India continues to grapple economic problems! When will it become a superpower?

The IMF conundrum: Bangladesh and India’s growth!

As COVID-19 hits both countries, Bangladesh seems to be faring better than India, at least economically! With the government taking steps in the right direction, a lot more can be done to ensure India can recover and grow!

Get this (excerpts from a post on LinkedIn by Dheeraj Jain):

In 1950, Japan and India’s per capita GDP was the same. In 1980, Japan became a superpower.

In 1990, China and India’s per capita GDP was the same. In 2020, China became a superpower.

In 2020, Bangladesh’s per capita GDP is slightly more than India, and by 2025, it will overtake India’s per capita GDP.

These are all based on IMF’s predictions on per capita GDP: Bangladesh to be $2,756.10 by 2025. In contrast, India will be $2,729.24 — making our neighbours a notch richer than us!

That means the IMF expects India to add about $1.4 trillion to its economy and $171 billion by Bangladesh. However, thanks to India’s population and persisting economic challenges, Bangladesh may have a higher GDP than India.

The data shows that India’s economy (-10.3% change to real GDP), due to COVID-19, has been severely hit, as compared to Bangladesh (3.8%). A bigger worry that the data suggests is that India’s economic growth is unlikely to catch up to the pace Bangladesh is growing at, which means troubles in the future as well!

It shows that since 2016, India’s GDP growth is considerably slowing down, as compared to Bangladesh, whose GDP growth has been steadily increasing. While India’s was 40% more than Bangladesh five years ago, Bangladesh has grown at a compounded rate of 9.1% in this time, as compared to India’s 3.2%.

During COVID-19, Bangladesh managed to fare better because its economy wasn’t as bad a state as India is. Bangladesh’s growth during this time was due to their ability to adapt to the global landscape, especially considering the US-China Trade war and the recent geopolitics across the globe!

Another reason India’s growth slowed is due to the drop in Gross Savings Rate. Bangladesh’s GSR increased to 30.1%, in June 2020, as compared to 27.4% in June 2018, as per data from CEIC. In contrast, India’s savings rate dropped to 30.1% for fiscal 2019, as compared to 36% in 2007–08.

This year’s falls are an aberration owing to the COVID-19 scenario (India’s COVID-19 scenario is way worse than that of Bangladesh!). Still, even then, the graph suggests that the IMF’s outlook is that India’s recovery from the pandemic may not be a smooth one!

How can India recover from the pandemic?

It is relatively straightforward that the government has a significant role to play in the COVID-19 recovery. If they don’t intervene with the right policies and frameworks, it will throw the economy into a vicious cycle!

Fiscal support: Most of the fiscal support the government is providing has been on the lines of credit guarantees and liquidity support.

Till Oct 1, banks had sanctioned loans of ₹1.87 lakh crores of the ₹3 lakh crores of the Emergency Credit Line Guarantee Scheme (ECLGS) for the MSME sector, to 50.7 lakh MSMEs units.

The stimulus of ₹20 lakh crores announced in May, despite being one of the highest in the world, was estimated to have a fiscal impact of around 1% on the total GDP.

Also, India announced an additional $9.94 billion (~730 thousand crores) boost on Monday. The tax exemption offered, in exchange of Leave Travel Concession, along with a slew of investment measures, may be positive in terms of boosting consumer demand ahead of the festive season, it has not left economists impressed.

Nomura’s chief economist for India, Sonal Varma, mentioned that the fiscal impact of GDP on India might be a mere 1.2%. Aditi Nayar, from Moody, adds this will only give India a temporary boost during the festive season, eventually fizzling out over time!

Malhar Shyam Nabar, Division Chief, Research Department, IMF, states that: “there is a need to tilt the composition of the fiscal support towards more of the direct spending and tax relief measures and to rely slightly less on the liquidity support measures, the credit guarantees, which are clearly important to support the provision of credit in the economy.”

The same thoughts were echoed by Jahangir Aziz, head of emerging markets economics at J.P. Morgan: “What India needs right now is income support so that when restrictions are lifted, consumers and businesses would have the financial stability to borrow and invest.”

Monetary Policy: Earlier this year, RBI allowed lenders to grant moratorium for six months to lenders to ease hardships faced by consumers during the pandemic.

Earlier this month, on Consumer Price Index (CPI), or inflation, RBI stated that it expected inflation to forecasted inflation at 6.8% between July 2020 — September 2020, 5.4%-4.5% between October 2020 — March 2021, and 4.3% between April to June in 2021. RBI viewed that the inflation was because of a supply shock, and as the economy reopens and supply chains are restored, it will reduce.

The RBI did not cut rates it was expected to. Instead, it bought down the ‘Marginal Cost of funds based Lending Rate (MCLR)’ for the banks, thus providing more liquidity to aid credit creation!

The IMF feels RBI may have become too aggressive early on: “It has paused recently with its interest rate cuts, looking through this inflation, the spike in inflation that they have had recently, but we believe there is more that the RBI can do, too, in terms of there is room to cut if needed, and we think that should be done once this inflation spike is more under control.”

Policy Changes: Recent policy changes to the labour reform bills (another link) and farm bills are definitive steps to the medium and long term growth prospects of India.

What would be more crucial to watch is the steps government takes to boost the demand of consumer and capital goods in the economy. In addition to ensuring boosting consumption, the supply chain also needs a boost.

That means more investments in terms of boosting infrastructure (logistics, telecom, roads, digitization, etc.) to ensure a well-connected, digitized, supply chain for a country which primarily has family-owned businesses.

The government, a few days ago, did announce an investment of $3.41 billion (₹250 thousand crores) on a host of things, a lot more is needed! The same investment is in addition to the $9.94 billion stimuli announced!

In other words, it means moving from ‘informal management of personal networks’ to an ‘organized and well-connected supply chain’ that is digitized, transparent, and unified.

In addition to this, Nabar mentions a lot more needs to be done: “We have had progress on labour reform bills and the farm bills. We think that this will advance their structural reform agenda in an important way, remove supply-side constraints in the agricultural sector and in the labour market, also allow for a better matching of workers with firms, provide firms with a little bit more flexibility in terms of hiring options, but at the same time also provide more social security and safety net options for workers as well,” he said in response to a question.

Boosting investment opportunities in India through Policy changes: Due to COVID, a lot of blue-chip companies are looking to move out of China and relocate to India.

For that, India approved a $23 billion package (₹13,760 crores) worth of Performance Linked Incentives (PLIs) to lure companies to invest in setting up manufacturing units in India.

A couple of days ago, it did approve $6.65 billion worth of incentives to 16 companies to boost India’s domestic smartphone manufacturing capabilities.

PLIs, in itself, is not enough, if the government wants to boost India as the forefront and get ahead of Bangladesh or its neighbours in terms of per capita GDP, it has to ensure national harmony, regional stability and coordination, and bring in specialists in the oversized bureaucracy.

Apart from that, tax credit policies and legal reforms (contract enforcement) will also help boost India’s ability to attract investment.

Put the interests of the nations first: Every party that is elected at the centre brings with it their own objectives and agenda, putting national interests aside.

At the root, to ensure that we begin a long haul journey towards becoming a superpower, what we need is a government that addresses the necessities of its people and believes in equality of gender, caste and religion! The current inequality has the potential to stumble our economy.

Gone are the days of Modi’s dream of seeing a $5 trillion economy. As per Forbes, conversations these days are on India could be the first of BRICs group to achieve a junk status.

At the moment, our private investments, consumption, exports, and other vital factors for detrimental growth are low, and while it seems clear the government has the intent to get growth back on track, a lot more has to be done to get the economy booming again!

COVID was a dampener to India’s growth plans. With signs of potential recovery there, India needs a lot more direct fiscal stimuli than credit generation. Whatever steps are taken, it will still be hard-pressed to achieve steady growth, given the government’s debt load!

What more can India do to recover? Please share below!

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