In the Review, we summarise the economic and policy developments in India; monitor global developments of relevance to India; and showcase the pulse of the economy through an analysis of high-frequency indicators and the heat map.
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India’s annual GDP growth 7% plus is the continuation of an ongoing acceleration. The question is whether this can last.
One country stands out from the gloomy overall tone of the International Monetary Fund’s (IMF) recent update of its World Economic Outlook. Against the backdrop of tepid 3.2% global growth in 2022 the IMF expects India’s gross domestic product (GDP) to expand by 7.4%. This is the fastest growth of any large economy except Saudi Arabia which is the incidental beneficiary of upward pressure on global oil prices from Russian President Vladimir Putin’s war against Ukraine. India may be buying Russian crude oil at a discount but as the world’s third-largest oil importer it is still burdened by high oil prices.
One might quibble that India had an exceptionally difficult pandemic so its economy now has exceptional scope for bouncing back. But other countries hit hard by covid such as Mexico are not doing nearly as well. One might also note that with India’s still-rapid rate of population growth per capita incomes are rising more slowly than its aggregate GDP figures. But a population growth rate of 1% does not fundamentally change the story.
India’s annual GDP growth in excess of 7% is in fact the continuation of an ongoing acceleration from roughly 5.7% in the 1990s to 6.2% from the turn of the century to the 2008 global financial crisis and then to 6.9% from the crisis to the eve of the covid pandemic. The country has benefited from a buoyant tech sector surprisingly robust agricultural productivity gains and decent manufacturing growth. With the worst of the pandemic now behind it the country’s economy is firing on all cylinders.
The question is whether this can last. Unfortunately there are good reasons to believe that given the current set of economic policies the answer is ‘no’.
To maintain its growth momentum India needs to export a lot more. The country has never been an export powerhouse to put it mildly. Exports of services do help but the outsourcing of back-office and customer-facing services is now poised to slow as firms ‘friend-shore’ more of their operations. The current Indian government’s commitment to investing in logistics seems promising but only time will tell how investment projects pan out. Rupee depreciation can make merchandise exports more competitive and limit consumption of imports. But the Reserve Bank of India (RBI) treating exchange rate stability as an important totem has been reluctant to let the rupee fall.
In the future Indian exporters will face a less favourable external environment. China’s economy has slowed. The US may not be able to avoid recession and Europe is already in one. So it is not clear whence demand for India’s exports will come. Every Asian economy that has successfully expanded its manufacturing sector has scaled up by exporting but this avenue may no longer be available to India.
The country can of course borrow abroad to finance its current-account deficit and domestic investment. But India continues to underperform as a destination for foreign direct investment which is deterred by bureaucratic obstacles to doing business. Having discarded suggestions that it issue dollar bonds the government now seeks to encourage foreign investors to purchase local currency bonds. But this revised strategy is no less risky. Foreign investors in local currency bonds tend to cut and run at the first sign of trouble since they otherwise will be hit by the double whammy of falling bond prices and a falling exchange rate.
Nor does India’s government have space to borrow from residents to finance additional spending on the infrastructure healthcare and education needed to sustain long-term economic growth. General government debt is already around 90% of GDP. The primary budget deficit which excludes interest payments is 3% of GDP. The government pays an average of 8% interest on its debt.
But Indian authorities are able to keep interest rates at that level and maintain a veneer of debt sustainability only by requiring banks and other institutional investors to hold government bonds. This in turn limits the ability of Indian banks to provide essential investment finance to the private sector. Meanwhile much of what the government takes in as revenue goes to entitlements and interest payments. Additional capital spending will therefore have to come from the private sector. And private savings are low by international standards.
Most fundamentally the government seems to have found it hard to implement structural reforms. Having experienced pushback from vested interests it has basically taken significant reforms of labour and product markets off the table.
Given its favourable demography democratic polity and its large and diversified economy India could in principle grow at 7% or higher for years to come. But the only route to such growth that remains open runs through structural reforms that relax all of the aforementioned constraints at a stroke.
Barry Eichengreen & Poonam Gupta are respectively professor of economics at the University of California Berkeley and a member of the Economic Advisory Council to the Prime Minister of India.
Banks play a critical role in economic growth. In India, the banking sector, dominated by public sector banks (PSBs), has underserved the economy and their stakeholders. The under-performance of PSBs has persisted despite several policy initiatives during the past decade. Meanwhile, private banks have further improved their performance and have gained significant market share. In this paper, we have made the case for privatization of PSBs. Due to its better performance and adhering to the development view of the PSBs, we propose that the State Bank of India (SBI) may remain under government ownership for now, but all other banks should be privatized. In order for them to set an example for the success of future privatizations, the first two banks for privatization should be the ones with better asset quality and higher returns. The most critical element for privatization to succeed would be the withdrawal of the government from the post-privatization board of the bank. The paper proposes a couple of different pathways to successfully transition the sector toward private ownership. It cautions that the status quo will result in further erosion of the market share of PSBs toward oblivion, while impeding India’s economic growth and inflicting substantial costs onto the depositors, firms, taxpayers and the government as their majority owner in the interim.
Given its favorable demography democratic polity and large and diversified economy India can in principle grow at 7% or higher for years to come. But the only route to such growth that remains open runs through structural reforms that the government has taken off the table.
One country stands out from the gloomy overall tone of the International Monetary Fund’s recent update of its World Economic Outlook. Against the backdrop of tepid 3.2% global growth in 2022 the IMF expects India’s GDP to expand by 7.4%. This is the fastest growth of any large economy except Saudi Arabia which is the incidental beneficiary of upward pressure on global oil prices from Russian President Vladimir Putin’s war against Ukraine. India may be buying Russian crude at a discount but as the world’s third largest oil importer it is still burdened by high oil prices.
One might quibble that India had an exceptionally difficult pandemic so it now has exceptional scope for bouncing back. But other countries hit hard by COVID-19 such as Mexico are not doing nearly as well. One might also note that with India’s still-rapid rate of population growth per capita incomes are rising more slowly than the aggregate GDP figures. But a population growth rate of 1% doesn’t fundamentally change the story.
India’s annual GDP growth in excess of 7% is in fact the continuation of an ongoing acceleration from roughly 5.7% in the 1990s to 6.2% from the turn of the century to the 2008 global financial crisis and then to 6.9% from the crisis to the eve of the pandemic. The country has benefited from a buoyant tech sector surprisingly robust agricultural productivity gains and decent manufacturing growth. With the worst of the pandemic now behind it the economy is firing on all cylinders.
The question is whether this can last. Unfortunately there are good reasons to believe that given current policies the answer is no.
To maintain its growth momentum India needs to export more. The country has never been an export powerhouse to put it mildly. Exports of services help but the outsourcing of back-office and customer-facing services is now poised to slow as firms “friend-shore” more of their operations. The current government’s commitment to investing in logistics seems promising but only time will tell how investment projects pan out. Rupee depreciation can make merchandise exports more competitive and limit consumption of imports. But the Reserve Bank of India treating exchange rate stability as an important totem has been reluctant to let the rupee fall.
In the future Indian exporters will face a less favorable external environment. China’s economy has slowed. The United States may not be able to avoid recession and Europe is already in one. So it is not clear whence demand for India’s exports will come. Every Asian economy that has successfully expanded its manufacturing sector has scaled up by exporting but this avenue may no longer be available to India.
The country can of course borrow abroad to finance its current-account deficit and domestic investment. But India continues to underperform as a destination for foreign direct investment which is deterred by bureaucratic obstacles to doing business. Having discarded suggestions that it issue dollar bonds the government now seeks to encourage foreign investors to purchase local currency bonds. But this revised strategy is no less risky. Foreign investors in local currency bonds tend to cut and run at the first sign of trouble since they otherwise will be hit by the double whammy of falling bond prices and a falling exchange rate.
Nor does the government have space to borrow from residents to finance additional spending on the infrastructure health care and education needed to sustain long-term economic growth. General government debt is already 90% of GDP. The primary budget deficit which excludes interest payments is 3% of GDP. The government pays an average of 8% interest on its debt.
But the authorities are able to keep interest rates at that level and maintain a veneer of debt sustainability only by requiring banks and other institutional investors to hold government bonds. This in turn limits the banks’ ability to provide essential investment finance to the private sector. Meanwhile much of what the government takes in as revenue goes to entitlements and interest payments. Additional capital spending will therefore have to come from the private sector. And private savings are low by international standards.
Most fundamentally the government seems to have found it hard to implement structural reforms. Having experienced pushback from vested interests it has basically taken significant reforms of labor and product markets off the table.
Given its favorable demography democratic polity and large and diversified economy India can in principle grow at 7% or higher for years to come. But the only route to such growth that remains open runs through structural reforms that relax all of the aforementioned constraints at a stroke.
Barry Eichengreen Professor of Economics at the University of California Berkeley is a former senior policy adviser at the International Monetary Fund. He is the author of many books including In Defense of Public Debt (Oxford University Press 2021).
Poonam Gupta Director General of the National Council of Applied Economic Research is a member of the Economic Advisory Council to the Prime Minister of India.
Periodic Labour Force Survey data shows the situation is worse for women. And those who got the training, almost half of them accounted for self-learning or ‘learning on the job’
Vocational and technical training has been the central pillar of Prime Minister Narendra Modi’s ambitious skill building mission since 2015. It is also the feature that will drive India’s Atma Nirbhar Bharat push. But data reveals that despite the government’s high-priority, the uptake for vocational and technical training has been surprisingly low. It is no wonder that many commentators are saying this has been languishing in neglect and needs to be infused with some ‘gati shakti‘. In 2020-21, over 84 percent of Indians between 12-59 age group did not receive vocational and technical training.
If fewer people are receiving VTT (vocational and technical training), then this calls for a greater awareness campaign, like other flagship programmes such as Swachh Bharat. With a Covid-battered economy, India can’t afford to go slow on a programme that has tremendous potential to catapult both the manufacturing and services sector.
Fewer people got training
We looked at the government’s Periodic Labour Force Survey (PLFS) data for the period 2017-18 and 2020-21. While there is so much talk about pushing VTT to bridge the employability gap, we found that the programme is yet to achieve the desired result.
The PLFS dataset shows that 92.6 percent of the people surveyed (in the 12-59 age group) during 2017-18 and 84.4 percent during 2020-21 did not receive any VTT, with a marginal three basis point difference favouring the urban areas as against the rural.
The situation is worse for women, with 95.6 percent in 2017-18 and about 90 percent in 2020-21 not receiving VTT, compared with men (about 90 percent and 79 percent for the respective periods). The lower level of VTT is one of the causes for a faltering growth in labour productivity.
The above results imply that only 7.4 percent (2017-18) and 15.6 percent (2020-21) of the people in the 12-59 age group received some form of VTT. This does not augur well for a country that aspires to become a hub of manufacturing and financial services.
An all-round dismal show
We also found that out of those who received some form of VTT, almost half received ‘learning on the job’ or are accounted for as ‘self-learning’ during both the periods for which data is available. The same trend was visible in both rural and urban areas. ‘Learning on the job’ and ‘self-learning’ means that there was no formal training provided and people learn and pick up skills as they work.
Formal VTT, which the PLFS defines as “training that is acquired through institutions/organisations”, accounted for only 1.8 percent in 2017-18. This marginally increased to 3 percent in 2020-21. People receiving such formal training in urban areas is two to three times those in rural areas. It is also seen that males in both rural and urban areas accounted for a higher share compared to females.
People who received VTT for carrying out hereditary activities accounted for less than 1.5 percent in 2017-18, which more than doubled to 3.8 percent in 2020-21. However, when compared to the overall scenario, it accounted for only about one-fourth to one-fifth of those who received VTT. No wonder people pursuing hereditary jobs are on the decline.
Further analysis showed that people across age groups did not receive any training—above 89 percent in 2017-18 and above 78 percent in 2020-21. Hence, the spread of malaise is “age-immune”.
Moreover, 20 states/UTs in 2017-18 and 23 states/UTs in 2020-21 (out of the total 36 surveyed) recorded higher than the national average of people who did not receive VTT.
Conclusion
A very large share of India’s population cutting across age groups did not receive any form of skill training, with the bulk of such population coming from rural areas and comprising women. Is it the lack of demand or the supply shortage of skill programmes or the inadequate infrastructure and trainers that is hampering the spread of VTT?
With limited dataset available from the PLFS, it is not possible to get a satisfactory answer. Only an in-depth analysis would be able to provide us with the much needed answers. Both the public and private sectors should shoulder the responsibility to build an efficient and competitive workforce, specifically targeting the youth. A fresh relook at the approach to extend the spread and depth of skill programmes is the need of the hour.
Dr Palash Baruah is Associate Fellow, National Council of Applied Economic Research (NCAER), New Delhi. and Danny Lewin Wankhar is a retired Indian Economic Service officer. Views are personal.