Economist Maitreesh Ghatak: At the moment, the GDP is at a four-year low
Maitreesh Ghatak, Professor of Economics at London School of Economics, in an interview to Tathagata Bhattacharya says the government has failed on many counts
At the end of the day, it is growth and employment generation via new investment that is key to long-term economic progress. Various welfare schemes are a way of providing a social safety net to the poor in the short-run. It is performance along these two dimensions that affect people’s daily lives most directly, says Maitreesh Ghatak, Professor of Economics at London School of Economics, in an interview to Tathagata Bhattacharya. He says the government has failed on these counts and many more
Q. Where do you think the Indian economy is headed?
A. At this moment, things don’t look very rosy. As far as GDP growth is concerned, it slowed to a four-year low of 6.7% in 2017-18. In fact, excluding the last two years of the UPA II government, the so-called period of policy paralysis, this is a 15-year low. The IMF in its World Economic Outlook (WEO) has downgraded India’s projected growth for 2018 from 7.7% in its April 2017 report, to 7.4% in its July 2018 update to the WEO. The talk of 8.2% growth in the first quarter of the new financial year is misleading – as the economy recovers from the twin shocks of demonetisation and messy implementation of GST, there are bound to be quarters where growth will appear high as the economy catches up with trend growth, from which it went on a downward swing in 20162017. Investment rates are down, employment growth is stagnant, exports are down and the rupee is in a free fall. The only positive I can see is that inflation has not been high, facilitated by drop in international oil prices. However, that too has started creeping up recently.
Q. A look at some of the crucial indicators like current account deficit, fiscal deficit, foreign portfolio investment, etc. shows that macroeconomic stability is under stress. Where did the government go wrong?
A. I think the government in its zeal for the so-called war on corruption took its eyes off pro-growth reforms or pro-poor welfare policies. At the end of the day, it is growth and employment generation via new investment that is key to long-term economic progress and various welfare schemes are a way of providing a social safety net to the poor in the short-run, and it is performance along these two dimensions that affect people’s daily lives most directly. To the extent corruption did actually go down that would be a good thing, but where is the hard evidence? According to a recent RBI report, 99.3 per cent of the demonetised currency has returned to the banking system, only 0.7% could be extinguished. In an economy like India where 85% people work in the informal sector, only 2% pay income taxes, you cannot get rid of corruption overnight through big-bang policies, as opposed to painstaking reforms in government administration and political funding.
Q. Is there any way of course correction for this government?
A. It is only eight months till the next elections and so I am not sure how much course correction is possible. But there is always scope for improvement, for example, to improve the delivery and flow of funds for social welfare programmes and MGNREGA.
Q. What is your take on this government when it comes to social sector spending?
A. The government has been attempting to project a more pro-welfare image than a proform image as elections approach, but I am not sure whether in terms of budgetary allocation to the social sector or in terms institutional reforms in public service delivery that makes government expenditure more productive, we have seen much improvement. For example, if you look at expenditure on education, its share in the budget has gone down from 6.15% in 2014-15 to 3.7% 2017-18.
The CMIE report shows there was in fact a marginal decline in formal sector employment in the financial year 2017-18
Q. The method of calculating GDP growth was recalibrated by this government. What is your take on it?
A. A sub-committee of the National Statistical Commission headed by the economist Sudipto Mundle has put out a report that provides the so-called back series. Since 2014, the Central Statistical Organisation (CSO) changed the base year for national income data to 2011-12 from 200405. However, since the new base was not applied to data from prior years, it made comparison of growth rates before and after 2011-12 impossible. With the removal of the problem of comparability, it turns out that over all, the economy under both UPA terms (10-year average: 8.1%) outperformed that under the Modi government (average: 7.3%). Even if we look at the average growth rate under UPA-II, a period of so-called policy paralysis, it was marginally higher at 7.4% than that under the Modi government. This new series is yet to be vetted by the Central Statistical Commission before they become officially acceptable, and the government has repeatedly pointed out that these are not official estimates yet.
Q. The government says it has delivered on jobs though it asked the Labour ministry to discontinue with its employment survey in 2016. CMIE reports show that the number of jobs has in fact come down. What’s your take on this issue?
A. This is a significant vulnerability for the government since the poll promise in 2014 was 10 million new jobs a year. The CMIE report shows there was in fact a marginal decline in formal sector employment in the financial year 2017-18. The economy is still recovering from the twin shocks of the illadvised demonetisation and the ill-planned implementation of GST. The negative effect on growth and the uncertainty combined to reduce investment and job creation. From a high of 34% in 2011-12, the investment to GDP ratio is down to 28.5% in 2017-18, foreign direct investments are down, and exports are down. So, no wonder job growth is stagnant. In any case, the formal sector employs only 15% of the people and agriculture, which employs 50% of people, contributes only 13% to the GDP. So, these employment statistics relating to the formal sector vastly understate the gravity of the problem. The real issue is how to get people out of agriculture, into jobs that are more remunerative than what the informal sector permits.
Q. The NPAs have become a big problem and credit to industry is down to one per cent. How serious is this problem?
A. It is a very serious problem. Reforms in this area were started by Raghuram Rajan when he was the Governor of the RBI. To be fair, the NPA problem is not unique to this government and as mentioned by Rajan in a recent note to the Parliamentary Committee on NPAs, they reflect loans that originated in the period 2006-2008 when economic growth was strong. Overoptimism, the financial crisis, slow growth in the subsequent years all played a role, and as Rajan says, while corruption undoubtedly played a part, but it is hard to tell banker overconfidence, lack of due diligence and corruption apart.
Q. Have the policies of the Modi government been anti-poor? If yes, could you please point at a few of those?
A. To discuss poverty, we need some measures of it. Unfortunately, we do not have any estimates of poverty since the last numbers that are available from 2011-12. A new poverty line has to be picked from alternative proposals, including the one proposed by C Rangarajan, which has not happened. Policies like demonetisation hit the informal sector hard. The agricultural sector is in stress. I certainly don’t see a huge pro-poor emphasis in the government’s policies. On top of it, the military-style rush in making the Aadhar card mandatory for food rations and other welfare schemes imposed great hardship on those who are the most vulnerable and voiceless, has not helped. What for others is merely an inconvenience, for them is a costly ordeal in terms of time, money, effort and forgone wages, given the remote areas they live in, the barriers they face in dealing with the bureaucracy and their precarious existence on the margin of subsistence.