Why It May Be The Wrong Time To Give Up Hope On India

On Saturday morning, a good friend forwarded the long-form article by Andy Mukherjee on his giving up hope on India of catching up with China, ever. What the article lacks in sharpness and rigour, it makes up for in drama and sensationalism. In the process, it ends up more being a polemic and a lament than a scholarly critique. It could have been a lot more useful to the country had it been the latter. Instead, he has sung for the choir.

Wealth Exodus

Let us start from the number of high net-worth individuals (HNWI) leaving India. Numbers are thrown in without context. There is no comparison to the past nor to that of trends from other countries. Emigration out of China is far bigger, the country he compares India to.

Data for 2018 from the AfrAsia Global Wealth Migration Review is presented by ‘Visual Capitalist’. 5,000 HNWIs had left India. But, 15,000 had left China in that year.

In 2019, 16,000 millionaires emigrated from China. The number was 7,000 for India. Neither country figures in the top 14 countries that have seen the largest outflows in terms of wealth outflows. Importantly, the report singles out China as running the risk of seeing its wealth outflows exceeding wealth generation in the light of its role in the global Covid-19 pandemic.

While he talks of the wealth exodus of individuals, India’s foreign direct investment, even on a net basis (ie, net of how much Indians invest overseas) is a better sign of confidence (or the lack of it) in India.

The record speaks for itself. India’s net foreign direct investment to gross domestic product (GDP) ratio has been consistently at or above 1.5 per cent in the last six years whereas that figure was breached only once in the previous 10 years. See chart below.

Our Universe Is Not THE Universe

On Muslims, some of it might well be true but there are questions that need answering:

• How much of it is just perception or the reflection of echo chamber mentality on the part of the writer and how much of it is real, and
• How much of the views and utterances of Islamic fundamentalists are taken into consideration?

Also, much of the problem with Islamic fundamentalists is that they view the conflict with other religions in civilisational terms.

On Ayodhya, the disputed structure was not a place of worship. It was a disputed structure, for a long time. Further, the current resolution is honourable — it gives a far bigger space for a mosque and it is court-settled. It is not through riots.

'Go to Pakistan' chants on Twitter or other trolling on the platform are not government policies. Such vitriol flows from both sides. Therefore, it is a one-sided critique. Of course, that is his prerogative. But, the downside is that it leads to the rest of the piece being taken less seriously as well.

Also, the spaces that we inhabit do not constitute the universe. The universe of Indian Twitter users is tiny compared to the population. Trolls are a fraction of Twitter users. To generalise from the behaviour there to that of millions of Hindus and Muslims co-existing largely peacefully is a leap of both logic and imagination.

On The Handling Of Migrant Labour

On migrant labour, it is a subject matter of the Indian states — not the Narendra Modi government. Yes, the initial lockdown was draconian and sudden. But, the government learnt from it. There have been no famine deaths or riots in India on account of lack of food.

Yes, the four-hour notice before the implementation of the national lockdown was hugely problematic. It was panicky and ill-thought through, in hindsight. Clearly, the Indian government did not anticipate the migrant worker exodus. But, I think they learnt well. That is what led to the acceleration of the issue of nationally portable ration cards. A good thing happened at double speed because of that.

But, to attribute the migrant labour's decision to return to safety to negligence on the part of the central government is to betray one's ignorance of the subject.

Let me turn to the chairperson of the Economic Advisory Council to the Prime Minister for wiser counsel:

So, the issue of migrant labour is an issue of failure on the part of the states to carry out certain responsibilities. However, I think all concerned have learnt their lessons. Subsequently, with respect to the Covid pandemic, India has done far better. In fact, recently, the government of India forbade states from announcing further lockdowns. They have learnt, compared to other countries.

On Demonetisation

On demonetisation, yes, the expected bank note return did not happen. It is as much a testimony to the extent of collusion between bank officials and some of their clients as it is on demonetisation itself.

Indeed, if anything, the failure to realise about 10 per cent or 20 per cent of the demonetised notes as unaccounted cash due to the collusion between certain banks and their officials and that of their clients was a clear sign to change the public sector bank model. That is a separate issue.

But, the important thing is that, at the time of demonetisation, the share of high denomination notes (500 and 1,000) in the overall currency in circulation was over 85 per cent. In particular, the value of 1,000 rupee notes in circulation was 6.3 lakh crore out of a total of 16.4 trillion rupees (as of March 2016) — more than 38 per cent.

In 2020, the 2,000 rupee currency note's value in circulation is Rs 5.48 lakh crore out of Rs 24.21 lakh crore as of March 2020, little over 22 per cent.

There have been many other consequences such as greater tax returns, taxpayers, etc. Now, there is digitisation as well. Assigning causality is tough, of course. But, if critics can attribute all the negative things to demonetisation without any rigour, it is definitely more valid to assign plausible positive causality to demonetisation.

On India’s Economic Growth Performance

On economic growth, snapshot comparisons to a developing country, which is in a much earlier stage of development than India is not necessarily apt. Many countries have caught up with India or overtaken it in per capita terms, given the extent of the first quarter contraction in India. But, Bangladesh' per capita GDP was higher than India's up to 1996.

I have been at pains to point out that India's growth slowdown in the decade of 2010s is not unique. Many important developing countries have faced the issue. See table below to see how economic growth has slowed sharply in almost all the countries in the list.

Further, India's growth slowdown is not just a consequence of demonetisation or due to the introduction of goods and services tax (GST), etc. In 2017-18 and part of 2018-19, India's monetary policy was tight and financial conditions were too tight. See chart below.

The extent of the tightness of the financial conditions in India in 2017-18 can be understood from the fact that, against the general tendency of USDINR to appreciate, the pair depreciated (ie, the rupee strengthened) in that year. That is why the dollar GDP of India at current prices rose 15.6 per cent in 2017-18 whereas the rupee GDP went up only 11 per cent.

Especially in 2018, the Reserve Bank of India (RBI) came up with its drastic circular in February on the recognition of non-performing debt. Through the year, it raised interest rates twice. Then, in response to the collapse of the IL&FS, there was no concerted and sustained attempt to ensure liquidity was ample.

It was a ‘too big to fail’ institution that had failed and it played a very big role in dragging down the economy as credit disbursement from non-banking financial companies (NBFC) dried up as they had lost access to their funding in the wake of the collapse of IL&FS.

Indeed, it is quite possible that Andy Mukherjee himself had written about RBI’s tight-fistedness and its failure to appreciate and assess the gravity of the fallout of the failure of IL&FS and take appropriate measures.

The circumstances that led to the resignation of Dr Raghuram Rajan and to that of Dr Urijit Patel were very different. So, to club them together and paint the government as the villain is, well, problematic at many levels.

On The Comparison With China

This year (2020) might be an inappropriate year to lose hope on India in comparison to China. This is the year in which China made a systematic attempt to alienate itself from as many nations as possible and succeeded spectacularly in doing so. The Pew Survey of public opinion in many countries around the world is proof enough. The title of the article that has documented the perceptions of people around the world of China says it all: ‘Unfavourable Views of China Reach Historic Highs in Many Countries’. It was published recently only — on 6 October 2020.

Financial Times wrote in an editorial comment recently:

Australia and New Zealand are signatories to the Regional Comprehensive Economic Partnership (RCEP) Agreement which was signed recently with members of the ASEAN nations, China, Japan and South Korea.

On China’s role in the origination and propagation of the coronavirus and in its handling of the virus fallout within and without China are evolving stories. History may be a better judge than contemporary chroniclers.

As far as economic growth is concerned, there is no doubt that China has been a success story. The first quarter century since China opened up to the world in 1979 was a spectacular growth story. It is not-so-stellar after that. Debt played a big role.

China’s nominal GDP in US dollar terms went up by nearly five times between 2005 and 2015. Non-financial debt of China went up by nearly eight times in that same period.

In 2005, China’s nominal GDP was 2.7 times bigger than India’s, measured in US dollars. By the end of 2020 (and March 2021, in India’s case), it will be 5.7 times giving credence to Andy Mukherjee’s storyline that it is time to give up hope on India.

But, in the same period, China’s non-financial debt had gone up by 10.3 times and India’s has gone up by only 3.3 times. So, on a debt-adjusted basis, India’s GDP is ahead of China’s. All the data are based on the International Monetary Fund’s ‘World Economic Outlook’ database of October 2020. Data on debt are from the Bank for International Settlements.

On India’s Economic Statistics And Growth Outlook

India’s economic growth statistics might have got it wrong in 2016-17 and in 2017-18 because it had fully failed to take into account the impact of demonetisation on the informal and cash-based economy.

Further, the downward revision to growth data in 2005-12 period may appear inexplicable. But, to attribute these to the political executive is to assume what remains to be established.

However, as I had written in a column for Mint, there has been no squeak about India’s GDP statistics when the National Statistics Office printed a contraction of 23.9 per cent (y/y) in the first quarter of the current fiscal year, 2020-21, due to the lockdown. Clearly, growth statistics, if anything, are exaggerated the contraction.

On the face of it, China may be growing this year whereas India’s GDP (measured in constant prices) might contract between 7 per cent and 10 per cent in the year ending March 2021. IMF projects India’s nominal GDP to grow at an annual rate of 11.7 per cent between April 2021 and March 2026 in rupee terms.

In US dollar terms, India’s nominal GDP will grow by 8.8 per cent per annum, according to the fund, reaching nearly $4 trillion by March 2026. Should the dollar weaken against the rupee rather than appreciating as in the past, then India’s dollar GDP might be bigger than this.

These figures might not take into account the impact of recent reform initiatives which, Fitch Ratings, concedes, only grudgingly, would boost India’s medium-term growth prospects. I will mention a few of them since Andy Mukherjee did not deem it fit to give them fair coverage in an otherwise long lament. Eminent agricultural economist Ashok Gulati called India’s farm sector reforms the 1991-moment for agriculture.

Harish Damodaran wrote that the government scrapped the APMC Act, allowed farmers to sell anywhere and everywhere and diluted the provisions of Essential Commodities Act (ECA). It procured a record amount of foodgrains, disbursed loans, made direct transfer to farmers’ accounts, transferred the first instalment payment under the PM Kisan Samman Nidhi Scheme and increased allocations to the Rural Employment Guarantee Programme (MGNREGA).

Damodaran notes that the amount the government of India had spent on the rural economy amounts to Rs 1.5 lakh crore and that too in a space of three months. Annualised, it worked out to almost 3 per cent of GDP — all in the middle of a nationwide lockdown, in the middle of the Covid pandemic. That is why despite millions of migrant workers trudging back to their homes in villages, India did not experience famine or starvation related sufferings.

Recently, the government de-criminalised many provisions of the Indian Companies Act. Many of the criminal provisions were introduced in the wake of the Satyam Computers scandal. Over the years, these provisions have created an atmosphere of fear and uncertainty.

In response, the government had decriminalised many of the provisions making them civil offences attracting penalties rather than criminal liabilities. That should de-clog the pending cases in the courts and company law tribunals.

On the labour reforms initiated by the government, economists from the Credit Suisse wrote:

On India’s Trade Openness

India’s weighted (weighted by the product import shares corresponding to each partner country) mean applied tariff rate was 4.88 per cent, according to macrotrends.net, based on World Bank data. It had come down from 7.32 per cent in 2013. Tariff rates remain in that range.

India may not have signed the RCEP Agreement but it has free trade agreements with almost all the member countries in RCEP excepting China. Australia is a member of the RCEP. China, according to South China Morning Post, imposed ‘devastating’ tariffs on Australia’s wine exports, barely days after the signing of the RCEP. So, what is the sanctity or spirit of RCEP agreement?

William A Galston, who served in the Bill Clinton administration, wrote in 2017:

So, what is the big hullabaloo about India not signing an agreement with someone who has no record of honouring agreements?

As for India’s production-linked incentives (PLI) for incentivising production in various sectors such that India becomes a manufacturing hub, ultimately, the policy has to be judged on the basis of its success or failure.

As research (‘From “Make-in” to “Self-Reliant” – A Primer on India’s Manufacturing Push’, 16 August 2020) from Citigroup (India) put it, the new pillars of the PLI scheme were explicit fiscal incentives, import restrictions, less focus on exports and a greater desire to attract the shifting supply chains to India, in the light of the pandemic. Although electronics has been a focus area since 2012, India announced a new policy on electronics manufacturing in 2019.

India’s electronics exports have nearly doubled to $11.8 billion in 2019-20 from $6.4 billion in 2017-18. The story repeats itself in the pharma sector. India’s pharma exports doubled in the last decade too from $9.0 billion to $19.0 billion. Seeking to emulate the success achieved with incentivising domestic production of electronics and pharmaceutical ingredients, the government has announced an ambitious scheme to become the global hub for the mobile phone manufacture.

Several international manufacturers have responded to the government’s PLI scheme for mobile phones. According to a report in Business Standard, Apple, Samsung and domestic players such as Lava Group were set to make India a major export hub for mobile device manufacturing.

Respected and eminent economist Dr Indira Rajaraman called the PLI commendable:

Of course, in the final analysis, one of the successes of the policy of such targeted incentives which goes under the broad header, ‘Industrial policy’ is the pursuit of fierce competition with accountability, as per a working paper of the IMF published in March 2019.

Hence, the policy can always be improved. But, that is not to deny the intrinsic merits of India’s PLI scheme since incentive is payable upon production above a benchmark level and it is not a subsidy extended based on hope and promise. It has a terminal date as well.

On The Law Of Unintended Consequences

The Covid pandemic has enabled women to work from home. India’s recent liberalisation of rules on Information Technology-Enabled Services (ITES) being delivered from homes may, unintentionally, facilitate many women being able to join the workforce. We have to wait and see. Unintended consequences always operate and they normally remind experts to be humble with their predictions.

There is enough data to show that digitisation in India has taken a big leap forward in the wake of the pandemic. Aravind Eye Care, one of India’s premier eye-care institutions, says that the pandemic has forced extensive digitisation of their operations from payments to patient care with considerable benefits in terms of enhanced productivity, efficiency and patient care.

In other words, with the world in a state of major flux and with developed nations assuming a lot of debt and determined to ‘default’ on them technically through engineered inflation (if they can help it) and currency depreciation (they are succeeding in this), this is no time to sign off on India. If anything, it may be the time to sign in.

India surely has work to do. The financial sector needs strengthening to be able to serve India’s investment needs. The sector needs attention. Further, state governments have to undertake reforms in critical areas that have contributed to stress for banks because their pricing policies make certain critical enterprises in power generation unviable. India has to manage its water resources and pay heed to the message coming from extreme weather events.

There is no indication that India’s democracy, in the last six years, has failed to send the right signals to the ruling class on their successes and failures. To fault the electorate for ignoring elite preferences is a preoccupation that neither redounds to the credit of elites nor does it enhance their expertise. It is often a sign of desperate hubris. That said, dialogue, discussion and feedback are essential for the executive to make sound policies and implement them effectively.

In the final analysis, Joan Robinson got India right. A quote attributed to her is of perennial relevance: “Whatever one says of India, the opposite is equally true”. Everyone paints with a wide brush when they attempt to depict the big picture, based on their small experiences.

The country's diversity is such that it is not possible to paint on the right sized canvas with the right brush. Generalisations are too tempting to avoid, for many. There are axes to grind, also, making it more complex.

In fact, coming at a time when a new administration is likely to take office in the United States of America, Andy Mukherjee’s article might become a convenient tool in the wrong hands and applied for wrong purposes.

The Indian government does need to hear well-argued and substantiated critiques. Offering it would have been a valuable service to the country that he claims to love. For reasons best known to himself, Andy Mukherjee chose to serve a different cuisine.