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Eeconomists moderated their growth forecasts as the second phase of Covid took its course. Most commentators agree that the economy should return to what it was two years ago at the end of the year. The question is, what will happen beyond that? Should we expect a return to rapid economic growth or is the country heading for disappointment in the medium term? The answer is to dig below recent growth rates.
First, as we know, the system was slowing even before the Covid hit, with growth halving from 8% at the height of the Modi years to just 4% in 2019-2020. Second, growth over the past three years has been supported by public consumption – which has grown by 30 percent during this period, compared to 2.1 percent for private consumption. Investment in fixed assets did much worse, falling 8.7 percent from the level three years earlier. It is understandable (even necessary) in a recession for government to become the primary engine of growth, but this position cannot be safely maintained – not when public debt has already fallen from two-thirds of GDP to 90%.
Third, and most importantly, downward trends in employment and growing inequalities make a rapid recovery in private consumption difficult. The size of the population willing to work has decreased. Within this declining number, unemployment has risen sharply. And among those who actually work, those who work in agriculture (i.e. low-wage jobs) have increased in number, while millions of jobs in industry and services have disappeared. Under these circumstances, the majority will find it difficult to maintain their current level of spending.
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If consumption increases only slowly, current low levels of capacity utilization will take two to three years to reach the level required for investment in new capacity to take off. With weak investment growth in the interim, rapid overall growth is unlikely. Unless of course you can use the export demand to compensate for the lack of domestic demand. It is possible today because the global economy is gaining momentum, trade is developing well and Western economies want to diversify their supply chains away from China. But policies need to help exporters take advantage of the opportunity, and it is not clear that atmanirbhar the campaign does the trick.
However, the internal market must also grow. What no one wants is to become like Latin America, whose extreme levels of inequality are now almost equivalent to India, and whose contrasts between rich and poor are increasingly reflected in divergent fortunes. of the rich and the rest in India. A vibrant stock market fueled by a dynamic small set of large companies is a good idea, but contrasts with the quagmire that traps the rest of the system. The high inequality of the Latin American type, especially when the majority is still poorly educated and quite simply unfit for high productivity jobs, restricts domestic demand and slows growth.
Policymakers should look at what’s called the Great Gatsby Curve – named after Scott Fitzgerald’s novel (and subsequent film) that dealt with American inequality and class distinctions in a time of skyrocketing excess. . The curve follows the intersection of two measurements. One is inequality, the other is intergenerational mobility, or the likelihood of the next generation moving up the economic ladder from low to middle income. The Nordic countries are doing better on the curve. East Asia does not perform very well, but the major Latin American economies are the worst. If India combines high inequality with low intergenerational mobility, it risks becoming, not like East Asia with its rapid growth rates, but like an underperforming Latin America.
This poor outcome can be avoided if the country manages its tax system better – more spending should be supported by revenue raising measures; whether it invests in improving school education at all levels; and creates labor-intensive but value-added jobs. While policies that ignore growing inequality and the disappearance of quality jobs will result in suboptimal growth. This in turn will create social and political pressures that will lead to what Latin America has seen in abundance: populist and authoritarian democracies.
By special arrangement with Business Standard
Also read: These 4 factors will shape how the Indian economy rebounds from the shock of the second wave of Covid
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