On March 2, 2020, Dr Harsh Vardhan, the then Health Minister, told Parliament that India was fully prepared to deal with the threat of coronavirus. The Minister said, “I don’t think that the people need to panic and wear a mask all the time at every nook and corner, out of fear. It is completely up to them if they want to wear (one) or not. “
As if on cue, one Dr Nitin tweeted: “I take pride in having a doctor himself own up the situation and look at it”, and added, “As a physician myself, I trust yourself and the medical system I belong to, that together we will easily beat #coronavirusinindia. “
Late in the evening of March 24, 2020, a nationwide lockdown was imposed. On July 7, 2021, as the second wave raged, Dr Vardhan was asked to resign!
I was reminded of Dr Vardhan and Dr Nitin when I read the reports for the month of February 2022 put out by the Ministry of Finance (MoF) and Reserve Bank of India (RBI). The ministry is the executive authority responsible for the management of the economy and the finances of the country: one can therefore understand the self-praise in the report. The RBI, however, is the monetary authority and is expected to speak frankly, even critically, about the management of the economy. Reading the two reports, and conceding that much of the facts and the data will be common, I was left wondering if they had been written by the same hand!
The RBI’s report on the State of the Economy starts on a sombre note: “The outlook for the global economy is beset with downside risks. Omicron continues to weigh on overall activity… As an increasing number of central banks watch with alarm, ever higher levels of inflation and rush to tighten monetary policy across advanced and emerging market economies, the pace of global recovery is at risk. ” The report also concludes on a sombre note:
“Inflation has become entrenched across economies owing to a spike in commodity prices and persistence of supply chain bottlenecks. The global macroeconomic situation remains embroiled in a heightened state of uncertainty, with risks tilted to the downside… Investor sentiment has been dampened by risk aversion, which could unsettle capital flows and impede the embryonic recovery going forward. ” Between the opening and the conclusion, the RBI’s report is no different from the government’s report.
The report of the MoF is understandably upbeat and self-laudatory but for a solitary warning: “Recent geopolitical developments have introduced an element of uncertainty into the economic growth and inflation outlooks in the new financial year.”
Flagging the Concerns
While I too wish the best for the Indian economy, it is appropriate to flag the concerns:
1. In respect of every region and every major economy, the IMF has lowered the GDP growth projection by an average of 1.5 per cent. The US’s growth has been lowered by 2 per cent and China’s by 3.2 per cent. It is difficult to believe that India’s growth will be lower by only 0.5 per cent and will remain at a whopping 9 per cent (in 2022-23).
2. Inflation has soared in most advanced economies and many emerging market economies. Gold, food and commodity prices are rising. India’s WPI inflation in February stood at 13.1 per cent and CPI inflation at 6.1 per cent. Food inflation has risen to 5.9 per cent, manufacturing inflation to 9.8 per cent and fuel & light inflation is still high at 8.7 per cent.
3. Investor sentiments have been shaken. Stock markets are down, bond prices have hardened and central banks have hiked or warned of hiking interest rates.
4. On the employment front, the labor participation rate in India has declined and the number of workers has also declined.
5. On the expenditure front, the government is banking on government capital expenditure (that will, government argued, ‘crowd in’ private investment, which is debatable). The estimate of government capital expenditure is suspect and there may be double-counting. The financing of capital expenditure is largely through market borrowing.
Is Welfarism Development?
The situation calls for deft management. The High Frequency Indicators reflect, largely, the economic situation of the middle class and the rich. The poor are more concerned with, and are hurt by, inflation and unemployment. The questionable jobs data that the government is trumpeting are jobs that the very poor, uneducated and unskilled cannot aspire for. They need jobs on farms, in low-end services and in micro & small enterprises, that are hard to come by. For the present, they seem satisfied with welfarism that will mitigate their hardships but bring little or no ‘development’.
Survey after survey shows that, in the just-concluded five state elections, the vast majority of voters desired ‘development’ but voted for the status quo. Welfarism is useful, but is no substitute for real and durable development.
Real and durable development will come only through disruption, radical reforms, less government control, increased competition, freedom, an atmosphere free from intimidation or fear, tolerance of differences and true federalism. In at least four of the five states, people seem to have voted for the status quo than change. In the bargain, whether they have voted against real and durable development, only time will tell.