Not a bumpy cycle ride

Not a bumpy cycle ride

Everything seems to suggest the start of a serious structural problem, not a temporary cyclical one.

After going through three successive quarters of slowdown in India, and with the prospects of that continuing for some more, every thinking economist is asking one question: is this cyclical or structural? In other words, is it just a series of bad quarters that will right itself soon enough with adequate monetary and credit stimulus? Or is it something more serious — one that is beyond the ken of repo rate-led monetary interventions?

Whatever I have learnt over four decades of economics, and all that I see in boardrooms of companies spanning different industries, suggest that we may have got into a structural impasse. Getting out of it will need interventions that go well beyond the realms of reducing the repo rate.

Make More in India

Let’s start with manufacturing. At 15%, India’s share of manufacturing to GDP has remained persistently flat over a long period. Compare that with Malaysia at 22%, South Korea and Thailand at 27%, China at 29% over a much higher GDP, and even Bangladesh at17%. It seems that ‘Made in India’ is about commissioning dreadful statues of gear-cogged lions at key cross-roads of our major cities. It has done nothing to increase manufacturing in our GDP.

There’s worse. Not only has there been no rise in the share of manufacturing, but it has also shrunk across key sectors. Over the last six months up to May 2019, textiles de-grew by1% a month, electrical equipment didn’t grow at all, rubber and plastic products slumped by over 3%, the output of fabricated metals as well as paper crashed by over 10% a month, and that of motor vehicles plummeted by over 5% a month. Matters have worsened in June 2019. The index of industrial production hit a four-month low with 15 of the 23 industry groups showing negative growth.

Next question: how much are we investing to create future income? Today, our gross fixed capital formation is between 31% and 28% of GDP, depending on whether it is measured in constant or current prices. There being no significant productivity increases, these rates are outright insufficient to sustain consistent GDP growth in the region of 7.5%, let aside 8%. Compared to our capital formation of around 31% of GDP, it was over 34% in Indonesia, 44% in China, and over 31% and rising in Bangladesh. In the last two years, I have seen no additional investment proposals in any boardroom.

Now for some longer-term issues. In the last 50 years, no economically significant nation has grown rapidly without investing in the quality of its workforce — something that becomes supremely important in an era of rapid computerisation, networking and artificial intelligence. Where do we stand here? Awfully.

In 2011, the literacy rate for Indians of 18-24 years was 86%. Compare that with 97% for China in its period of highest growth, 99% for Indonesia, and 98% for Malaysia and Thailand. It is worse for women of same age group: 82% for India, 95% for China, 99% for Indonesia, and 98% for Malaysia as well as Thailand. No Southeast Asian and East Asian country has discriminated against girls in education. We have, and continue to do so.

Given this educational disparity, it isn’t surprising that India has a very low share of women in the workforce — which itself is fast declining over time. In 2005, women accounted for over 26% of the workforce. This has steadily reduced to 22% in 2018. In comparison, the share in Bangladesh in 2018 was over 30%, China 44%; Indonesia 39%, Malaysia 38%, and Thailand above 45%.

As You Sew, So Shall You Rip

On to exports. Between April 2011and June 2019, our exports have been pretty much flat — oscillating around $25 billion a month. China, with five times our GDP, exports almost eight times as much. South Korea, at 60% of our GDP, exports twice as much. Malaysia and Thailand, with less than a fifth of our GDP, export over three-quarters as much as we do. Simply put, notwithstanding IT, we have failed as an exporting nation. A persistently overvalued real exchange rate has also played its role.

The scenario is depressing. Our manufacturing is jammed at a longterm low of 15% of GDP and going through a grim phase. Domestic demand has seriously slowed down. There is no vent through greater exports. Having ignored education for decades, we have millions of young people without the skills for tomorrow’s employment. We are persistently poor in employing women. To me, it looks like the beginning of a serious structural problem, not a temporary cyclical one.

It requires serious kick-starting with a severely constrained exchequer. So, it must go back to banking, and creating sufficient liquidity with affordable credit flows to key sectors. I can think of four: low-cost housing, roads and highways, rural infrastructure, and textiles. The first three have high employment potential while creating demand for core industries, and the fourth creates an essential product for the people. Each of these can get a fillip through specific credit flows catalysed by accommodative policies of the Reserve Bank of India.

These will not solve the longer-term structural problem, but may mitigate some of it, while helping a cyclical uptick. Having said that, I fear that the days of 7% growth are over. We may have to now live with 6% — heaven forbids, perhaps even lower. As you sow.