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Thursday, June 24, 2021

Why isn’t the prospect of long-term economic stagnation giving us nightmares?

Pratap Bhanu Mehta writes: Even as we battle Covid, we have to think about what will truly reverse the diminishing of our economic fortunes.

Written by Pratap Bhanu Mehta
Updated: June 2, 2021 8:05:45 am
Labourers working in a factory in New Delhi (Express Photo/Praveen Khanna)

The GDP numbers, like the Covid numbers, have become the object of regular anxiety and contention. With both, there are now questions on what exactly we are measuring. There is relief, or official spin, if they turn out to be less worrisome than predicted. If the GDP growth is close to negative 7.3 per cent, there is a huge sigh of relief. It could, after all, have been negative 10 per cent. These are small mercies. But there is no denying the fact that the Indian economy has been amongst the worst performers, even in the South Asia region.

So here is the big picture we need to keep our eyes on. India is staring at the prospect of slower growth, rising poverty, and a shrinking middle class. This is the first time in a generation that India is experiencing something like this. Instead of moving towards being a high middle income country, we will be relieved if we don’t slip further down the global ladder. Everyone understands that Covid was a shock to the economy, and we will, at some point, emerge from this shock. But we are in completely uncharted territory in terms of our psychological orientation to the economy.

In the first decade of this century, we were looking at an average of seven to eight per cent growth, steep drops in head count poverty numbers, and an expanding middle class. But all of these trends are now in reverse. Growth has slowed and it would be a brave economist who has any analytical basis for projecting what India’s trend growth rate will be over the next five to 10 years. We are on a wing and a prayer. We do not have authoritative consumption-based poverty figures since 2011. But Azim Premji University’s “State of Working India” report, 2020, estimated that almost 230 million Indians had fallen back into poverty. For reference, the period of growth from 2000 to 2016 had seen roughly 270 million lifted out of poverty. A new Pew Research Centre Report, published before the second wave lockdown, suggested that the Indian middle class had shrunk by about 32 million people in 2020. And we don’t have serious numbers on shrinking incomes or on the possible effects of long-term morbidity. This number could get worse.

There are signs of this all around. The latest CMIE unemployment numbers put out by Mahesh Vyas are sobering reading. The unemployment rate is 14.5 per cent as of the end of May; the rural unemployment rate had crossed 7 per cent. Labour force participation has not increased. As Jean Dreze had prominently pointed out in these pages, it is unlikely that nutrition levels, employment wages had even recovered to pre-pandemic levels before the second wave struck; household savings have been generally on a downward trend. This big picture truth of economic worries can be easily obfuscated by the narrative wars.

The Sensex is rising, fuelled by global free money. There is a lot of excitement about unicorns; they are certainly a testament to entrepreneurial dynamism and ingenuity. But the idea that they are the backbone of a thriving economy is exaggerated. There might be limited progress on the distribution of private public goods like gas and water. But these cannot take away from the fact that for the first time in a generation, young India is looking at a bleaker future than their parents did in terms of employment and income.

It is a remarkable fact that this fundamental triad of slower growth prospects, potentially shrinking middle class and rising poverty has been kept out of public political consciousness. The poor in India were always invisible. But the degree of economic and ideological obfuscation is such that even the normally influential middle class’s tale of economic uncertainty has become invisible. What should worry is not just the trends; but the fact that we are not worrying enough about the worrying trends. There is good reason to think that unless there is drastic change in national priorities, the very foundation of our future is being sapped.

So even as we battle with Covid, we have to think about what will truly reverse this diminishing of our economic fortunes. There are the obvious things to do. An investment in health is an investment in the economy; but our health investment is still in catastrophe management mode. For example, we are still not investing enough in long-term surveillance of the disease or dealing with its secondary effects. The government has done the right thing by extending the free foodgrain programme, and creating credit facilities of various kinds. But there is still going to be a serious loss in nutrition gains in rural India. And it is hard to imagine that output declines, employment losses, and the adverse environment for small businesses will not warrant another round of income support of some kind. As Uday Kotak has argued, we need a major fiscal stimulus to support consumption. It is highly likely that in the pandemic India has probably slipped back on its education goals and targets.

Other measures like regulatory reform and privatisation are underway, though how effective they will be is an open question. There will have to be a serious reconsideration of tax policy. This is not the place for technical details. There is no question that the range of investment — in health, education, infrastructure, income support, that the Indian economy requires will need a new social contract. The top one per cent have benefited enormously from the current economy. Devesh Kapur has made the powerful point that taxing the super rich a bit more, those who have made extraordinary gains over the last two years, even if temporarily, to service the real needs of the economy more, should not be seen as an act of redistribution. So much of the money that is being made on the stock market, in real estate or in capital gains is because of the easy liquidity governments are providing; a little bit of payback as a gesture of solidarity or justice is not unwarranted. The spectre of our bad old days of socialism and 90 per cent marginal rates of taxation will be trotted out to obfuscate the basic fact: We need to invest in our future, and we cannot do so without more taxation.

A million plus Covid deaths is an extraordinary catastrophe. But the prospect of long-term economic stagnation should also give us nightmares. We are in completely uncharted territory.

This column first appeared in the print edition on June 2, 2021, under the title ‘Diminishing prospects’. The writer is Contributing Editor, The Indian Express

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