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Arvind Subramanian’s paper ‘India’s GDP Mis-estimation’ published in June this year caused a lot of controversy. I was initially sceptical of his argument. But now having heard him at the India Policy Forum at NCAER on July 10 where he presented more data on India’s slowdown I am convinced about the significance of his research. The lessons I take away from his papers and new work are not exactly the ones he would emphasise but the general message is important for India and the nation’s policymakers.

What he showed was if you take 17 major items like electricity consumption and airline traffic that correlate well with India’s growth and track them you will see that their growth slows down after 2011-12 and drops substantially below levels consistent with the official GDP growth. This leads him to conclude that India’s recent GDP growth is slower by as much as 2.5 percentage points from what the official data suggest.

I do not think that India’s GDP computation has obvious flaws. What the divergence demonstrated by Subramanian reveals instead is underlying disturbances in the economy. India’s economy has many fundamental strengths and is capable of taking on this challenge but it requires skillful policy maneuvers. Before I go into this let me point to some evidence beyond that in Subramanian’s paper which are signals of an impending slowdown.

To start with a little history the first time India’s GDP growth rate crossed the 9 per cent mark was in 1975 the year of India’s Emergency. It is possible that the shock of the Emergency caused this growth spike. Before anyone jumps to the conclusion that authoritarianism is good for growth let me point out that the following year growth slumped to 1.2 per cent and by 1979-80 it had dropped to negative 5.2 per cent which is the lowest recorded growth in India since 1947. While it is true that there are some examples of authoritarian regimes leading to high growth (China being the most prominent) there is overwhelming evidence from history of dictatorial control leading to disaster.

India’s true transformation occurred after 1993 when growth became stably high and foreign exchange reserves rose exponentially. The economy’s most remarkable period was 2003 to 2011 when annual GDP growth was approximately 8.5 per cent. Within this the most significant stretch was from 2005 to 2008 when India grew by over 9 per cent each year.

The slowdown began in 2012 reversed in 2015 but over the last two years it has slowed again. The last official quarterly growth data pertaining to the first quarter of 2019 shows GDP growth to be at 5.8 per cent. The examination of micro data suggests a genuine risk of a further slowdown in the short run. It is time for policymakers to sit up.

Subramanian already pointed to the fact that from 2011-12 to 2017-18 India’s export growth was zero per cent. Six consecutive years of average zero per cent growth in exports does not augur well. For emerging economies raring to grow exports are important. During the same period Vietnam’s exports grew over 300 per cent.

Of as much concern since this is one of the big drivers of growth for developing countries is the performance of investment rates the percentage of GDP that consists of expenditure on items like infrastructure machines and technology. All the Asian super-performers had investment rates over 35 per cent. India crossed the 30 per cent line in 2004. This had never happened before and was quite a landmark for the nation. By 2007-8 India’s investment rate had reached 38.1 per cent putting India in the Asian super-performer league. Unfortunately it has fallen steadily and is now back to just above the 30 per cent line.

Turning to other micro data India’s automobile sector is stalling and the balance sheets of Indian corporations have worsened. Companies’ combined borrowings were up 13.2 per cent in FY19 but their net worth did not rise comparably. Another figure is the relationship between home prices and buyer incomes. According to the RBI house price to income ratio has risen from 56.1 in March 2015 to 61.5 in March this year. This in itself is not a problem but if home prices make a downward correction this can cause general demand to stall.

What should the government do to ward off short-run risk and strengthen long-run sustainable development? For the former it is time for some Keynesian demand boost. We should be prepared to make a measured increase in fiscal deficit for a year or two. This will boost demand for goods and be a much-needed shot-in-the-arm for India’s firms and farms. If the extra expenditure is directed at the poor and the agriculture sector that will help those who need it most. Another item on which the government can step up expenditure is on building infrastructure. This can simultaneously boost demand and raise investment.

Turning to more long-run matters we must continue to cut bureaucratic costs. It is true that important steps have been taken in the last three years such as the new Insolvency and Bankruptcy Code 2016. There are also improvements in the ease of doing business. However the latter was done mainly to appease the World Bank by taking steps exactly on indicators that the World Bank tracks. What is needed is to cut the culture of permissionism. There is a reason governments allow this to persist. If citizens and businesses do not have to repeatedly turn to the government for permission this clips the government’s power and most governments have a tendency to resist this.

Finally the long run belongs to nations that promote higher education creativity and scientific temper. Among developing nations India was an outstanding performer on these scores. This advantage has been eroding in recent years. I hope we will have the sagacity to reverse the trend.

The writer Kaushik Basu is C. Marks Professor at Cornell University and former Chief Economist and Senior Vice President World Bank.

India had an opportunity to take major initiatives but what the bureaucracy gave us is just another incremental budget

The Bharatiya Janata Party’s massive electoral mandate provided a great opportunity for introducing major fiscal and other initiatives through the budget. Unfortunately that opportunity has been missed.

Following her meteoric political rise finance minister Nirmala Sitharaman had barely a few weeks to come to grips with her enormously complex portfolio before the budget was presented. Much of the detailed work on the budget had probably been completed by the time she took charge. Prime Minister Narendra Modi’s penchant for game-changing schemes notwithstanding that is not in the DNA of bureaucrats. Hence the North Block mandarins have given us a largely incremental and pedestrian budget. That said there are features of the budget that need discussion.

Regarding the fiscal stance most others and I had assumed that the government would go on a spending spree prior to elections and breach the 2018-19 fiscal deficit (FD) target. It was breached but only marginally at 3.4% of gross domestic product (GDP) as against the target of 3.3%. This was despite tax revenue growth (Centre’s share) of only 6% down from 12.8% in 2017-18. The deficit was mainly contained due to significant expenditure compression. Revenue expenditure in particular grew by 6.9% in 2018-19 down from 11.1% a year earlier quite remarkable for an election year. But it is also one of the factors that contributed to the growth slowdown in 2018-19.

For 2019-20 the FD target has been set at 3.3%. But tax revenue (Centre’s share) has been assumed to grow by 11.1% way higher than the 6% growth achieved in 2018-19. Hence the FD target is likely to be breached again. Not necessarily a bad thing when headline inflation is low there is a positive output gap with high unemployment and the yield on government securities has seen a sharp decline. Alternatively we could again have significant expenditure compression with a further adverse impact on growth.

On the receipts side non-tax revenues are budgeted to grow by over 27% similar to what was achieved in 2018-19. This includes a whopping 37% increase in dividends and profits from public institutions mainly the Reserve Bank of India (RBI). Hopefully it does not entail dipping into past RBI surpluses pending submission of the Jalan Committee report.

The target for capital receipts from public sector disinvestment is ₹1.05 trillion. This figure may be achievable given the successful disinvestment record of 2017-18 and 2018-19. But selling public sector assets to mostly finance current expenditure is like selling property to meet daily household expenses. The central government’s finances are surely not in such a parlous state.

Planned capital receipts will also include market borrowings of over ₹4.48 trillion of which about 10% is proposed to be raised as foreign currency loans. This is an unprecedented and bold move but also risky. I wonder why the government did not opt for rupee-denominated foreign borrowing or so called masala bonds which would have reduced domestic crowding-out without incurring any exchange rate risk.

Turning to tax receipts income tax and goods and services tax which account for about half of total tax revenue are projected to grow at modest rates of 7% to 8%. But the other half—mainly corporation tax customs duties and central excise—are expected to grow at much higher rates of between 14% and 20%. The basis of these asymmetric buoyancy assumptions is not clear.

One very disappointing aspect of the budget not much commented upon is the continuing reversal of hard-won tariff reforms and the return to discretionary annual tampering with tariff rates. Import duties have been changed for 45 different tariff lines along with further changes in export duties cesses etc.

On the expenditure side the structure of spending remains heavily skewed in favour of infrastructure (22%) as compared to social services (below 5%) and it is still thinly spread over a huge number of central and centrally sponsored schemes. The reform urgently required here is to strip it down to just a few high-priority schemes and fund them generously. In this regard the integration of all water-related departments including drinking water and sanitation in the Jal Shakti ministry is an excellent move. It enables a comprehensive policy response to India’s most urgent natural resource crisis namely water.

Another priority scheme is Pradhan Mantri Kisan Samman Nidhi (PM-Kisan) now extended to all farmers with a budget allocation of ₹75000 crore. Though the income support per farmer-household is small at ₹6000 per year it is a very important beginning. In a paper presented at the National Council of Applied Economic Research (NCAER) India Policy Forum on 8 July Maitreesh Ghatak and Karthik Muralidharan argued that building on this programme India could move towards an unconditional universal income transfer scheme that would directly reduce poverty eliminate the administrative burden and high cost of targeting and plug leakages as well as errors of inclusion or exclusion among other benefits.

Proposing such a programme called the Inclusive Growth Dividend (IGD) programme they say it may be anchored at 1% of GDP. As such per capita income support would rise in a fiscally sustainable manner as the economy grows. Can India afford such a programme? As I had explained in an earlier column in this paper on 19 April unwarranted “non-merit” subsidies currently eat up nearly 6% of our GDP. Appendix 7 of this year’s receipts budget confirms that revenue forgone on tax exemptions and concessions eat up another 5% of GDP. Merely tweaking them would yield the 1% of GDP required for IGD.

Clearly there are no political administrative or fiscal constraints for expanding PM-Kisan into a flagship IGD programme which could set a global standard for welfare programmes in developing and emerging market economies.

Sudipto Mundle is a distinguished fellow at the National Council of Applied Economic Research

In India investing in the laggard States will ensure their role as being the greatest contributors of the future

Last month the United Nations released the 26th revision of World Population Prospects and forecast that India will overtake China as the most populous country by 2027. The only surprise associated with this forecast is the way it was covered by the media. Is this good news or bad news? Is it news at all?

Is this news? Not really. We have known for a long time that India is destined to be the most populous country in the world. Population projections are developed using existing population and by adjusting for expected births deaths and migration. For short-term projections the biggest impact comes from an existing population particularly women in childbearing ages. Having instituted a one-child policy in 1979 China’s female population in peak reproductive ages (between 15 and 39 years) is estimated at 235 million (2019) compared to 253 million for India. Thus even if India could institute a policy that reduces its fertility rate to the Chinese level India will overtake China as the most populous country.

The element of surprise comes from the date by which this momentous event is expected. The UN revises its population projections every two years. In 2015 it was predicted that India would overtake China in 2022 but in the 2019 projections it is 2027. The UN has revised India’s expected population size in 2050 downward from 1705 million in 2015 projections to 1639 million in 2019 projections. This is due to faster than expected fertility decline which is good news by all counts.

Like it or not India will reign as the most populous country throughout most of the 21st century. Whether we adjust to this demographic destiny in a way that contributes to the long-term welfare of the nation or not depends on how we deal with three critical issues.

Population control

First do we need to adopt stringent population control policies? History tells us that unless the Indian state can and chooses to act with the ruthlessness of China the government has few weapons in its arsenal. Almost all weapons that can be used in a democratic nation have already been deployed. These include restriction of maternity leave and other maternity benefits for first two births only and disqualification from panchayat elections for people with more than two children in some States along with minor incentives for sterilisation.

As demographer Judith Blake noted people have children not birth rates and few incentives or disincentives are powerful enough to overcome the desire for children. Ground-level research by former Chief Secretary of Madhya Pradesh Nirmala Buch found that individuals who wanted larger families either circumvented the restrictions or went ahead regardless of the consequences. As one of her informants noted “The sarpanch’s post is not going to support me during my old age but my son will. It does not really matter if I lose the post of sarpanch.”

Second if punitive actions won’t work we must encourage people to have smaller families voluntarily. There are sharp differences in fertility among different socio-economic groups. Total Fertility Rate (TFR) for the poorest women was 3.2 compared to only 1.5 for the richest quintile in 2015-16. To get to TFR of 1.5 a substantial proportion of the population among the top 40% must stop at one child.

In western societies low fertility is associated with the conflict that working women face between work and child rearing and the individual’s desire to enjoy a child-free life. Not so for Indian couples. In India couples with one child do not consume more nor are women in these families more likely to work. My research with demographer Alaka Basu from Cornell University shows that it is a desire to invest in their children’s education and future prospects that seems to drive people to stop at one child. Richer individuals see greater potential for ensuring admission to good colleges and better jobs for their children inspiring them to limit their family size. Thus improving education and ensuring that access to good jobs is open to all may also spur even poorer households into having fewer children and investing their hopes in the success of their only daughter or son. Provision of safe and easily accessible contraceptive services will complete this virtuous cycle.

Population and policy

Third we must change our mindset about how population is incorporated in broader development policies.

Population growth in the north and central parts of India is far greater than that in south India. What should we do about the old policies aimed at not rewarding States that fail to control population growth? These policies include using the 1971 population to allocate seats for the Lok Sabha and for Centre-State allocation under various Finance Commissions. In a departure from this practice the 15th Finance Commission is expected to use the 2011 Census for making its recommendations. This has led to vociferous protests from the southern States as the feeling is that they are being penalised for better performance in reducing fertility.

There is reason for their concern. Between the 1971 and 2011 Censuses the population of Kerala grew by 56% compared to about 140% growth for Bihar Uttar Pradesh and Madhya Pradesh. A move to use the 2011 Census for funds allocation will favour the north-central States compared to Kerala and Tamil Nadu.

However continuing to stay with a 1971 Census-based allocation would be a mistake. Cross-State subsidies come in many forms; Centre-State transfers is but one. Incomes generated by workers in one State may also provide the tax revenues that support residents in another State. The varying pace of onset and end of demographic transition creates intricate links between workers in Haryana today and retirees in Kerala and between future workers in Uttar Pradesh and children in Tamil Nadu.

Demographic dividend provided by the increasing share of working age adults is a temporary phase during which child dependency ratio is falling and old-age dependency ratio is still low. But this opportunity only lasts for 20 to 30 years. For States such as Kerala and Tamil Nadu which experienced fertility decline early this window of opportunity is already past.

As the United Nations Population Fund estimates over the next 20 years the window of opportunity will be open for moderate achievers such as Karnataka Haryana and Jammu & Kashmir. As the demographic window of opportunity closes for these States it will open for Uttar Pradesh Bihar and other States that are the last to enter fertility transition. This suggests that workers of Bihar will be supporting the ageing population of Kerala in 20 years.

The focus areas

In order to maximise the demographic dividend we must invest in the education and health of the workforce particularly in States whose demographic window of opportunity is still more than a decade away. Staying fixated on the notion that revising State allocation of Central resources based on current population rather than population from 1971 punishes States with successful population policies is shortsighted. This is because current laggards will be the greatest contributors of the future for everyone particularly for ageing populations of early achievers. Enhancing their productivity will benefit everyone.

It is time for India to accept the fact that being the most populous nation is its destiny. It must work towards enhancing the lives of its current and future citizens.

Sonalde Desai is Professor of Sociology University of Maryland and Professor and Centre Director NCAER-National Data Innovation Centre. The views expressed are personal

There has been a decline in economic activity since the last fiscal. Both economic activity and inflation showed falling trends throughout 2018–19.

Akin to the rest of the world business uncertainty had increased in India post the Lehman bankruptcy in September 2008. A measure of volatility the standard deviation (SD) of the quarter-on-quarter (q-o-q) growth rate of the NCAER Business Confidence Index (N-BCI) was 8.7 between January 1998 and July 2008. Leaving out the third quarter of 2008 the SD of the q-o-q growth rate of the N-BCI increased to 12.6 for the period January 2009 to April 2019. This volatility was pronounced in the post-demonetisation period from January 2017 to April 2019 with the SD being higher at 13.5 

There has been a decline in economic activity since the last fiscal. Both economic activity and inflation showed falling trends throughout 2018–19.  The year-on-year (y-o-y) growth of GDP at market prices went up from 6.0 per cent in Q1 of FY18 to peak at 8.0 per cent in Q1 of FY19 before declining again to 5.8 per cent in the Q4 of FY19. Overall retail inflation had stayed at moderate levels at 3.6 per cent in 2017–18 and 3.4 per cent in 2018–19. Retail inflation fell from 4.8 per cent in Q1 FY19 to 2.5 per cent in the fourth quarter of 2018–19.

The available monthly leading indicators do not show much hope.  The Index of Industrial Production (IIP) showed 3.4 per cent y-o-y growth in April 2019. Core IIP also showed higher annual growth of 5.7 per cent for the period April-May period versus 4.4 per cent in the corresponding period in 2018. However this was mainly driven by growth in electricity and steel sectors. As per the Society of Indian Automobile Manufacturers production of passenger vehicles commercial vehicles three-wheelers two-wheelers and quadricycles showed a de-growth of 9.31 per cent in the period April-May 2019. The Nikkei Manufacturing PMI also was lower in the first quarter of 2019-20 at 52.2 as compared to 53.6 in the corresponding period in 2018-19.

Retail inflation stayed at 3.0 per cent in both April and May 2019. Food and fuel retail inflation have also stayed benign. Merchandise exports and imports (USD terms) showed y-o-y growth of 2.5 per cent and 4.3 per cent in April-May 2019-20 on a corresponding basis. Services PMI has also fallen in the April-May 2019-20 versus the corresponding period in 2018-19 on a sequential basis. As per the Indian Meteorological Department the cumulative departure of rainfall for the country as a whole from June 1 2019 to July 1 2019 had been 31.8 per cent. 

In one sentence despite interventions and improvements supply-chain bottlenecks continue to plague India.  Plus there are weaknesses in both external and internal demand rural and urban.  The financial sector in India will continue to act as a drag on economic growth at least in the short run.  

What should the government do to address an economic slowdown amidst a period of economic uncertainty with limited fiscal space?  The answer lies in a stable certain policy framework – boost investor and consumer sentiments address sector-specific woes and keep on working on the long-term challenges.

On the supply side the Government of India should continue to work on the Ease of Doing Business to promote FDI. The empirical evidence shows the open economies tend to grow relatively faster.  Investments in physical infrastructure – transport energy and telecommunications – have to continue.  Integrated water and land policies are important for both rural and urban areas.  

The woes of the agricultural sector have been solved in a systematic sustained and holistic manner. Global warming is a certain in our economy implying that temporal and spatial variations in monsoon are going to be the norm rather than a departure from it.  The detailed policy recommendations may be found in the Doubling Farmers’ Income report where NCAER was one of the Knowledge Partners.

As mentioned in the Economic Survey 2017-18 we need to focus on our current comparative advantage of labour-intensive industries like clothes textiles and apparel etc. and link it up with the export sectors to fuel both internal and external demand. Giving specialised attention to our border areas especially on the Eastern side which also happens to be the Aspirational Districts can fuel exports and internal demand.  Opening borders with security protocols can encourage cross-border commerce thereby encouraging growth in these areas.  

Bornali Bhandari Senior Fellow National Council of Applied Economic Research New Delhi is a guest contributor. Views expressed above are the author’s personal views.