INDIA'S LOST DECADE

Countries pass through stages on the road to economic prosperity. Economist W.W.Rostow postulated five such stages of economic development: the traditional society, pre-take-off, take -off, drive-to-maturity, and period of mass consumption.

The year 1991 was a watershed point in India’s economic history. It marked a distinct move away from socialist economic policies and an embracing of economic freedom and free-market policies. As a result, the economy started to grow, slowly at first (pre-take-off, 1993-2000) and then more rapidly in the take-off period from 2000-2009. GDP growth doubled, accompanied by significant improvements in the standard of living and a huge reduction in overall poverty from 45% to 18%.

Starting in 2010, the India economy was ready to begin its drive to become a mature economy. Expectations were for double-digit economic growth, significant expansion and diversification of the industrial base, massive investment in both physical capital (infrastructure) and human capital (schools, hospitals, universities, etc.), and a quantum improvement in indicators of human development.

That was the expectation. Unfortunately, reality was very different.

The years from 2010 to 2019 will go down as India’s lost decade. The second term of Prime Minister Mr Manmohan Singh, an eminent economist who started the country’s reform process in 1991, was marred by scandals, systemic corruption, bad coalition politics and ineffective governance. Then came Mr Modi in 2014 with a promise of regulatory reform, small government, and greater economic freedom. But four plus years of adhocism, misguided policies, piecemeal reforms, a major banking crisis and large handouts to politically important groups have come at a severe cost to national progress. India is slowly, but surely, moving back to the days when economic decision making was steered by a few people instead of the collective wisdom of free markets.

I compare the data on several indicators of economic growth and human development for two periods: the take-off years, 2000-2009, and the drive-to-maturity stage 2010-2018.  In the following charts the 2000-2009 decade is represented in green and the 2010-2018 period in red. The underlying data comes from official government sources like the Reserve Bank of India, Ministry of Commerce, Ministry of Statistics and Programme Implementation (MOSPI), and other reliable sources like Confederation of Indian Industry (CII), WHO, and the World Bank.

ECONOMIC GROWTH

 The Indian economy witnessed strong growth from 2000 to 2010. GDP rose steadily, there were three consecutive years of growth over 9% (2005,06,07), and the country experienced double-digit growth ( 10.26 %) for the first (and only) time in its history. The figure shows a strong upward trend in GDP growth in the 2000-2009 decade. But starting in 2011, economic growth fell for two straight years to a low of 5.4% in 2012, bounced back to 8.1% in Modi’s first year, but then dropped for five consecutive quarters to a low of 6.5% in 2017. The overall trend in economic growth during the lost decade (the red segment) is clearly pointing in the wrong direction.

Note: There have been changes in the base year used to deflate GDP which makes the GDP numbers after 2013 higher than they would have been. The difference in the economic growth between the two decades would have been more pronounced under the old methodology.

The period starting 2010 was India’s drive-to-maturity stage and the economy should have seen accelerating growth. Many economists had predicted double-digit growth especially after the strong performance in the take-off period. Instead, economic growth in the lost decade was an average of 1.3% (130 basis points) per year lower than in the 2000-2009 period. In comparison, during its drive-to-maturity stage (1999-2008) China’s GDP grew steadily from 7.8% to 14.2% with fourteen consecutive quarters of double-digit growth.

What was the opportunity cost of this lost economic growth? If the 7.7% average growth rate of the previous decade had been sustained, current GDP would have been around $3.1 trillion instead of $2.6 trillion. At the very minimum, therefore, the cost of the lost decade is about $500 billion (around Rs 32.5 lakh crores). Realistically the opportunity cost could well exceed $1 trillion since expectations were to build on the momentum of 2000-2009 and achieve double-digit growth. The people of India have paid a substantial price for failed leadership and policy misadventures.

Investment in physical capital like roads, railways, schools, hospitals etc. is essential to supporting economic growth. This investment is measured by Gross Fixed Investment (taken as a per cent of GDP). The figure shows that investment in physical capital increased steadily from 24.3% in 2000 to a high of 34.2% by the end of 2009, but has since declined every year ending at 26.4% in 2017. The government invested less on infrastructure in the lost decade than in the previous decade.

The drive-to-maturity stage is marked by a significant increase in a country’s manufacturing capacity. Its industrial base expands as does the capacity to produce a wider range of complex and value-added products.  The Index of Industrial Production (IIP) measures the strength of the manufacturing sector. From2000-2009, there was a marked improvement in the manufacturing sector and the IIP index grew at a compounded annual growth rate (CAGR) of 7.6%. But this trend reversed in 2010 and IIP growth dropped dramatically to 2.9% in the lost decade indicating a significant deterioration in the manufacturing sector.

A growing economy needs infrastructure output, which comprises the output of sectors such as coal, crude oil, natural gas, steel, cement and electricity. India’s infrastructure output shows an increasing trend in the 2000-2009 period and a contraction in the lost decade. The CAGR in aggregate infrastructure output from 2000-20009 was 5.8%. It fell to 4.1 % in the subsequent decade.  As a comparison, China’s infrastructure output grew at a CAGR of 16% during its drive-to-maturity stage.

Consumer and business confidence are vital indicators of an economy. When consumers are confident they purchase, and when businesses are confident they invest and hire.  The consumer confidence index rose from 116 in 2000 to its peak of 120 in 2010. Since then it has gone down dramatically falling to 95 in 2018. The business confidence index also shows a similar trend. It fell from an average number of 64 in the 2000-2009 decade to 56 in the 2010-18 decade, reaching an all-time low of 46 in 2013.

An indicator of a country’s increasing prosperity is an improvement in the financial condition of the average household reflected by reduced household debt. Data on household debt (taken as a % of GDP) points to a deterioration in the financial health of households after 2010. As the figure shows, household debt fell steadily from 13% in 2000 to its lowest point of 8.7% in 2012 but has since risen back to 11% in 2018. Stagnating incomes from fewer job opportunities and lower GDP growth are forcing households to borrow more.  The repayment of this debt will eventually affect their propensity to consume and hurt growth down the road.

A weak currency is the sign of a weak economy, and a weak economy leads to a weak nation. The Indian rupee which depreciated by 6% from 2000-2009 has fallen more than 33% in the lost decade. This represents a significant lowering in standards of living in India relative to other countries. When a country’s currency is depreciating its exports should rise and imports should fall. With India its been the reverse. In spite of all the hoopla and promotional shows surrounding ‘Make in India’, total exports started to drop in 2014 and by October 2016 had fallen to their lowest level in ten years. A comparison of the two decades shows a stark deterioration in India’s exports.  The annual growth rate (CAGR) in exports was 12.2% in the 2000-2009 decade but dropped to a measly 5.4% during the lost decade. And imports, which should have dropped, increased by 20% from the previous decade. Failed government policies are keeping India from producing high-value, high-quality products that other countries want.

As a result of lower exports and higher imports, India’s trade competitiveness worsened in the lost decade. The average trade deficit was $ 3.8 billion per month from 2000-2009. It jumped three times to $12 billion from 2010-2018. The current account deficit as a per cent of GDP, which averaged -0.7% from 2000-2009, tripled to -2.2% from 2010-18.  India is exporting less and importing more, just the opposite of what a growing economy should be doing. India’s external debt has now reached more than half a trillion dollars and servicing this debt with a deteriorating currency will severely test India’s fiscal stability. In comparison, during its drive-to-maturity, China ran trade surpluses of around $40 billion per month.

Much has been written about India’s increasing FDI levels since Mr Modi began his globe-trotting routine. But FDI as a percentage of GDP tells an entirely different story. It increased from 1.3% in 2000 to reach a peak of 3.5% in 2009 but has since dropped steadily to 1.6% in 2017-18. As a % of GDP, which is the proper way to measure the level of FDI, it is lower today than it was in the previous decade. In comparison, without much fanfare, China increased its FDI to 4% of GDP during its drive-to-maturity.

All these economic indicators point to one immutable fact: The country took a huge step backwards after 2010. The benefits of liberalisation gained in the period 2000 to 2009 have been squandered away by successive governments failing to expand on the economic reforms of free markets, privatisation, small government, reduced regulatory burden, lower and simpler taxes, minimal state interference in matters of the economy, and a safer society.

The period from 2010-2018 was marked by declining growth, lower consumer and business confidence, a deteriorating manufacturing sector, declining investment in physical capital, greater household debt, and a weakening external sector marked by a precipitous decline in the value of the nation’s currency.

HUMAN DEVELOPMENT

Growth means nothing without human development. The ultimate purpose of economic growth is to generate the public and private resources necessary to improve living standards for the citizens.

How did India perform on human development indicators during the wasted decade?

Let’s start with the most basic need–food availability and hunger. In the 2017 Global Hunger Index, India ranks 100 out of 119 countries (lower than even North Korea). Over this last decade, India has had the smallest reduction in hunger of any country in the index. On child-wasting, which is the share of children under the age of five who are acutely undernourished, India is one of only four countries with child wasting estimates above 20% (the other three are South Sudan, Djibouti and Sri Lanka). In comparison, that number is 14% in Bangladesh, 10.5% in Pakistan and 1.3% in China.

Both air and water quality have also deteriorated significantly in the wasted decade. According to a 2018 report by State of Global Air, India has had the steepest increase in air pollution of any country since 2010. Data from the Institute of Health Metrics and Evaluation (IHME) shows that deaths per 100,000 population due to air pollution reduced from 165 in 1990 to 137 in 2009 but have remained unchanged since then. Fourteen of the top twenty most polluted cities in the world are in India (2018 WHO report), with Kanpur being the most polluted city on earth. The country’s  air quality has been mercilessly destroyed, not by faster economic growth, but sheer government apathy and incompetence.

The deterioration in water quality over the last decade has been equally bad. A recent NITi Ayog report warns that India faces a critical water crisis.  A major source of water-borne diseases is untreated sewage discharged into the water system. Data from the Central Pollution Control Board shows that in 2009, about 49% of the sewage generated was being discharged without treatment. By 2017 that number had jumped to 70%. That is an alarming statistic –70% of the country’s sewage is discharged into the water system without any treatment. The citizens of India are paying a considerable price for poor governance.

Another indicator of development, per capita power consumption, grew at a CAGR of 7.8% from 2000-2009, but only 3.3 % in the lost decade. In 2018, power consumption in India was 805 kWh per person compared to the global average of 3125 kWh. As a comparison, during China’s stage of rapid development, per-capita power consumption grew at a CAGR of 12% per year.

Investment in human capital–education and healthcare– has also declined in this decade. Nobel prize winner Amartya Sen recently said that on socio-economic parameters like health and education, India had taken a big step in the wrong direction. Government expenditure on education (as a % of GDP) declined from 3.42% in 2009 to 2.6% in 2017. The global average is 4.8%, and the United Nation’s average for countries that are low on the human development index is 3.6%–India is lower than that.

Government allocation to healthcare in 2017-18 was 1.2% of GDP–a figure that has remained almost unchanged since 2009. This translates to about $16 (Rs.1,112) per capita per year–among the lowest in the world. The world average for public healthcare investment is 6% of GDP.

The period from 2010 to the present has been a wasted decade for India. It was marked by declining economic growth, weaker manufacturing, falling consumer confidence, higher household debt, a deteriorating currency and higher trade deficits, higher levels of air and water pollution, lower investment in education and health, and no improvement in hunger and child nourishment.

India had the opportunity, and the momentum, to reform into a free and open economy with minimal government interference, an economy open to the world for investment and trade with a fully convertible currency. It had a chance to reform and build its capital markets, eliminate state control over financial resources, implement a fair and simple tax regime with low taxes, install a transparent welfare system, engage in comprehensive agriculture and labour reforms, and develop an open process for political funding. Instead what the country got were scandals, piecemeal and disjointed reforms, an increasing breakdown in law and order and greater social disharmony, and unrestrained misuse of public funds.

The people of India will rue the opportunity lost during the this decade.