Hyderabad: Amid fears of a mounting financial crisis in coming years following a sharp cutback to India's projected rate of growth by the International Monetary Fund (IMF) in its October 2022 World Economic Outlook report, concerns related to the economy have gone up inside the country. The former, when combined with a probable global output loss predicted in a report by the UNCTAD (United Nations Conference on Trade and Development) recently, raise worries even further.
While the IMF report adjusted India's GDP growth projections in the current fiscal year to 6.8 percent, compared to 8.7 percent in FY 2021 which concluded on March 31 this year, it also displayed a further downward slide to 6.1 percent in 2023. The United Nations report, on the other hand, said India was among nations likely to contribute most to a global output loss owing to an economic slowdown. It displayed the country's 'expected output gap' to be 7.8 percent in the next fiscal year.
In a conversation with ETV Bharat, Professor N.R. Bhanumurthy, who has taken charge as the first Vice-Chancellor of the Dr. B.R Ambedkar School of Economics University (BASE University), Bengaluru and is currently on leave from NIPFP (National Institute of Public Finance and Policy), New Delhi where he has been active as a Professor since 2009, reflects on the issues plaguing the Indian economy at the juncture where it stands at the moment, while also weighing in on corrective options at hand.
Q: What is your take on the state of the Indian economy?
A: While COVID-19 has impacted the Indian economy in all aspects, due to some prudent macroeconomic policies, India could recover swiftly and reach the pre-COVID situation within a span of two years, and this despite the pandemic still not having completely gone off yet. As the pandemic affected the global economy adversely, the current state of the Indian economy can be understood when in comparison to other economies, especially those of advanced countries.
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Based on the recent IMF report, the probability of advanced countries getting into recession in 2023 appears to be more real than it was thought earlier, And inflationary conditions in those countries are in double-digits for a long time. The conditions in India, however, do not suggest any such crisis, although growth prospects could be marginally lower in 2023 due to the expected decline in global demand. In a sense, in India, both GDP and other macro-parameters such as inflation appear to be more stable compared to advanced countries.
Q: Has it come out of the 'woods', i.e. COVID-19-induced shock?
A: The impact of COVID, and especially severe lockdowns, appear to be permanent in some parts of the economy, while in most other areas, India seems to be back in a pre-crisis situation. However, as a recent RBI report pointed out, recovering from GDP loss due to the pandemic could at least take 10 years if little more than a medium-term growth rate is observed. Overall, Covid-19 appears to have changed the structure of the economy. But whether that could help in improving employment opportunities, one needs to wait.
Q: In your view, what are the challenges and opportunities we have on the economic front right now?
A: The medium-term challenge would be the management of rising public debt. This seems to be especially severe at the state level. Some preliminary estimates suggest public debt is over 90% of GDP, compared to the target of 60%. This could put severe pressure on debt servicing costs and could hamper the fiscal conditions of the states, which are already in precarious condition.
In terms of opportunities, as India is recovering much earlier than others, there is a huge opportunity to attract more foreign investments and enter newer areas of production. With Atmanirbhar Bharat as the new objective, recent FDI in new areas such as semiconductor manufacturing, defense is part of these efforts. Despite present global conditions, India continues to attract significant foreign investments.
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Q: Don’t you think the high tax burden on the people is contributing to high inflation in India?
A: Not necessarily so. With the implementation of GST, in my view, being a single tax regime, it should have brought down the overall tax burden compared to the multiple and complicated tax structures that we had earlier. However, to reach an optimal tax structure, which is largely a data-driven exercise, we need to wait for some more years.
Q: The population growth is alarming and is putting a lot of pressure on resources and physical infrastructure. Some say it’s a demographic dividend and some are of the view that it’s a drain on the country's resources, and is nobody's gain. How do you look at this?
A: There is no doubt that India has a bright chance of having a demographic dividend given the vast working population. However, it is important to have these cohorts have the necessary skills that the market is looking for. For this, there is a need for a flexible labour market, which is lacking right now. The demand for resources and physical infrastructure is going to be too huge and it needs large investments.
As experienced in China recently, demography places a major role in achieving sustainable high GDP growth for a very long time. And for this skilling becomes a major aspect and the government already taking this as a major policy through Skill India Program. Many states have also adopted this.
Q: Many state governments are reeling under a heavy debt burden. Some states are seen raising off-budget loans in the name of corporations. Why can’t the Centre force the states to include all loans raised by the governments directly, as well as through these corporations, to include in the budget which will bring transparency and responsibility?
A: It is true that some states are looking at new options to borrow off-budget routes. A classic case is the Andhra Pradesh government’s strategy to borrow through Beverage Corporation. Even Kerala was trying to borrow additional funds. While there are some checks and balances from the Central government in allowing the state governments’ borrowing program, the recent AP example suggests that it is difficult for the Central Government to completely restrict such off-budget borrowing.
Only CAG or the state Audit could bring this out but with a lag. Finance Commissions do highlight the off-budget issue in each of the reports but without including it as part of the devolution exercise. In other words, it only preaches. But the state governments that are violating the fiscal norms do get punished by the markets. A look at the bond rates of the states does suggest that markets punish the erring states.
Q: Do you think long-term planning and setting goals is necessary for the country, which we used to have and executed? Do such practices not lead to greater public participation and put pressure on governments to execute and show results?
A: This is a very important issue. With the absence of any Planning Commission, such long perspectives are lacking in India right now. We do have SDGs (Sustainable Development Goals Commissions). However, even for this, there is a need for an institution to execute them. NITI Aayog is doing its bit but it is also involved in many mundane issues. Some states have brought in new institutions such as SDG Commissions.
But at the national level, we certainly lack an institution to plan the long-term vision. The honorable Prime Minister laid out the vision of a 5 trillion USD economy, as well as a developed country by 2047. But all these need a long-term perspective planning for which we lack institutions at the moment.
