Opinion | India’s economy bears signs of a deep malaise but not of a crisis

There is an emerging narrative in international commentary that India is now gripped by an impending economic crisis. This will only accelerate given the current woes at Yes Bank. The doyen of this nascent conventional wisdom is Arvind Subramanian, India’s former chief economic adviser and currently visiting lecturer at Harvard’s Kennedy School, who has dubbed the current downturn the “Great Slowdown”. In a December 2019 working paper, co-authored with Josh Felman, Subramanian has gone so far as to suggest the present situation more closely resembles the lead-up to the 1991 crisis than the recession in 2000-02. The authors point to sharp contractions in key domestic macroeconomic variables, including investment, corporate profits, government consumption, direct taxes, consumer production, total credit, exports, imports, and, of course, gross domestic product (GDP).

Commenting on the Subramanian-Felman research, Martin Wolf, chief economics columnist for the Financial Times, has written recently (India Is Facing Twin Economic And Political Crises, 25 February, 2020): “It is essential for India’s future that growth be raised back above 7% and that this growth be both employment-generating and environmentally-friendly. This is a huge challenge. It will demand cleaning up the bad debt, raising savings and investment, improving international competitiveness, in a more difficult external environment, and bringing about reforms in agriculture, education, energy and a host of other important areas.”

There is no denying that India is in a major economic slump, one that can certainly be described as a malaise that is not going to be easy to break out of, given the range of structural and cyclical factors that are all presently pointing downward. The financial sector is surely in need of major repair. Wolf’s succinct take on where India must go and what it must do to get there is perfectly valid.

But does the present situation amount to a crisis of the magnitude of the epochal macroeconomic one in 1991 that led to the economy’s opening up over subsequent decades? It is odd that while pronouncing that India looks like 1991 today, doomsayers miss the political economy of crises in India and elsewhere, and remarkably fail to look at measures of international indebtedness, which are key to foreign exchange, currency, or debt crises.

The fact is that, even with the economy in a funk, real GDP growth is positive (even if too low), inflation is broadly under control and, fiscal policy, while looser than it ought to be measured as a share of GDP, is not anywhere near Latin American or African crisis territory. Likewise, India’s monetary policy, while looser than it should be in my judgement, has more or less hewn to the central bank’s inflation-targeting mandate, which was sensibly put in place during the Narendra Modi government’s first term in office.

Reserve Bank of India (RBI) data on the ratio of external debt to GDP shows that, in the crisis year of 1991, it was 28.3%, and has been more or less steadily falling since then, down to 19.8% in 2019 (provisional measurement) and perhaps about 20% at present, according to an RBI update in January 2020. This does not bespeak an impending crisis à la 1991. As a useful benchmark, Europe’s weaker economies that have suffered external indebtedness crises in recent years, such as Greece, had external debt-to-GDP ratios well over 100% when the crises began, and then upwards of 200%. At this level of foreign indebtedness, a weak sovereign borrower, such as Greece, is not merely illiquid, but insolvent. In other words, the present value of future tax revenue cannot possibly match the present value of net foreign indebtedness. In a word, the economy is bankrupt.

It is fanciful to suggest that India is anywhere close to the situation of economies, such as Greece, that have faced major macroeconomic crises with international ramifications in terms of an exchange rate crisis (not possible in the Greek case given its membership in the euro) or a foreign indebtedness crisis (Greece and many others). Even given the legitimate question marks over Indian data quality, one cannot credibly argue that India’s domestic macroeconomic indicators are in crisis territory, although they are certainly gloomy and far from where they ought to be.

I have a sneaking suspicion that doomsayers, especially the well-meaning ones, are in a state of wishful thinking, and would actually like India to experience a full-blown international macroeconomic crisis as in 1991: For, they believe, that is what it will take to jump-start serious economic reforms. The political economy of reforms teaches us one major lesson loud and clear: It often does take a crisis to unlock the political constraints that heretofore made painful economic reforms difficult to accomplish.

However, in my judgement, these well-wishers, hoping for a crisis, are going to be disappointed. The Indian economy will continue to muddle along for the foreseeable future, neither doing brilliantly well nor disastrously poorly and, therefore, the onus for much-needed reforms will not fall on the deus ex machina of an external crisis, but on domestic policymakers.

And, this is why good advice from genuine well-wishers, such as Wolf’s cited above, should be heeded. The Modi government appears to have gotten distracted of late with a spate of cultural issues unrelated to the economy. With more than four years remaining of the government’s current electoral mandate, there is still ample time to sharply and purposefully refocus attention on the economy, and get the job done. That would be the best response to doomsayers.