This slowdown is a fallout of liberalisation (Economic slowdown 2019 in India)

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 This slowdown is a fallout of liberalisation (Economic slowdown 2019 in India)

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• What led to this slowdown: Analysts point out the harmful effects of demonetisation and a bad GST, but there are deeper structural problems with Indian economy at play.
• Rewind back to liberalisation period: Many measures taken from 1991 have contributed to the 2019 slowdown.

1. 1991 was when the foreign exchange crisis forced the govt. to pledge its gold. But that crisis was due to lack of competitiveness in global markets. So logically, foreign capital and products were allowed into India, to help locals compete better.
2. India's economy grew fast, but that wasn't due to Indian firms becoming more competitive. It was due to low cost of inputs that India started offering - manpower, natural resources et al.
3. IT industry - the nascent hardware industry quickly gave up, and all focus shifted to software where quick money was made using cheap labour. But hardware imports kept growing in parallel.
4. Economic growth rate was overtaken by growth in imports. Pressure on Balance of Payments (BoP) grew. We needed more foreign capital now, and since FDI didn't grow too fast, FII was relied upon.
5. Getting more and more FII money meant constant adjustment of laws, and managing of sentiment.

• Structural changes in stock markets: Regional stock markets were shut down in faour of the NSE, so that FIIs didn't have to deal with multiple exchanges. BSE was too big to be shut down, and finally only one city of India had the two big exchanges.
• GST: The same logic was applied to simplification of taxation regime, and GST came about.
• Various reforms that meant little: When the UPA govt. forced through the multi-brand foreign retail law, everyone cheered. The credit rating agencies saw it as a positive (at whom it was targetted). But the really big chains never came to India.
• Problems: This liberalisation approach - keeping foreigners happy - led to some problems.

1. Local (regional) businesses could not tap stock markets any more - new national houses could not emerge. Investment slowdown can be traced to this factor also.
2. 'One nation One market' infatuation led to new money flowing into existing successful markets. High-cost metro centres were pampered by infra upgradation. But low-cost labour cannot move to such places with their families. So labourers came to metros, families stayed back, and overall cost of labour went up.
3. Little effort was made to build local capital to make globally competitive goods, and Indian competitiveness is where it was.

• Summary: India lost the low-cost advantage, while it really couldn't gain a foothold in competitive space of high-end products. Slowdown had to happen.
• The wrong priorities of successive governments, post 1991 liberalisation, in managing the economy have led to the present slowdown.

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