INDIAN ECONOMY – FROM CREST TO TROUGH

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 INDIAN ECONOMY – FROM CREST TO TROUGH

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• The story: In 1991, India liberalized its Soviet-style economy in a huge transformation that finally pulled about 300 million out of poverty, fueling one of the biggest wealth creations in history. Then, in 2020, came the world’s fastest coronavirus surge which left overflowing hospitals turning away the dying and crematorium smoke darkening city skies. Decades of progress in India has been unwound now, as crores of Indians who had escaped poverty face grim job prospects again, and carry heavy debt loads.
• Visible pain: The 2020-21 devastation showed how poor the Indian health care and infrastructure was, something neglected by all governments in the boom after liberalization. It is literally holding back India and her people. 

1. More than 20 crore have now gone back to earning less than minimum wage, or $5, a day.
2. The middle class, which is the engine of India's consumer economy, shrank by 32 million in 2020, according to the Pew Research Institute
3. India is now growing in stature globally, while its society is hollowing out internally

• 2014 and 2021: Experts say that given the slowdown and crunch, from here on, a lot is needed on the policy front to get back to the 7%, 8% growth that alone can pull India back on the track to prosperity. 

1. Even before the 2020 pandemic, cracks in economic growth began emerging.
2. Modi had come to power in 2014 amid voter frustration over scandals and policy paralysis that contributed to bad loans at banks and threatened to derail Indian growth. 
3. But the economy is now facing severe hurdles, starting with the 2016 cash ban, which hurt the informal sector, and a hurriedly implemented new tax system (GST), that further helped formal sector gain market share from the informal.

• An aspirational goal: The PM pledged to turn India into a $5 trillion economy by 2025, but the pandemic has other plans. The International Monetary Fund (IMF) expects India to grow 6.9% in FY23 (April 2023 onwards), lower than the more than 8% needed long term to reach the ambitious target. Lower growth means lower ability to create jobs for the millions entering the work force.
• Structural reforms: Some experts had been recommending many things that would allow the Indian economy to be "40 times larger" by 2050. The list included making substantial improvements to areas like infrastructure, education, introducing better public-private partnerships in areas like healthcare, further liberalizing financial markets and working on environmental issues. Most ideas didn't get pursued at all.

1. India’s fantastic demographics, that gives it the potential to rise strongly, possibly at double digit rates China enjoyed for a long time, is not being put to use at all
2. The government claims it is trying to get growth — of 8%-10% — back on a sustainable path, for which structural changes 
3. Once the fastest-growing major economy, India saw its biggest ever contraction in 2020-21 — shrinking more than 7% — after a stringent nationwide lockdown. Just when the economy started showing some momentum, the second wave of infections hit.
4. Now the RBI expects India to grow at 9.5%, sharply lower than the double-digit rebound many had earlier expected. That estimate is heavily boosted by the comparison with the sharp contraction of the previous year, and many economists expect it could be pared even further.

• FDI: The foreign direct investment surged 19% in 2020-21 but even that remains lower as a percentage of GDP compared with countries like Singapore and Vietnam. And a big portion of the foreign investment went to billionaire Mukesh Ambani’s digital platforms. Some have warned of a K-shaped recovery for India, where the rich get richer and poor get poorer. Growing inequalities are not just a moral issue, but they can erode consumption and hurt our long-term growth prospects.
• Why reforms in 1991: Thirty years ago, India was forced to remake its economy. A mammoth trade deficit and plunging foreign exchange reserves necessitated a loan from the International Monetary Fund. On July 24, 1991, then finance minister, Manmohan Singh, announced major steps to cut tariffs and encourage trade, essentially opening up the economy to the outside world. In the boom that followed liberalization, growth crossed 8%. Technology giants like Infosys were born and start-ups worth billions mushroomed in Bangalore. A new middle class emerged that watched Netflix and shopped online on Amazon. In the south, the Wistron factory won special economic benefits to assemble Apple iPhones (and later saw workers' riots). India became the world’s biggest supplier of generic medicines and the Serum Institute of India became the world’s biggest vaccine maker. An Indian exchange now handles the world’s highest number of derivatives contracts.
• Slower than needed: Yet there were clear signs that India wasn’t hitting its full potential, as average GDP growth of 6.2% over 30 years was lower than China’s 9.2% and even lagged Vietnam’s 6.7%. For years, Indians have been living shorter lives and are now earning less on average than people in smaller nations like Bangladesh. Vast inequities developed. Researchers have found wealthier people in urban areas and from upper castes were taller in India, a sign of development favoring groups that were already advantaged. The percentage of women joining the workforce fell from 30.3% in 1991 to about 21% in 2019, according to data from the International Labor Organization (ILO). India’s government spent less than 2% of GDP on healthcare before the pandemic.
• Inward turn: Unlike the old guard in 1991, PM Modi has surprisingly turned the economy more inward, focusing on self-reliance and homegrown companies. Despite championing free trade in global forums, he’s raised tariffs on goods including electronics and medical equipment, partly reflecting global trends.
• Summary: India’s ambition of being seen as a major player on the world stage took a hit as the pandemic has laid bare the weaknesses in the capacity and competence. The key question for global investors now is whether India will get old before Indians get rich. The pandemic has India back hugely.

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