessarily true for India. India needs to be growing rates of GDP growth faster than 7 per cent, if it has to continue to pull its millions out of poverty.
As Vijay Joshi, an economist at the University of Oxford, writes in India’s Long Road—The Search for Prosperity: “The ‘power of compound interest’ over long periods is such that even a small change in the growth rate of per capita income makes a big difference to eventual income per head.”
And how do things look for India? Where would it end by 2040 at different rates of economic growth? As Joshi writes: “At a growth rate of 3 per cent a year, income per head would double, and reach about the same level as China’s per capita income today. At a growth rate of 6 per cent a year, income per head would quadruple to a level around that enjoyed by Chile, Malaysia and Poland today. If income per head grew at 9 per cent a year, it would increase nearly eight-fold, and India would have a per capita income comparable to an average high-income country of today.”
This explains why high economic growth is so important for India. Another factor that needs to be kept in mind is that 12 million Indian youth are entering the workforce every year. This is India’s so called demographic dividend. But with construction and manufacturing growing at the rates they are, where will the jobs for the demographic dividend come from? The services sector growth continues to remain robust, but the support from industry is necessary, especially construction, given that most of these youth are low on jobs skills.
A major reason for the same comes from the lack of a good basic education. As per the Annual Status of Education Report 2016: “The proportion of children in Std III who are able to read at least Std I level text has gone up slightly, from 40.2% in 2014 to 42.5% in 2016.” Further, “in 2014, for the country 25.4% of Std III children could do a 2-digit subtraction. This number has risen slightly to 27.7% in 2016.” This has how the situation has been since 2010, after the introduction of the Right to Education.
Given this, a large portion of the youth entering the workforce are low on skills. Hence, they need low-skilled jobs which the construction and the real estate industry can provide. Both these sectors are going through a tough phase.
What hasn’t helped are India’s convoluted labour laws and the lack of ease of doing business. This has ensured that even industries like apparel manufacturing, which have the potential to create many jobs, continue to operate on a small scale. A recent report titled Ease of Doing Business—An Enterprise Survey of Indian States, published by the Niti Aayog, a government body, found that 85 per cent of the firms operating in the apparel sector employed less than eight workers. At a broader level, 85 per cent of Indian manufacturing firms are small and employ less than 50 employees.
The government feels that it has done enough to reform the labour laws, and it is the industry’s responsibility now to respond and set up labour-intensive enterprises. But that as the data suggests isn’t really happening.
Over and above this, agriculture which contributes around 15 per cent of the GDP, continues to employ half of the workforce. Exports during the first five months of this financial year (April to August 2017) are lower than where they were in 2013 and 2014.
All these factors have ensured that India has huge underemployment. Numbers from 2015-2016, suggest that only three out of five individuals who are looking for a job all through the year, are able to find one. The situation is worse in rural India, where only one in two individuals looking for a job all through the year are able to find one.
The negative effects of demonetisation have made things worse on the jobs front with many firms operating in the informal sector, which were the real job creators, having to shutdown. The botched-up launch of the Goods and Services Tax (GST), which was supposed to be a good and simple tax and it isn’t, hasn’t helped things either.
The other big worry for India is the mess its largely government owned public sector banks continue to operate in. 17 out of the 21 public sector banks have a bad loans rate of 10 per cent or more ( as of March 31, 2017). This basically means that out of every Rs 100 of loans given by these banks, loans of Rs 10 or more have already been defaulted on. Bad loans are essentially loans in which the repayment from a borrower has been due for 90 days or more. One bank (the Indian Overseas Bank) has a bad loans rate of 25 per cent.
These bad loans have primarily accumulated on lending to industry (read crony capitalists) where the overall bad loans rate, stands at 22.3 per cent.
The government has pumped in close to Rs 1500 billion as capital since 2009 to keep these banks going. With the banks continuing to accumulate bad loans and the Basel III norms coming into force from 2019 onward, these banks are going to need billions of rupees as capital in the years to come, to continue to be in operation.
The government clearly does not have this money and they remain reluctant to privatise or even shutdown some of these banks. Also, a major impact of the bad loans has been that the public sector banks are now reluctant to lend to industry.
To conclude, there are way too many structural issues with the Indian economy as of now. If a long-term growth rate of 7-8 per cent per year has to be sustained, these issues need to be tackled on a war footing.
The column originally appeared on the BBC on Sep 26, 2017.