Much has been written about how the pandemic impacted our economy, but the RBI not only goes further to quantify the losses but also predicts how long recovery will take.
In its’ latest report on Currency and Finance which is a panoramic sweep of the economy, the RBI says recovery could take until 2034-35, because of what it calls hysteresis effects, a neat word that explains how the past impacts the present. The weight of the past is essentially the long-standing structural deficiencies. It also meant that the pre-pandemic economy was not in great shape, to begin with. The structural quirks are everywhere.
Agriculture, resilient through the pandemic, used up the largest amount of land and labour but returned the lowest productivity — the result of low capital formation, high reliance on subsidies, price support and a monsoon-dependence for over 50 per cent of its gross sown area.
In manufacturing, although GVA was growing, the impact on income and employment was limited as capital-intensive sectors pre-empted investments at the cost of labour-absorbing industries like textiles and leather.
The RBI posits this as a reason for the low labour force participation rate (LFPR), as these industries had traditionally employed a large number of women. Mining and quarrying remained a puzzle — despite having some of the world’s largest reserves of metallic, non-metallic and fuel minerals, it added only 2 per cent to GVA and was also highly import-intensive.
The labour market exhibited features that affected employment and income — the low LFPR meant that only 42 per cent of eligible people were seeking work; even those counted as employed were mostly in informal employment (71 per cent ‘self-employed’).
The statistics in the PLFS report 2019-20 were also not encouraging — 28 per cent of population was illiterate, 26 per cent had only primary school education and only 9 per cent had a graduate/post graduate degree. The labour problem clearly becomes one of underemployment rather than unemployment. Foreign trade also had lopsided characteristics — imports were dominated by raw materials and intermediates (65 per cent) than capital goods, while many export items including IT services, were not competitive enough to garner large market shares.
Foreign capital flows were of course successful, often exceeding the economy’s requirements, but the large accumulation of reserves had unintended consequences, especially their inflationary impact. So much so, the RBI believes that foreign capital beyond 2.5 per cent of GDP may actually be growth-impairing.
The financial sector, which is largely the banking system, had its share of fragilities. The huge overhang of stressed assets pushed banks to practice extreme risk-aversion leading to what the report calls ‘G-Sec banking’. It acknowledges that low-cost liquidity by itself was not enough and banks needed to be freed of stress. That called for debt restructuring but the story of IBC has been mixed. Though the IBC had started out with a resolution theme, liquidation soon became the preferred route. Yet progress was painfully slow as banks were reluctant to accept haircuts.
The prescriptions
After the deep dive into structural shortcomings, the post-Covid agenda prescriptions of the RBI however meander into generalities. It speaks of addressing structural constraints being central to revival but is short on specifics. The prescriptions also reflect inherent contradictions.
When it speaks of government stimulus being inevitable for recovery, it also points out that public debt beyond 66 per cent of GDP is growth-impairing. Current debt levels are far higher and the RBI is itself not sanguine about them declining below 75 per cent — the Gordian knot looks impossible to cut. Many of these issues go back to the structural deficiencies which may not be obvious. GDP was growing but the economy itself was in a low-output, low-employment, low-income trap with high levels of inequality. The combination of low average per capita income (around $2,000) and high inequality has several economy-wide ramifications. For one, they make personal consumption, the largest driver of growth, dependant on a few; second, they have caused our direct tax base to be low, forcing us to depend more on expenditure-linked taxes such as the GST.
Finally, they have led to the deepening of the role of government in the economy, even as it tries to exit it through disinvestment. Intervention in the form of subsidies, doles or welfare programmes that simply seek to bridge gaps rather than boost growth, have led to government spending ballooning year after year.
For all this, government spending did not significantly impact GDP as the report points out that revenue expenditure has a small growth multiplier. The greater need is for an agenda that helps us break out of the low-output, low-employment, low-income trap which is not quite the same thing as recovering the losses of the pandemic.
The writer is an independent financial consultant