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Tech tonic for growth: Will Sitharaman’s bahi-khata have what’s been missing from Budgets so far?

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Millions lost their jobs, walked thousands of miles to get home, starved, got sick, died. The lockdown following the Covid-19 pandemic was the worst catastrophe for India since the ‘Spanish flu’ influenza epidemic a century ago. Just how bad is documented by the Reserve Bank of India (RBI) in its Financial Stability Report (FSR; bit.ly/3oP9DBT) released on January 11, a precursor to the annual budget.

Growth fell by 25% over two quarters in India, the highest among major economies. Britain came next, and Mexico third, among the major economies. Surprisingly, China recovered within a quarter. Developing countries in general were more severely affected than industrial countries. But some of India’s extreme suffering was, no doubt, due to its government’s panic reactions, including lockdown and closing down of long-distance transport.



Still a Lag

As the FSR points out, output is still below pre-pandemic level. This is just the time when the economy needs financial stimulus. But it has not come. Banks are in sounder financial situation than last year. Their bad debt ratios have fallen, provision coverage has improved, and return on capital and assets has risen. But they are failing in their basic function, which is to lend. The report does not say why. But, if asked, the banks would say that their potential borrowers are not worth lending to.

The biggest among them are the biggest defaulters, and the rest are not in a financial position to service fresh debt. Their owners also would be wary of fresh loans from banks, which are financially bankrupt and are kept in business only because the government owns them and does not liquidate them. The new issue market is so moribund that the Securities and Exchange Board of India (Sebi) does not even issue summary statistics for it.

It may not occur to the common man, but economists must wonder: how does an economy with dysfunctional banks and equity markets continue to grow year after year? Its growth must be reflected in its components. A sixth of its GDP comes from agriculture, and three-tenths from industry. Manufacturing produces even less value added than agriculture.

A quarter of industrial output comes from construction. A builder may think that his labourers are doing him a service. But every time a worker carries bricks up to make a building, he is being industrious according to the government. Despite that, however, almost half of GDP comes from services. And the most important set of services, accounting for a fifth of GDP, is financial, real estate and property services.

That may suggest that banks play a huge role. But financial services are only a quarter of this sector. The rest is real estate ownership, trading and related services. Even according to official figures, real estate construction, trading and speculation are the largest economic sector accounting for over a sixth of GDP. We keep buying and selling shops and homes, their prices keep going up, and we feel we are getting richer and richer. Then once every few years, we cannot buy all the property put up for sale, prices collapse, and we get poor.

Tech It Is, Texla to Tesla

Banks lent generously to real estate at one time and lost much of the money. Those who made a packet in the property boom may have enjoyed it. But banks are unlikely to finance another boom, at least for the present. Countries have historically got rich by advancing technically — by learning to produce better things at lower prices. We have built great institutes of technology, and the government has set up so many laboratories. But all that investment has not led to much technological advance. What advance has occurred has depended, to a considerable extent, on importing technology.

That is fine. India did extremely well after it liberalised technology imports in the 1990s. We also trained many young men and women in information technology. They were exported in thousands when the US had an formation technology revolution, and their remittances made their parents rich in India.

But these technological advances came to an end, and the boom they created collapsed. All developed countries, including the US and in Europe, are stagnating. There is no galloping tech horse that India can jump on. The Chinese continue to develop technology by importing, copying and improving it. But ‘Chinese’ is too difficult, so Indians are learning nothing from the Chinese. In this way, technological advance has slowed down to a crawl. That is the basic reason for the chronically falling Indian GDP growth.

The finance minister has, hitherto, shown little understanding of the crisis India is facing. Technology has been, more or less, absent in her discourse. It is not just her. There is no one in the ruling party with any consciousness of the problem we face.

Many Indian scientists have made a career abroad. So have good Indian economists. They have come once in a while to India to advise governments. But the government’s incipient xenophobia rules out using them.

The writer is former chief economist, ministry of finance, GoI

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