Putting people at the heart of economic policy

More than half-a-century after economist-philosopher E.F. Schumacher talked of “economics as if people mattered”, India is caught in an economic story that is increasingly about numbers bigger than the people they are meant to serve.

As 2023 drew to a close, Prime Minister Narendra Modi reiterated in Parliament that India will soon become the third largest global economy. The Union minister of state in the PMO Jitendra Singh repeated the promise on 30 December 2024, when he said, “Hopefully this year [India] will emerge as the fourth-largest economy and during PM Modi’s third term, India will be the world’s third-largest economy, marching on to become the No.1 economy by 2047.”

Ironically, the claims of a march to global superstardom come come at a bad time, even from a numbers-only perspective. To begin with, growth is down and inflation is up. GDP was 9 per cent in 2022–23 H1, fell to 8.2 per cent in 2023–24 and further slipped to 6 per cent in 2024–25 H1. GVA (Gross Value Added), which is growth on the supply side, was 6.2 per cent in 2024–25 H1, down from the 8 per cent mark in the same period for the previous two years.

Inflation (CPI-Combined) crossed the targeted upper threshold of 6 per cent in October 2024, with food inflation at an alarming 9 per cent. Food inflation this close to double digits was at a 14-month high. CPI inflation came down to 5.48 per cent in November 2024, with continued high food inflation at 8.2 per cent. Largely, inflation has been on a higher trajectory since 2020, above the mandated upper target of 6 per cent for as many as 25 months in the last four years.

It is plain that the Indian economy has had a bumpy ride in the year gone by, with many red and amber warning lights. The hope being expressed is that the ride will settle and pick up pace, an optimism reflected in the newly appointed RBI governor Sanjay Malhotra’s statement: “…prospects for the Indian economy are expected to improve after the slowdown in the pace of economic activity in the first half of 2024–25.”

The question is: how do you “improve”? Here comes the clamour for a rate cut as a panacea, but since food inflation is alarmingly high, a rate cut must come by ignoring this fact. Yet, food inflation hits the poor the most, so this approach translates to ignoring the poor while keeping the engine going along the lines of failed trickle-down theories.

As the illustrious former RBI deputy governor, the late Savak Tarapore once remarked: “(High) food inflation just cannot be wished away as a supply side problem… it gnaws into the vitals of large tracts of the population.” In November, minister for commerce and industry Piyush Goyal said it was an “absolutely flawed theory” to consider food inflation when deciding on bank interest rates. The call for excluding food inflation while working the central bank’s inflation targeting framework rather than expressing alarm at galloping food inflation ignores the simple wisdom that the common man suffers first from food inflation, not from core inflation.

Keeping to first principles, lower rates should push credit delivery, drive increased investment, see more projects take off and deliver growth—the sign of a nation on the move. Yet, these first principles don’t translate to practice when the signals going out are contrary to the idea of growth that is fair, balanced and equitable.

But the Indian economic story has been marked by weak governance and strong signals emanating from the top that all business houses are not created equal.

The continued inaction on allegations against the house of Adanis, the loss of moral authority of market regulator SEBI, with the chairperson personally embroiled in connected allegations, the political donations via opaque electoral bonds (since struck down by the Supreme Court), the selective use of central investigative agencies, and the willingness to use strongarm tactics to silence critics are all part of a philosophy of command and control.

These signals sit at odds with the idea of free market entrepreneurship and investing; they kill creativity, innovation and risk-taking that can fire animal spirits and take the economy to a higher orbit. Before considering an investment today, a prudent businessman must consider how his or her statements, positions and partners will sit with the powers that be, then carefully tip-toe around any potential political minefield before making an investment decision.

Separating good governance from good economics, almost cutting them into neat exclusive sets and then expecting durable growth is like asking everyone to join in a marathon in which the winners are predecided. The game will soon be seen as a charade, with longer term implications for investments, reputation and growth numbers.

Hidden away from the headlines of laudatory mentions on growth is the story of a per capita income that keeps the majority of Indians from reaping the benefits of the claimed growth success. Coupled with a pervasive joblessness that shows up in eyepopping (and heartbreaking) events like the stampedes when lakhs queue up for a limited number of vacancies, it speaks of a nation divided, its businesses subdued, its citizens reduced to scrabbling for nonexistent jobs.

Communal divides are bad enough, economic divides are equally so. The increasing concentration of wealth in the hands of a few is a nation split, literally and metaphorically, between the handful ensconced within gated communities and the majority who are kept out. In that sense, Mumbai’s glittering high-rises built by BJP-friendly builders are symptomatic of a deeper rot. Economists will tell you that good growth and price stability are the two pillars of a robust economy.

These work on the backbone of financial stability. In this context, note the accolades being claimed over the headline statement that bank NPAs (non-performing assets) have been reined in. To quote from the official statement titled ‘Public Sector Banks: A Resurgent Force’: ‘The Gross NPA ratio of Public Sector Banks (PSBs) has witnessed a remarkable improvement, declining to 3.12 per cent in September 2024 from a peak of 14.58 per cent in March 2018. This significant reduction reflects the success of targeted interventions aimed at addressing stress within the banking system.’ But how has this reduction been achieved?

There is an increased tendency to clean the books with write-offs. For example, reduction in gross NPAs during 2023–24 for all public sector banks was of the order of Rs 1.73 lakh crore, of which as much as Rs 1.13 lakh crore were plain write-offs.

This tendency will need some further probing if financial stability is not to be reduced to a joke. Further, there is an urgent need to study the quantum of new NPAs being added to the system as more of the old ones are written off. In 2023–24, Rs 84,435 crore new NPAs were added to the public sector banking system. This is a cautionary tale as we step into the new year. Governance and economic management cannot be reduced to headline-grabbing for long.