India and the ongoing economic turmoil

By “ongoing global economic turmoil”, I mean a process that has been unfolding since the late 1990s: One that is changing, and will further change, the economic polarity of the world. And which will have counterpart impact on political polarity.

The economic (and political) arrangement of the world was restructured by the combination of wealth expropriated by colonisation and the wealth created by the Industrial Revolution. The process of ascendancy of the West continued till the end of World War II and beyond, as the world remained frozen for decades thereafter.

Starting the late 1970s and early 1980s, this arrangement has been slowly and then greatly changed by the end of the 1990s— a process that is likely to continue into the future. When such foundational changes happen, turmoil is but inevitable. The larger process will have multiple phases of storm and calm. How well we traverse these storms and benefit by consolidating in the calm, depends entirely on our own ability and application.

Since 2000, the developing world has been gaining market share of global output and incomes, up from 21 per cent to 39 per cent in 2015 and the developed world has yielded share.

In the developing world, Asia has gained most, and in Asia it has been China whose economy has gone from being a $1.2 trillion economy in 2000 with a 3.6 per cent global share to an $11 trillion economy with a 15 per cent share of the world economy. India also gained, but by less: from $0.5 trillion in 2000 to $2.1 trillion in 2015. That China and India and other developing economies may continue to gain is not in doubt.

But the relative pace at which they capitalise on opportunities and manage risk will determine the differential paths they take and where they end up. In fact, the developing world’s share was stagnant in 2014 and 2015 and would have fallen had it not been for Asia which continued to expand.

There is no divine sanction about the success that developing economies might garner and no protection against their failures of policy and management. The weaknesses of the developed world has made the ground slippery and opened up new fissures. Which is why, it is all the more important for India and others to tread wearily, build their own strengths and take nothing for granted.

In the eight years since the 2008 crisis, the world economy has recovered, but it has acquired new weaknesses and presumably new strengths, too. In the developed world the recovery is easy to see, but the climate is not anywhere as confident as it was before 2008.

In the US, there has been a recovery, reflected in hiring. It has driven the unemployment rate down to 4.9 per cent, with 14 million new jobs created outweighing the 9 million lost in the crisis. Yet the expected growth spike has not materialised and growth seems headed down, even with the easy monetary policy. In Europe, more than the 2008 crisis, it has been the internal difficulties of the EU that have stalled growth. Also, refugees from the Levant and North Africa now threaten to end the region’s political arrangements of free movement and shared governance.

The developing and emerging countries fared better in the 2008 crisis, largely because their financial system were not holding bad assets that US and European banks had. Recovery was quick and strong through 2009, 2010 and 2011.

Commodity prices rose, close to their pre-2008 peaks, helping exporters — Brazil, Russia and many African and Central American nations — and fuelled inflation in others, as in India. Overall growth rebounded, but the weakness of recovery in developed markets, plus imbalances caused by high commodity prices, overvalued currencies and country-specific problems in others dragged the developing world into a slowdown after 2011. In the past four years, things have got worse in some countries: Brazil is in serious economic and political crisis, Russia is in recession, and several others are barely in the black.

In the first three decades after Independence, India’s economic growth averaged 3.7 per cent per annum. This was pushed up to 5.5 per cent in the 1980s through an unsustainable combination of fiscal expansion and rising trade deficits, funded by short-term credits that led up to the 1991 crisis.

In the post-reform period and including the period of slower growth after 2011, the average was much higher at 6.9 per cent. It took 40 years, for per capita income, adjusted for inflation, to double (2.2 times) by 1990-91. In the 25 years after reform, real per capita incomes more than trebled (3.2 times). Every other metric tells the same story of acceleration.

Investment drives growth. The investment rate crossed 30 per cent of GDP in the mid-2000s, peaking at 39 per cent; and even with current weaker economic growth it remains close to 35 per cent.

The financing of this investment was primarily out of domestic savingson net basis; the interaction of domestic with international finance acted as a powerful catalyst in the process and provided the excess capital inflows that have helped build our forex reserves.

In the quarter century of reform, almost all our children go to school, drop-out rates in higher classes have fallen and gender-wise, progress is much closer to being even. In rural India, even small holdings are mechanising with hired-in services, as men find work away from the farm and animal husbandry and horticulture catering to urban markets has become as important an activity as raising grain once was. Agriculture has also begun to lose net jobs/livelihoods.

After climbing to a peak in 2004-05, the farm sector has lost 4.2 million jobs per year to 2011-12. The non-farm sector created 7.2 million jobs per year in this time period, resulting in an overall increase in jobs. Both trends showed acceleration between 2009-10 and 2011-12.

Further, the number of young people staying back in education rather than seek jobs/livelihoods has increased dramatically among boys and girls. These educated youngsters will continue to pour into the workforce. It is estimated that over 210 million job/livelihood opportunities will have to be created by 2027-28 — roughly 13 million a year — which given the track record of 2004-05 to 2011-12 – is possible. However, for that to happen the economy has to pick up pace.

A serious challenge faces India, as does the opportunity. It has the opportunity to build on the economic strength accumulated and on the human energy and aspirations of educated young. Failure is not an option. The external world is changing and the rules of the game are being re-written.

The onus of making the transition to a more prosperous society rests on the heads of emerging countries. Those who nurture domestic economic and social stability, demonstrate determination and ability to implement decisions made, keep a level head and have a healthy scepticism for formulaic conventional wisdom will make the transition.

The writer was Member, Planning Commission and Economic Advisory Council to Prime Minister Manmohan Singh. This article is a summary of the SAGE-MSE Lecture delivered in Chennai on February 26