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Why India is not first choice

The state of our infrastructure and logistics is way behind China’s

Why India is not first choice

BLOW AFTER BLOW: It is difficult to see how the economy can get back to high growth.

Subir Roy

Senior Economic Analyst

INDIA’S economy has just received not one but several blows. First, in the just ended quarter (Q4 2019-20), GDP grew by a mere 3.1 per cent, the lowest in any quarter since 2004. Consequently, in the whole year, the economy grew by 4.2 per cent, down from 6.1 per cent in the previous year.

The second blow is that this is not a freak quarter. The quarterly growth rate has been falling for over two years now, not having recovered from the twin blows dealt to it by the confusion resulting from demonetisation and introduction of GST thereafter.

It is crucial to ask why factories shifting out of China have till now been going to Vietnam, and, in the case of garments, Bangladesh.

The third blow is that things are going to get much worse. The last quarter figures included just one week of lockdown. In the current quarter, at least two of three months have been totally washed out by the lockdown. It is only now being slowly relaxed and there is no knowing when or how fast the economy will pick up. The RBI has predicted that the economy will contract in the current year and Goldman Sachs has put a number on the contraction — 5 per cent.

The only positive indication is that agriculture will hold out and grow by around the trend rate. Perhaps the best news is that the monsoon has hit Kerala right on time and look robust. The only two sectors that held forth in the last quarter were agriculture and government spending, and this is likely to be the pattern in the current year.

Private consumption, which has been severely hit by loss of income because of the lockdown, will recover very slowly. It will be the same story with private investment, which will not be forthcoming unless demand picks up, and that will not happen unless the government spends more and banks lend more.

The government can, and plans to, rev up public investment, which is the right thing to do. The US got its highway network, when in the 1930s, the government spent to get the economy out of the Great Depression. But the government is also in a great mood to disinvest and keen to use private initiative as the enabler of growth. Right now, it will be tough getting private investment into infrastructure, even on a PPP basis.

Additionally, the government is obsessed with maintaining its fiscal deficit at conservative levels. This, when a cross-section of economists have been exhorting the government not just to spend (give quick help to small businesses) but actually give cash to migrant workers trudging across the country, so they do not starve. The high demand for MGNREGS work must be met and quickly paid for.

But let us assume the best. The coronavirus pandemic will die down, with people maintaining social distancing, and hopefully, a vaccine will be ready by the year-end. That will take us back to where we were for the most part of last year.

The key issue before us is how to get back to the high growth phase unleashed by the economic liberalisation and briefly interrupted by the financial crisis of 2008. That helped reduce poverty rapidly and brought India into the middle income group of countries.

One positive development is the reforms that the government promised while delivering the stimulus package. Particularly noteworthy are the reforms for agriculture that have been described as Indian agriculture’s 1991 moment. If all goes well, agricultural efficiencies will go up, better marketing of agricultural produce will reduce the farm gate-to-fork markup and nutrition levels may well go up without people having to spend much more on food.

But good agricultural performance will not be sustainable if water deficiency is not addressed. A fresh set of reforms is needed to change farm practices so that the outdated water and energy guzzling Green Revolution is discarded for a new model of sustainable agriculture.

But there is no scope for being similarly optimistic about manufacturing. ‘Make in India’ is a good slogan but for higher domestic value addition in manufacturing, India has to go up the global competitiveness league table by reducing the cost of doing business and critically improving workers’ skills. It is necessary to ask why factories shifting out of China have till now been going to Vietnam, and, in the case of garments, Bangladesh.

What will not help is upping tariff barriers which a nationalist-minded government has been doing in response to pressure from domestic business lobbies that are part of its constituency. You become competitive by having to survive against cheap and easy imports, not by keeping them out. It is idle to think that global companies will shift out of China to India just on Donald Trump’s say-so. They will do so only if the state of India’s infrastructure and logistics is better than China’s. Right now, it is way behind.

That leaves us with services which account for around half of the value added in India’s GDP. The services sector rides on the rest of the economy and India’s services sector is already efficient. To get services to contribute more on their own, hope must rest on sectors like software doing even better. Plus, healthcare and education can, and should, grow much faster.

It is difficult to see how the economy can get back to high growth even if coronavirus imposes only a one-time cost.

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