Forget these freak statistics. The big picture shows three things. First, India has proved far more resilient than expected after the terrible first quarter of Covid, and this bodes well for the short term. Second, India has been resilient despite having among the smallest fiscal stimuli among major nations, which means the long-term scars of Covid (such as the debt-GDP ratio) will be correspondingly shallower, aiding the recovery in 2021. Third, Indian growth was steadily falling even before the pandemic – from 8.3% in 2016-17 to 7.0%, 6.1% and 4.2% in subsequent years. This revealed deep structural problems, so India’s new normal for GDP growth may be 6% rather than 7-8% until it tackles problems leading to export stagnancy, jobs and third-rate education.
Several vaccines for Covid are about to be launched, and look like being effective even against new mutated strains. If so, the whole world will bounce back fast in 2021. World commodity prices boomed in the last quarter. Brent crude has crossed $52 per barrel.
A lot riding on consumer spending
Steel, copper and aluminium have shot up in price. Iron ore has almost doubled from its nadir in 2020.
Unquestionably manufacturing will boom in 2021, in India and in the whole world. But services account for over half of global GDP. Unless fear of Covid diminishes, services like entertainment, travel, tourism and restaurants will remain subdued. Much depends on the animal spirits – not of investors but of ordinary people fed up with being cooped up for safety for months. Quick massive vaccination followed by a spending spree on services is what India needs. Given how used Indians are to crowding, and how keen they are on pilgrimages (which account by far for the most tourism), Indian services should return to normalcy much faster than in the West.
Many analysts are pessimistic. India badly needs reforms to reverse the GDP decline from 2016-17 onward, but resistance from vested interests is strong. The farmers’ agitation represents pure vested interest rather than the national interest, but shows no sign of an early end. The labour reforms proposed in 2020 are weak and incapable of convincing investors to set up factories with 50,000 workers as in Bangladesh. Land acquisition remains such a problem that India has not completed the eastern or western dedicated rail freight corridors despite 15 years of work. A strike by Uttar Pradesh power staff ended attempts at privatising power distribution in the state. The Centre is genuinely keen on privatisation, yet finds it difficult to attract bidders at reasonable prices, partly because it’s unwilling to sack a single surplus worker.
One of India’s main advantages is supposed to be its demographic dividend, the rise in the share of population in the working age group of 15-65.
In fact, the open unemployment rate has tripled to 6%. In most miracle economies, the labour force participation rate (LFPR) rose to 60-65%, boosting gross domestic product. In India, it has slipped to 43% in 2019-20 from 50% in 2016-17, and Covid has driven it down further to 39%. Useless colleges are churning out unemployable graduates. Female urban labour participation is barely 14%, among the lowest in the world, because urban women fear rape, molestation and robbery. Without huge social and legal changes, India is going to miss out on its demographic dividend.
On the positive side, government capacity has improved a lot. Very few countries could in a short time have opened 350 million bank accounts for the unbanked, provided 80 million cooking gas connections or 100 million toilets for the poor. The Unified Payments Interface (UPI) platform is promoting the digitisation of payments impressively. Despite glitches and exaggerations galore in government figures, the improvement in government capacity is a clear plus.
Pessimists think, post-Covid, India will be lucky to achieve 4-5% GDP growth. Yet gross fixed capital formation has remained at 29% even in the Covid-stricken months. This is down from a peak of 37%. But if fixed investment is 30% of GDP, a reasonable incremental capital-output ratio (ICOR) of 4 will yield 7.5% growth.
Even a poor ICOR of 5 will yield 6% growth. Many analysts keep saying that “nobody is investing” but that is plain false. Gross fixed capital formation remains as high as 30% of GDP and could pick up once Covid passes. This is possibly the greatest cause for hope, for it could not be this high unless many things were actually working out.