PremiumNEW YORK : India’s economy is in a downward spiral. The Economist Intelligence Unit just lowered the forecast for India’s growth in the coming year from -5.8% to -8.5%. This is not out of line with what other forecasters are predicting. India’s own credit rating agency, Icra, predicts a growth of -9.5%. For the first quarter of 2020-21, the State Bank of India is predicting a growth of -16.5%.
The low growth in 2020-21 is not in itself surprising. Thanks to covid-19, the whole world is slowing down. But there are two reasons for concern.
First, India is not just slowing down, it is dropping rank in all global charts. Consider the 42 major economies in the world for which The Economist provides data every week. Till six or seven years ago India was, for several years, among the three or four fastest-growing economies. For 2020, it has dropped to 35th among the 42 nations.
Second, while the pandemic has made the situation much worse, the slowdown cannot be put down entirely to covid-19. It began well before that. In fact, from 2016, India’s economy has moved as though it was walking down one of the many historic stepwells one sees all over India, with each year’s growth rate lower than the previous year’s (see Chart 1).
The number for 2020-21 is partly a forecast but there is now enough data and little doubt that India will break its own record of low growth since 1947, which happened in 1979-80, when India’s economy grew -5.2%. So the growth we are expecting in 2020 has no parallels outside of our colonial times.
That said, we need to ask why India has done relatively worse after the pandemic struck in March. After all, in terms of fundamental strengths, India’s economy is well-positioned in all the three sectors that could be expected to be the leading drivers of global growth in the post-pandemic world: information technology and outsourcing, health and pharmaceuticals, and higher education and research.
The world will come out of the pandemic much savvier in the use of digital technology. There are currently some anti-globalization sentiments, with some countries raising tariffs and closing boundaries for trade and talent, but this will not last. Nations that adopt closed economy strategies will either learn this does not work, or cease to be nations of significance. As soon as this happens, IT and outsourcing as a sector will grow in leaps and bounds.
Thanks to the lessons of the pandemic and, also, given our growing awareness of climate change, the components of growth are likely to change. I do not think long-run growth will drop but the constituents of growth are likely to change. Instead of buying more luxury cars, yachts and homes, we will buy better health, education, the arts and music. This, in turn, will boost the higher education and research sector.
India is extremely well poised in all these sectors and for that reason, I have been optimistic about India. One would have expected that, despite the country’s poor performance since 2016, international investors, especially the ones dislodged from China, would see these long-run strengths and come to India. But over the last few months, these hopes have receded.
Lockdown woes
Much of the problem lies with India’s disastrous management of the pandemic. When the lockdown was announced on 24 March, a lot of people got hope from this early action. Much has been written about this; one of the most noteworthy is the National Bureau of Economic Research paper by Debraj Ray and S. Subramanian. Within days, it became clear that no supporting policy action and relief measures that such a major, sudden lockdown needs had been readied.
While our cities, factories and transport, and therefore the economy, were totally locked down, it was evident that no plan had been made for the tens of millions of migrant workers who were suddenly left with the stark choice of remaining locked down and perishing or trudging hundreds of miles across the nation, just to go home.
Leaving aside the lack of empathy and compassion that this policy signalled, it achieved the very opposite of what a lockdown should do. Some 4 or 5% of India’s population were literally sent off like sprinklers across the nation. No matter how one cuts and splices the covid-19 data, it is clear that India’s ‘lockdown-and-scatter’ has caused the virus to spread and also hurt global confidence in India, which is fuelling the economic slowdown.
The fact that India has become the third-most infected nation in the world, and is expected to overtake Brazil and be second within a month, behind only the United States, is not the big worry. India is the world’s second-most populous country and there is no surprise that it will tend to have more absolute numbers of people testing positive for covid-19 and also dying of the virus.
It is important to normalize using the population as a base. So, we should look at the data on cases of covid-19 per one million population and number of deaths caused by this virus per one million population. The latter is referred to as the Crude Mortality Rate (CMR) and I personally like to place greater weight on this. In all nations, more so in some, there is a tendency to undercount these numbers. But it is more likely that we will undercount infection (which is often not even reported) than deaths.
In analyzing the pandemic across nations, it is important to keep one geographic pattern in mind. Till now, the virus has turned out to be much less serious in Asia and Africa than other parts of the world (see Chart 2). This is a matter for epidemiologists to study. It can be partly due to the age structure—Asia and Africa are much younger, or immunity acquired due to other diseases such as tuberculosis or malaria has been of some help.
It is also possible to argue that this is just a temporal difference. Asia and Africa are in the foothills of the peaks that Europe and America have scaled, and Asia and Africa are yet to climb it.
Whatever the explanation maybe for these huge continental differences, to compare a nation in Asia or Africa with the United States or some nation in Europe and to take credit for good management of the pandemic and saving lives is disingenuous and misleading. We have to do the comparison within ‘covid-homogeneous regions’.
Once we do this, it becomes clear that India’s performance is very poor, even correcting for population. Over the last few weeks, India has overtaken first Pakistan and now Afghanistan to become the nation with the highest CMR in South Asia. For every million population, there have been 43 coronavirus deaths in India. The number for Afghanistan is 36, Pakistan is 28, Bangladesh 24, Nepal 6, Sri Lanka 0.6.
And if we take all the 106 countries in Asia and Africa for which Worldometer collates coronavirus data, in terms of CMR, India gets a rank of 85. In other words, only 21 nations are doing worse.
Why did this happen? This strain of the coronavirus is new and no one fully understands its character and propensities. But it is now increasingly clear that India’s lockdown, which for a segment of the population was the exact opposite, has made the pandemic much worse than it need have been, causing more cases and more deaths.
Other numbers corroborate this. The total number of new cases every day has been rising in India since late March with no flattening of the curve. There are not too many countries in the world that have seen this kind of sustained increase for such a long time.
The contrast becomes clear just by looking at the graphs of daily new cases (3-day moving average) in three neighbouring countries: India, Bangladesh and Pakistan (see Chart 3). At the end of March, all three were roughly similar. After the severe and sudden lockdown in India, for some weeks, the three nations looked similar, with India looking slightly better than Bangladesh and Pakistan. But then, the flattening of the curve that was expected did not happen in the case of India.
The lockdown had clearly backfired.
Another data point that corroborates this hypothesis is one that shows how the virus has spread disproportionately in rural India after the lockdown. Of the total number of people who had coronavirus in April, 23% were in rural areas. This has now risen to 54%.
Economic virus
The lockdown froze a large part of the economy but our poor treatment of workers did exactly the opposite of what a lockdown does. What we are seeing now is the outcome of this lockdown-and-scatter approach. India is seeing one of the worst spreads of the virus. Economic growth has plummeted and unemployment has shot up. What the poor management of the virus, visible all over the world, has done is to shake up investor confidence and trust in our institutions.
This added speed to the growth slowdown which was already underway and has taken India further down the stepwell. One of the most important drivers of long-run growth is the investment rate—the share of the national income that is invested in machines, factories, infrastructure, human capital and research. India’s investment, or gross capital formation, as a percentage of GDP reached 38.1% in 2008 and was at 39% in 2011. Then, it started falling, slowly initially, and rapidly thereafter, now standing at 30.2%.
Investment depends on economic variables, like interest rates and bank lending parameters, but it also depends on social and political factors—like investor confidence and trust in institutions. The rise in divisive politics, heightened religious bigotry and the attendant increase in insecurity has clearly contributed to the economic slowdown.
The strong fundamentals that India had—especially in IT, pharma and higher education potential, it still has. We need corrective policies before the opportunity is lost altogether.
The damage done by the poor management of the pandemic cannot be fully reversed. But we can bring in professional talent to manage the pandemic and the economy here on, so that investors can see these are in the hands of people with expertise. Beyond this. the main task is political—to heal the wounds of division; for people to feel included and secure, and willing to invest in the future.
Starting 73 years ago, India made great progress in building a society that strove to be secular, democratic and have freedom of speech, which is the key for science and ideas to flourish. There were no parallels among the many countries which broke from the colonial yoke and became independent around the middle of the 20th century. India stood out.
After making this political investment, India was on an upward stepwell in terms of economic growth, with the growth rate picking up in 1994, again in 2003, and spectacularly from 2005.
It will be unfortunate if we choose to retreat now.
Kaushik Basu is professor of economics at Cornell University and former chief economist at the World Bank
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