Many economists are struggling to classify the Indian economic slowdown. Should it be called “cyclical" or “structural"? Typically, a cyclical slowdown is caused by an excess of investment demand—over-investment in capital assets (residential and non-residential) and in inventory. The production of final goods generated by excess investment is not absorbed, leading to inventory reduction, lower prices, lower economic activity, and some loss in employment. When this is accompanied by excess debt, the cyclical slowdown can be prolonged or it may become structural.

In the case of India, the current slowdown is best described as cyclical-structural or largely structural. The slowdown in economic growth observed in recent quarters is sharp and sudden. It has come about because of the collapse of Infrastructure Leasing and Financial Services (IL&FS), the collapse of some housing finance companies and because of questions raised over the solvency of others. IL&FS lent to illiquid and long-duration assets. That these assets eventually failed to generate returns made it difficult for IL&FS to service its obligations. When excessive debt growth is involved and when assets fail to deliver returns, partly because of government policies (such as power sector tariffs) and strange court judgements, the problems are more than cyclical.

In Can India Grow?, Gulzar Natarajan and I had noted that India had not been able to sustain high growth rates for more than three years at a stretch, post-1991. Before that, there was not much high growth to speak of, except for a brief period in the late 1980s which, unsurprisingly, resulted in the balance of payments crisis of 1990-91. Lower global economic growth post-2008, high debt levels in the developed world, economic (income and wealth) inequality and its social consequences have adversely affected the growth prospects of developing countries. They have forced developing countries, particularly in the East, to introspect on their growth models and their flaws. It is time for India to accept the challenge.

The Indian economy is fragmented in all sectors. There is no global scale and hence efficiency gains remain meagre and untapped. Operating conditions have to become genuinely easier for micro and small businesses to grow. If we believe that small is beautiful, we are inclined to keep them small. Instead, let us accept that small is only an initial condition and the sooner that businesses grow out of it, the better it is for them and for the nation. For India, big is not bad, but beautiful.

How do we get out of this situation? If it is a cyclical slowdown, the continued high general government deficit and the monetary stimulus in train would suffice. I had written in the last couple of weeks on some of the macroprudential measures that the Reserve Bank of India (RBI) could undertake. Further, others have suggested an RBI-ordered “asset quality review" of non-banking financial companies (NBFCs) to spot good-quality NBFCs for banks to lend to.

Many argue that this is a good opportunity and reason for the government to shed some of its assets. One way is to privatize government undertakings by divesting government shares. Despite the government considerably diluting the conditions and sweetening the deal, it is finding it difficult to sell Air India. If it tries to sell its assets more aggressively by offering, for example, attractive prices, it may stoke political objections. There is also the challenge of finding domestic buyers. If cash-rich businesses are only few, then it would also stoke allegations of favouritism. If they are sold to foreigners, it could be all the more controversial. We do not know if foreign demand would exist, given the mounting uncertainties, except at throwaway prices. So, privatization may be slow to come by. Instead, the government could think of long-term leases for its land holdings, perhaps 99-year leases, like Singapore does.

There is also a good reason to preserve traditional stimulus firepower for emergencies that might arise when a global meltdown arrives. The 2008 crisis was severe. As developed nations have addressed it by facilitating more indebtedness for individuals, institutions and households, the denouement this time around will likely be worse. Outside of the US, 45% of global government bonds are trading at negative yields. The amount exceeds $16 trillion. Big and momentous shocks are likely in the global economy and political landscape. Therefore, it’s good to keep some traditional policy ammunition dry.

In Can India Grow?, we have outlined policy recommendations in several areas. Most of them fall under the purview of state governments, including devolution to and empowerment of local administrations. There is no better time than now for the Prime Minister to call for a conclave of all like-minded chief ministers over a weekend to arrive at a common minimum programme to address “plumbing" issues such as human capacity development and state capacity and reform of factor markets—land and labour, primarily. The progress of implementation should be shared periodically with the public. In addition to rejuvenating the economy, it will restore faith in policymakers, in democracy and strengthen federalism.

V. Anantha Nageswaran is the dean of IFMR Graduate School of Business, Krea University. These are the author’s personal views

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