Here is an overview of the Indian economy
Current positions on the outlook for the Indian economy seem to oscillate between alarmism and triumphalism. For example, you can juxtapose Morgan Stanley’s recent exuberant report on India’s impending economic boom, with a CMIE analysis of India’s dismal jobs record and the continuing strain it poses. Much of the economic debate is shaped by affiliation with political mood. There are real difficulties in understanding what is happening.
In some cases, there just isn’t enough data, a situation that is not helped by the government’s distrust of data. Different shocks have taught us how much our knowledge of the economy is post facto. Growth is also often the product of specific circumstances. What may seem like a structural impediment to growth at one time may be offset by changing circumstances. But it is worth taking seriously the case of the optimists. Why would we think that India is more competitive and more attractive today? Will any of these conditions be met?
Central to the optimist’s story is India’s vastly improved infrastructure. Indian logistics, although not top-notch, are improving. Interestingly, Morgan Stanley argues that land is not a binding constraint (perhaps it never was). India’s digital infrastructure is potentially exceptional. The optimism seems well founded here. But the Morgan Stanley report makes two other claims. First, digital infrastructure will lead to outsourcing of services to India, and second, it will lead to better access to credit that will enable growth. Both statements are plausible, but by no means certain.
The second pitch is India’s energy transition. India’s economic performance is traditionally tied to the price of oil. Optimists are betting on a major green energy transition that will not only bring more investment but make India energy self-sufficient and competitive. It’s in the plausible but not easy category. There is a big “if” in this story.
The third element is renewed manufacturing optimism. Incentive systems linked to production can, at the margin, work. Small steps in defense manufacturing, investments like Apple, could reach a critical mass where we start to create an ecosystem with huge ripple effects. Pessimists are too quick to dismiss this possibility. It is now a plausible story, but its realization remains an open question.
The fourth element is human capital. India has a long way to go. But often, assessments of the quality of human capital are also post facto; we infer the human capital qualities of successful economies. But it could be argued that India now has sufficient human capital that this is not a binding constraint.
The fifth element is domestic demand. This has been the Achilles’ heel of the optimist’s case. There has always been a propensity to overestimate domestic demand. This situation has been aggravated by the unequal distribution of income. The poor were somewhat shielded from shocks by NREGA and PDS. But you can’t keep consumption on the backs of the top ten percent alone; most post-Covid consumer trends suggest increased demand driven largely by the wealthy. The Morgan Stanley report assumes that the percentage of households in the income distribution between 10,000 and 30,000 rupees will increase from 24% to 46% over the next eight years. The pessimists will say the following. Growth in India is very capital intensive. Income distribution could therefore be even more skewed. During the last consumer boom, the growth of agriculture helped. Can this happen again, especially in the face of climate uncertainty? It may be useful to ask whether it will be the expansion of public employment that will help to modify this distribution. But at the moment, projections for the distribution of Indian consumption seem speculative at best.
The sixth element concerns MSMEs and the informal sector, which have been hit hard in recent years. The assumption has always been that small businesses are sufficiently connected to supply chains that growth at the top can also pull them up. This assumption may still hold. But can we be sure that these links will always hold?
The seventh element is geopolitics. It’s the idea that the need to diversify away from China will give India an advantage. This seems the least tenable of the optimists’ claims. On the one hand, it is not clear that more than a small fraction of relocation from China will come to India rather than going to Vietnam or Indonesia. On the other hand, the scale of offshoring is probably exaggerated. FDI in China continues to rise, and unless a war breaks out, you may not see a drastic change. Betting on geopolitics is not a growth strategy.
The eighth element is the State, on which Morgan Stanley is silent. In many ways, state capacity has steadily increased over the past two decades. India’s macroeconomic regime is, like its foreign policy, a case of cautious caution. There is optimism about state revenues. Arguably, the quality of public spending has also improved. But four clouds are still hovering.
The first concerns state finances. Much of India’s recent growth has been supported by public investment. But given subsidy pressures, expanding public employment and now a reversal of the old pension system, there may be more serious limits to public investment. Second, the regulatory framework is still uncertain. In the e-commerce space, the implications of building swadeshi might not be so bad, but our basic view of commerce isn’t entirely clear. Third, there remain the usual challenges of the inability to deal with complex governance issues, such as pollution and urbanization, which have reputational effects.
Finally, there are the uncertainties that arise from the political economy of letting a few national champions dominate the economy in so many sectors. What systemic risks does this pose for competitors and for the financial system as a whole? But you can still argue that the Indian state has enough credibility to attract investment.
But here’s the problem. Analytics may not matter much if you can’t convince investors. Private investment in India still lacks the momentum one would expect from the case of the optimists. Is it for structural, purely transitory or psychological reasons? Arguably, the euphoria of Morgan Stanley’s reports is still unmatched by investors, including perhaps its own. But the honest truth might be that when it comes to economics, agnosticism is what the evidence warrants rather than over-blooming or catastrophic gloom.
The writer is a contributing editor, The Indian Express