Current positions over the prospects of the Indian economy seem to swing between alarmism and triumphalism. For example, you can juxtapose Morgan Stanley’s exuberant recent report on India’s impending economic boom, with analysis that comes out of the CMIE on India’s dismal employment record and the enduring constraint it poses. A lot of economic debate is shaped by political mood affiliation. There are genuine difficulties figuring out what is going on.
In some cases, there just is not enough data, a situation not helped by the government’s diffidence to data. Different shocks have taught us how much of our knowledge of the economy is post facto. Growth is also often a product of particular conjunctures. What may seem like a structural impediment to growth at a particular time can be compensated for by changing circumstances. But it is worth taking the optimists’ case seriously. Why might we think India is more competitive and attractive now? Will any of these conditions obtain?
The central element in the optimist’s story is India’s vastly improved infrastructure. India’s logistics, while not top class, are improving. Interestingly, Morgan Stanley argues that land is not a binding constraint (perhaps it never was). India’s digital infrastructure is potentially outstanding. Optimism here seems well founded. But the Morgan Stanley report makes two further claims. The first, that the digital infrastructure will lead to offshoring of services to India, and second, it will lead to enhanced access to credit which will enable growth. Both of these are plausible claims, but by no means certain.
The second pitch is India’s energy transition. India’s economic performance traditionally has been tied to the price of oil. The optimists are betting on a major green energy transition that will not just bring more investment but make India energy self-sufficient and competitive. This is in the plausible but not easy category. There is a big “if” in this story.
The third element is a revival of manufacturing optimism. The production linked incentive schemes can, at the margins, work. The baby steps in defence manufacturing, investments like Apple, could reach a critical mass where we begin to create an ecosystem with enormous spillover effects. The pessimists are too quick to dismiss this possibility. This is now a plausible story, but whether it will materialise is still an open question.
The fourth element is human capital. India has a long way to go. But often, quality assessments of human capital are also post facto; we infer human capital qualities from successful economies. But it could be argued that India has enough human capital now for this to not be a binding constraint.
The fifth element is domestic demand. This has been the Achilles heel of the optimist’s case. There has always been a propensity to overestimate domestic demand. This has been compounded by the unequal distribution of income. The poor have been cushioned from shocks a bit by the NREGA and PDS. But you cannot sustain consumption on the backs of only the top ten per cent; most post-Covid consumption trends suggest increased demand largely on account of the rich. The Morgan Stanley report assumes that the percentage of households in the income distribution Rs 10,000-30,000, will go up from 24 per cent to 46 per cent in the next eight years. The pessimists would argue the following. Growth in India is very capital intensive. So income distribution could be even more skewed. In the last consumption boom, agriculture growth helped. Can that happen again, especially in the face of climate uncertainties? It might be worth thinking whether it will be expansion in public employment that will help change this distribution. But for the moment, projections of India’s consumption distribution seem speculative at best.
The sixth element is MSMEs and the informal sector, which took big hits in the last few years. The assumption always was that small enterprises are hooked in enough to supply chains so that growth at the top can pull them up as well. This assumption may still hold. But can we be confident that these linkages will still hold?
The seventh element is geo-political. This is the idea that the need to diversify away from China will give India an advantage. This seems the least tenable of the optimists’ claim. For one thing, it is not clear that more than a small fraction of the offshoring from China will come to India rather than go to Vietnam or Indonesia. For another, the extent of offshoring is probably exaggerated. FDI in China is still rising, and unless a war breaks out, you may not see a radical shift. Banking on geo-politics is not a growth strategy.
The eighth element is the state, which Morgan Stanley glosses over. In many respects, state capacity has been increasing steadily over the last two decades. India’s macro regime is, like its foreign policy, a case of cautious prudence. There is optimism about state revenues. Arguably, the quality of state expenditure has also improved. But four clouds still hover.
The first is state finances. Much of India’s recent growth has been sustained by public investment. But given the pressures of subsidies, expanding public employment, and now a reversal to the old pension scheme, there might be more serious limits on public investment. Second, the regulatory framework is still uncertain. In the e-commerce space, the implications of building swadeshi may not be all that bad, but our basic outlook on trade is not entirely clear. Third, there are still the usual challenges of the inability to deal with complex governance problems, like pollution and urbanisation, which have reputational effects.
Finally, there are the uncertainties that arise from the political economy of letting a couple of national champions dominate the economy across so many sectors. What systemic risks does that pose for competitors, and the financial system as a whole? But you can still make the case that the Indian state has enough credibility for it to attract investment.
But here is the issue. The analytics may not matter much, if you cannot convince investors. Private investment in India still does not have the momentum that you would expect based on the optimists’ case. Is this because of structural reasons, purely transitional ones, or psychological? Arguably, the euphoria of Morgan Stanley’s reports is still not being matched by investors, perhaps including its own. But the honest truth might be that when it comes to the economy, agnosticism is what the evidence warrants rather than hyped up bloom or catastrophic gloom.
The writer is contributing editor, The Indian Express