In the last two decades, we have made some progress in understanding business cycles, both in emerging as well as developed economies. One key difference is that in the former, the ‘path’ of the economy itself can shift, while, in the latter, the economy reverts to the mean trend.
This implies that in a country like India, the mean growth can increase or decrease for a relatively long time. Indeed, that has been our experience: around 5% growth rate in 1997, above 6% in 2002, then above 8% in 2004. It stayed above 8% till 2009, after which it came down and stayed between 6% and 8%, until recently, when the trend went below 6% — for the first time since 2002. This is significant, since even though in certain quarters the growth rate fell below 6%, the trend has always remained above that for almost two decades.
So, how quickly will we recover? Is this a ‘transitory’ or ‘permanent’ shock? Not only policy formulation, but also India’s long-term future depends on the answer to this question. A clue to the nature of the downturn, and what the policy response should be, could be obtained if we try to think about the origin of the current situation. While many global downturns and recessions can be traced back to certain sectors or specific factors — the dotcom bubble, the Asian Financial Crisis, the 2008 subprime crisis, sovereign debt crisis in Greece, etc — India’s current situation can’t be traced to a single origin.
True, non-performing assets (NPAs) are an important contributor. But it’s not the driving factor of the slowdown. Rather, it’s the systemic uncertainty that’s a major cause behind India’s current economic performance. This means it’s likely that consumers and corporates alike will defer consumption and investment expenditure. As a result, both demand and production have gone down.
So, where did this systemic uncertainty arise from? It partly originates from the global situation that includes trade wars, (the now certain) Brexit, and the possibility of an economic slowdown in the US. However, the current crisis is largely a domestic creation. A significant cause is lack of clarity in economic policymaking and its fuzzy communication.
Closing a Window or Two
In recent times, India has deviated from the path of making the economy more open, more competitive, and by reducing friction for investment. For the first time in decades, it has reversed policy and increased tariffs. Instead of trying to take advantage of the US-China ‘trade war’, we have become its participants.
India did not sign the Regional Comprehensive Economic Partnership (RCEP) treaty. Yet, it is not very clear whether it will eventually join the treaty and under what conditions. On the domestic front, too, there have been many policy flip-flops — on foreign investment in retail sector and aggregators, in the telecom sector, in the implementation of the goods and services tax (GST), etc. Moreover, for non-standard policies such as demonetisation, the objective of the policy was not clearly communicated, and the narrative kept changing.
All of which raise fundamental questions about policy intention. People are unsure what policy change hovers on the horizon, and the path GoI will follow. Further, even when GoI has taken good policy decisions, they have been shoddily executed.
Take the Insolvency and Bankruptcy Code (IBC) passed in 2016. So far, it has resulted in only two resolutions and three amendments to the Act.
Would it have been possible to foresee some of the problems with IBC and create a better legislation to deliver quicker results? The design of GST is another case. Again, adopting GST is welcome. But as of now, a plethora of rates makes it very complex. So, instead of pushing the economy up as it should have, it is weighing the economy down.
Add to these, the almost complete unavailability of dependable data, and we have unpredictability and doubt, which don’t help any purchase and investment decisions to be taken. So, what is to be done? Following standard developed market business cycle literature may not work here.
Corporate tax cut, for example, is a policy change for the good. But whether it alone will lead to investment is unclear. What investors want to know is the path India is following. If the tax cut is followed up by more restrictions on investment, or the State becoming more litigious, or increase in input tariffs, then the tax cut may not be a significant incentive to invest.
Limelight on the Economy
GoI not only has to make economically sound policies, but also significantly improve the policymaking process. It has to be much more inclusive, deliberative and open. It also needs to signal that the economy is not a side story for this government, but bring it to the centre of its narrative. It has to bring in many more talented professionals, from academia and business, and get them involved in this process.
India needs a sustained, consistent action from the government to push the trend growth rate to a higher trajectory. This has to start urgently, for —to borrow the title of a 2004 paper (bit.do/fkCdc) on procyclical capital flows and macroeconomic policies —when it rains, it pours. Let us hope the long-lasting damage of a flood is prevented.
The writer is head, Economics Department, Shiv Nadar University, Greater Noida, Uttar Pradesh
Views expressed are author’s own.