Jagdish Rattanani
The economy is in a bad shape. Everyone knows and experiences the adverse impacts of a fall in growth. In a way, all reference points have disappeared like they do in a tsunami. We don’t know if the sea is on the land or the land is in the sea. Marooned in such a situation, official economic indicators have little meaning.
Yet, some pointers are available on the extent of the collapse though the government has cautioned the people against any comparisons with the past. Factory output as measured in the Index of Industrial Production (IIP), which tracks manufacturing, mining and electricity, is in a free-fall. The IIP for April and May, the first two months of lockdown, reports a 45 per cent fall from the same period last year. The collapse, not unexpected, comes on the back of negative numbers that began showing up pre-pandemic in the last fiscal. For example, IIP was down 4.3 per cent in September 2019, with mining down 8.5 per cent, manufacturing down 3.9 per cent and electricity down 2.6 per cent.
The national economy is hit hard by the pandemic at a time it was already weak. The numbers quantify one part, but they also point to what can’t be measured – the yet-to-come cascading impact on investments, spending patterns and overall attitudes and behaviour that could dramatically alter some basic constructs.
Take the example of cement, in which India has the second highest installed capacity in the world with some one million people employed therein. The industry shut shop during the lockdown and opened up as the lockdown eased. But, it still has unused stocks that reflect the weak off-take in construction, which reflects the collapse of demand. This scenario is likely to worsen as more companies in IT services space take to working from home and dramatically lower their office space usage.
So, even if there is a pick-up in IIP, it will run into show stoppers of the kind that will emerge from several quarters as businesses and citizens adjust to changing paradigms. Clearly, it is too early to read ‘green shoots’ (a term used five times in the government’s Macroeconomic Report, June, 2020) into numbers even when they indicate a pick-up.
Consider, then, the “crucial cushion to external shocks” in the nature of forex reserves at $475.64 billion as on July 10. This looks robust by itself till one appreciates the fact that the total external debt stood at $558.5 billion (March-end, 2020 figures). Total reserves can finance only about 85 per cent of external debt; and short-term residual maturity (maturing in less than 12 months) of external debt accounts for some 50 per cent of total reserves. This was fine in a stable world. In a geopolitical climate brimming with volatile hotspots, this should not offer comfort. Accretion to reserves was high in 2019-20 at $59.3 billion but as economist Dr. RK Pattnaik has noted, it contains an unusually high “other capital receipts” portion of $18.4 billion, which includes forex that came in but was in all likelihood not deployed as the market turned messy and the pandemic spread across the globe. This tells us of the huge gaps that now stand between plans, investments and execution, again an indication of uncertainty that points to dangers in the external sector in a world where globalisation is in retreat.
India’s current account balance may generate a small surplus in the first quarter of this fiscal but this will be because the economy has stalled, leading to a collapse in imports. That isn’t good news either.
India weathered the 2008 financial crisis rather well but that came at a time the nation had recorded a five-year period of growth in the region of 8 per cent. For a crisis like the pandemic that is far worse, India enters with an economy that is far weaker than we have known for a long time. In the January-March quarter of 2019-20, growth was down to 3.1 per cent – taking India back to the so-called Hindu rate of growth of the pre liberalisation days. For the full year, growth was 4.1 per cent, the lowest recorded in 11 years.
At the same time, inflation is up and has crossed the upper limit of 6 per cent in April-May-June quarter, telling us that prices have risen beyond tolerance level, just when incomes have fallen drastically. RBI has lowered rates repeatedly (cumulatively 225 basis points from February 2019 to date), but the classical argument that this would lower rates to retail borrowers and businesses, making it easier to buy and invest more, remained a mythical story.
There is clearly an immediate crisis but the Indian economy also faces a larger crisis of vision, direction and integrity. Numbers can’t tell us about this crisis and indeed a crisis like Covid-19 conceals inherent weaknesses. It is the inherent weaknesses that do not allow the nation to look up almost three decades after liberalisation promised to unshackle India and unlock its entrepreneurial energies.
Instead, we have had one worse – an unresponsive public sector of the past replaced by a post-liberalisation private sector that continues to pull privilege, comfort and support of public institutions and stays far less answerable to people and to Parliament. The story of rising NPAs that have led to a fall in trust in banking sector tells us not only of the collusion between crooked bankers and businesses but also of the failure of the sector to regulate, appraise and take a call on what should be its fundamental activity – whetting ideas and proposals, giving out loans and monitoring their use. It tells us of the cover that the system offers to those who take public money and misuse it or divert it with impunity, and of a regulatory system that holds none of this to account. On July 19, it was the All India Bank Employees Association that released a list of willful defaulters – the term itself is an oxymoron but it is so legitimised that we don’t stop to think how it might look if the crime were a little different – like willful murderers, or willful dacoits. Yet, it is the AIBEA that wants an ordinance to go after these people, not the government. All of this is pre-Covid stash but it will determine how we respond to the pandemic.
It is said that a time of crisis tests mettle, resilience and character. The Indian economy and its key drivers are likely to come out poor on these fronts. The way businesses pushed or coerced the government while a majority of the “leaders” and Twitterati CEOs fell silent when labour laws were suspended by many states tells us again that India may have opened up and liberalised three decades ago but the license-quota-permit Raj did not go away. The ‘yes-man’ culture lives on. The loot continued. The looters changed. In a vibrant economy, downturns can come and go. Disruptive change opens opportunities for new players who drive innovation, new products and services as some of the entrenched vacate space. In an economy oiled by high order graft, downturns expose grimy layers. Nothing happens. The poor suffer even more.
Jagdish Rattanani is a journalist and faculty member at SPJIMR. The Billion Press.