Opinion How India can keep growing amid a global economic slowdown

The second advantage is global diversification away from over dependence on any one country. The China+1 and Europe+1 factor will continue to create opportunities for India.

There is a view, however, that the economy has fundamental problems, so growth cannot sustain without major reforms. This view points to the slowdown of the last decade and has been predicting a growth crash post-pandemic. India’s growth recovery, however, is one of the highest among major economies. Since it exceeds that of countries with a worse slump, it is not only the base effect.

Another criticism is that India’s GDP is not measured correctly. Official figures, however, are very much in line with high frequency and other economic indicators. Revised figures were expected to show a destruction of small firms. But evidence coming in is pointing to their resilience.

As a global slowdown looms, a further argument is that India cannot grow without a push from good global growth. It is true India’s highest growth was in the 2000s when there was a global growth boom.

Research finds some late starters, with better policies, including openness to new technology, trade and to more efficient forms of organisation, grow rapidly after crossing a certain threshold and double per capita incomes in 10 years. India reached this threshold in 2000. There was doubling in the 2000s but not in the 2010s.

This seems to support the argument of dependency on global growth, which was higher in the 2000s. But fiscal-monetary-financial policy veered from over-stimulus after the global financial crisis to over-tightening in the 2010s, despite the capital flow surges of the quantitative easing (QE) decade. As a result, external shocks were aggravated rather than smoothed. This made India’s catch-up growth volatile and may have interrupted the decadal doubling.

There were also other domestic policy shocks. Any reform that changed the status quo for large groups in a democracy attracts protests. Such reforms included some essential ones as well as attempts at the land-labour-farm law reforms prescribed by international institutions. Controversial reforms are not pre-requisites since growth has recovered without them. They are best left to competition among states in a federal structure.

As tight monetary and financial conditions relaxed in 2019 there were signs of recovery in high frequency data before Covid-19 hit in March 2020. These conditions also aided good recoveries between Covid-19 waves. Timely regulatory and other relief to the financial sector reduced risk and interest rate spread. But its timely withdrawal was equally important in preventing moral hazard, dependencies and poor incentives.

Macroeconomic policy was counter-cyclical, with the required balance between demand and supply-side initiatives. Restrained deficit expansion and inflation-reducing action in the food and energy sectors allowed monetary policy to support the growth recovery, while limiting inflation, anchoring inflation expectations and reducing risk in the economy. Lower volatility of interest and exchange rates helped keep real interest rates smoothly below growth rates. As a result, India’s public debt to GDP which had reached 90 per cent in the pandemic year 2020 (from 75 per cent in 2019) is expected to fall to 84 per cent (IMF projection) by end 2022.

Past bad luck in the financial sector is currently creating good luck. India had corporate de-leveraging in the 2010s while globally huge debts were built up under QE. Banks balance sheets strengthened with good recoveries. Missing institutions were set up. A credit cycle not in sync with the global cycle reduces financial instability risks and allows credit to expand in India. Broader regulation means there are fewer fault lines compared to AEs with their narrow bank-focused regulation.

As industry and government worked together to fight the pandemic, more dialogue and understanding resulted. The focus shifted from disciplining to facilitating industry. Reforms continued but successful ones worked with current technology and global trends and towards reducing costs. Public digital goods further enhanced digitisation.

Rationalising laws, regulation and taxes; easing compliance; improving infrastructure and lowering logistics costs, all helped production. Industrial policy sought to encourage export competition, sunrise high-tech and green industry, capture opportunities in supply-chain diversification and create jobs. The poor were supported through better public goods, assets such as housing, piped water, subsidised food, empowerment and skilling for sustainable inclusion.

AE policy in contrast, created excess demand through large hand-outs when supply had contracted, thus contributing to worldwide inflation. The sharp tightening that followed is creating financial and growth risks worldwide. These over-reactions ignore spill-overs to the rest of the world. Geo-political and climate change shocks also loom.

India can continue to do well, however, if it learns from the pandemic period lessons in smoothing shocks and continues to undertake feasible low-resistance reforms that further its advantages. This more context-relevant middle path may help the economy find its way back to faster growth — 7 per cent can double real income in 10 years; 9 per cent can double per capita income.

The writer is member, Monetary Policy Committee and Emeritus Professor, IGIDR