Tackle the factors that make India uncompetitive, long-term growth’s greatest threat
The Indian economy keeps sliding downward. GDP decelerated steadily from 8.2% in the first quarter of 2018-19 to 5.8% in the last quarter. Is this a short-term blip, or a deeper, more serious structural problem? The correct answer is ‘both’. The combined impact will mean maybe no more than 5.5-6% growth in 2019-20, against the officially projected 7.5%.
Countercyclical strategies using fiscal and monetary easing can combat short-term threats. But the long-term outlook is gloomy, since India has ceased to be internationally competitive, with exports barely growing for the last five years. Politicians are giving no priority to restoring that competitiveness, and instead are falling back on protectionist nostrums, raising import duties on dozens of items year after year. This threatens to sink India’s long-term prospects.
Export and Flourish
No country has sustained 7% growth without buoyant exports. Fast growth requires a competitive economy, and a political will to keep improving that competitiveness. The absence of political will in India is dragging down long-term growth. That cannot be fixed by fiscal or monetary boosts.
The global economy is slowing and taking India down with it. The International Monetary Fund (IMF) projects world GDP growth slowing from 3.6% in 2018 to 3.2% in 2019. Export-oriented Singapore and South Korea have registered negative export growth, ringing alarm bells of global deterioration caused mainly by the US-China trade war.
Interest rates are already so low in many countries that their central banks find it difficult to use monetary policy to stimulate growth in response to the current slowdown. Globally, $13 trillion worth of bonds are trading at negative interest rates, something unheard of earlier. Central banks have created a huge global economic bubble, which is going to burst some day with ruinous consequences.
In the April-June quarter, growth in the EU was barely 0.2%. Export-oriented Germany is on the brink of recession, with all top corporations reporting plunging exports. British GDP fell 0.2% in the latest quarter, reflecting Brexit uncertainties. The US economy grew at a decent 2.1%, but this was down from 3.1% in the first quarter, suggesting that the fiscal stimulus of President Donald Trump’s tax cuts in 2018 is tapering off.
The US is going to impose additional tariffs on $300 billion worth of Chinese exports. China has responded by saying it will not buy any more US agricultural exports. Both sides are preparing for a deepening of trade war. That, in turn, is breaking global value chains, hitting investment and animal spirits.
Superimposed on this is now the threat of currency war. China’s currency slid recently, leading Trump to decry this as currency manipulation, which he will retaliate against. Many analysts now predict a global recession, though that is far from certain.
India is now substantially integrated into the global economy and cannot escape the global downswing. India’s exports had risen 9% in 2018-19, but crashed by 9% in June. Auto and motorcycle domestic sales, as well as exports, have crashed. TV sales fell despite stimulus of the cricket World Cup. Fast-moving consumer goods are growing only half as fast as last year, especially in rural areas. Corporate profits have been dismal along with corporate investment. Foreign investment has been a rare success story, hitting a record $63.4 billion in 2018-19. But much of it has been in financial infusions rather than greenfield investment.
Faster, Higher, Stronger
Three droughts in five years, combined with low agricultural prices, often below the minimum support price (MSP), have dented rural demand. Possibly a good monsoon this year will stoke a rural recovery, but it cannot offset the impact of the global slowdown.
Some economists want a fiscal boost to revive demand, raising the fiscal deficit to, say, 4% of GDP. However,economies have automatic stabilisers. In a downturn, tax revenue falls while spending on safety nets increases, so that the fiscal deficit increases without any conscious effort to do so. I expect the slowdown to push up the fiscal deficit past 4%. But this will not revive the economy.
While agricultural and global cycles will reverse after a dip, no automatic revival can be assumed for lack of competitiveness. Global trade wars and currency wars are going to make exports more difficult than ever. The response should be to tackle all the factors that make India uncompetitive.
Political competition between parties has ensured that, compared with its Asian neighbours, India has among the highest cost of land, labour, capital, electricity, railway freight and air freight. The need of the hour is to change land laws to cut land prices, ensure flexibility in labour laws, reduce interest rates, end high industrial electricity rates used to subsidise farmers, end high railway freight rates used to subsidise passengers, and slash extortionist taxes on aviation spirit to cheapen air cargo. This must be combined with educational reforms to hugely improve learning and create skilled, employable college graduates instead of substandard unemployable ones.
This is a long and difficult agenda, and will stoke furious political opposition. But if it is not undertaken, India’s competitiveness will slip further. That is greatest threat to India’s long-term growth.