Deciphering India’s Lost Decade
After a stellar record of increasing economic growth until 2010, the Indian economy began its descent into gradual stagnation, taking along with it the dream of a $5 trillion economy by 2024. The past decade as many economists and journalists have already identified is one littered with missed opportunities and ineffective policy-making. GDP growth peaked at 8.49% in 2010, and has since fallen to an average of a meagre 6% per annum. This article seeks to understand the reasons behind this descent and alternatives methods actions that could have prevented it.
In 2010, agriculture consisted of 17% of GDP, while industry was 30.7%. 9 years later in 2019, agriculture decreased to 15.69% of GDP, and industry to about 24.88%. Despite the falling share of agriculture, a sign of a progressing economy, nearly 65% of the population is still dependent on farming as a means of sustenance. As generations pass, farmlands are divided further, accruing very little gains to each farmer. In turn, nearly 65% of India’s population is left behind in the path to prosperity. Additionally, there is a consistent decline in the secondary sector (industry), making it much more difficult to sustain economic growth. According to economist Santosh Mehrotra, the secondary sector is a source of economies of scale, new technologies and positive spillovers that result in steady progress. On the other hand, the services sector, which has consistently been increasing from 45% of GDP in 2010 to 50% percent in 2019, only employs about 26% of the workforce, thus, further escalating the inequality amongst the Indian population. The services sector, despite its growth has failed in stimulating a comparable level of employment to absorb some of the rural workforce. Furthermore, it has not been matched by adequate technological progress or capital accumulation, which are key drivers to economic growth.
Savings to GDP ratio has been consistently decreasing since 2010 from 34.27% to 28% in 2019 and it also doesn’t help that banks and corporate entities have been equally strained financially, resulting in the “twin balance sheet problem” coined by former Finance Minister Arun Jaitley. As a result capital accumulation has significantly weakened over the years. As a percentage of GDP, it has declined by nearly 8 percentage points between 2008 and 2019. The average value of investments per intent was an average of INR 100 crore, which drastically fell by a whopping INR 70 crore by 2015. Apart from capital accumulation, R&D expenditure as percentage of GDP has dwindled to a paltry 0.65% by 2018, as compared to China whose R&D expenditure stands at 2.2% of GDP.
What had led to this collective slowdown over the past 10 years? According to Guruswamy and journalist Pooja Mehra, both the UPA led government from 2010–2014 and the NDA led government from 2014 to the present are equally to blame. Both regimes saw a rise in policies that favored the middle and upper class population, alongside the urban population. Guruswamy says that rather than greater investment in human capital through education and healthcare, UPA implemented subsidies for LPG and motor fuels. For the rural population, there was the fertilizer subsidy, which mainly assisted large farmers. The NGREGA scheme for the poor suffered from multiple leakages in the system where only a fraction of the budget actually reached its beneficiaries. Consequently, the vast poor, rural population was largely ignored.
After the 2008 financial crisis, Pranab Mukherjee, the then Finance Minister, encouraged banks to lend for infrastructure projects. This vast stimulus led to a gradual accrual of bad debts and even crony capitalism, resulting in an eventual economic slowdown. As of now, major banks and their clients are both facing mountains of unpaid debts, leading to a dry spell in investments. Apart from a broken financial system, the end of the UPA regime was characterized by substantial corruption scandals such as the Colgate and 2G Scam, that consisted of billions of dollars, while promoting crony capitalism and an anti-competitive environment. These scams were a trigger in crushing motivations for industrial investments, according to Sumit Majumdar. They were a sign that economic power was to be concentrated in the hands of a few, and there was no reason to believe that reformation of the system would be enough to divert this power and eliminate such distortions. Along with its publicized scams, the UPA regime was also characterized by inflation, where consumer prices had risen 10% yearly since 2009 to 2015.
If the UPA created a number of problems, the subsequent NDA regime, did very little to resolve them. Financial reform to clean up the balance sheets of banks was not prioritized. The economy was not helped by shocks such as demonetization and GST. The demonetization produced great economic losses for rural households of up to 15.5% of their income 2 months after its implementation. Since the beginning of the NDA rule, farmer protests have increased by a whopping 700%. The most recent PM-KISAN scheme, which focused on cash transfers to farmers still does not do enough to empower the rural populace which are in dire need of greater infrastructure. Along with modifications to the Land Acquisition Act of 2013, which now allow land to be acquired without consultation of the local community for matters concerning defense, infrastructure and industry, there has been an insufficient focus on the rural community. Additionally, the GST made it more difficult and expensive for small enterprises who could not cope with the rising expenses of conducting business. According to Pooja Mehra, the policies during both governments were forged as a result of political motives rather than for the economic progress of the nation.
There are various actions that should have been undertaken by governments instead. Given a massive share of approximately 65% of the population, there needs to be further support provided to rural India. Policies must be adequately implemented towards enhancing agricultural productivity and rural growth. As one of the largest users of water in India, the agriculture industry is in need of efficient methods of water management. The over-pumping of water is leading to plummeting water groundwater levels. On the other hand, in rain-fed regions which also house the majority of the rural population, agriculture practices must be modified to reduce soil erosion, while increasing absorption of rainfall. Farmers must also be incentivized to diversify cultivation towards high value commodities for greater prosperity. Alongside agricultural growth, according to a NITI study, the dearth of skills and technical knowledge are obstacles for rural workers to enter the manufacturing sector. Human resource development programs are necessary to deliver important skills for expansion of rural employment.
While focusing on its comparative advantage, which has been cited being in labour-intensive industries and the ICT industry, India must also focus on physical and human capital accumulation. Expenditure on education and healthcare has been far below most developed countries, providing a multitude of negative long-term consequences. Mehrotra suggests an adoption of an industrial policy, centering in on subsidies for industrial training, supporting domestic firms in competing with foreign firms and assisting in the coordination of strategic investments with potential to spur significant economies of scale. A lack of a strong endowment structure will weigh down on India’s growth and expansion into other industries away from its comparative advantage. As Raghuram Rajan, the former RBI Governor has emphasized, the crippled financial industry needs a major clean-up of bad loans to stimulate investment and facilitate the creation of jobs.
India’s past decade is marked by missed opportunities and disappointments. Little has been done to alleviate the inequality amongst the rural and urban population in the pursuit of a sustainable yet impactful economic growth. Without significant reforms and policies on empowering rural and most vulnerable groups in India, the economy is doomed to continue on its current trajectory.
