India’s economy after Covid | The interpreter
One of the costs of the last two years of limited air travel is that it has become too easy to lose touch with what is really going on in other countries. Having not been back for several years, a trip last month served as a reminder that it is always awe-inspiring to absorb, however fleetingly, how quickly emerging economies like India are changing and, despite the pandemic, improving. widely. Better infrastructure, cleaner streets, more and better cars, fewer but better motorcycles, fancier shops and restaurants, many more cell phones. The pace of change is far beyond what most people in wealthy countries like Australia are used to.
Nowhere is India’s progress more evident than in the technology sector. In the past, India’s tech story was about its dynamic entrepreneurs and skilled IT people. Today however, the most impressive elements are what is happening at the bottom of the pyramid, via digital inclusion.
The government’s sustained efforts for more than a decade have borne fruit. Most of the Indian population now has access to both a unique biometric ID and a bank account. Ten years ago, most had no access to official identification or the banking system. A unified payment interface now enables easy transfers and payments. And all this digitization not only leads to a boom in innovation and start-ups, but also by enabling a promising modernization of India’s notoriously âleakyâ welfare system â using better targeted direct benefit transfers and reducing opportunities for corruption. Arriving just in time to make a difference during the pandemic, according to a study.
India’s broader economic outlook, however, appears less optimistic. Much is said about the fact that India is now expected to be the fastest growing major economy in the world, given China’s ongoing structural slowdown. India’s economy has certainly rebounded strongly and most official forecasts call for growth of around 7% over the next few years, despite a struggling global economy.
Dive just a little deeper though, and things look less impressive.
Other countries are likely to retain most of the benefits of greater openness. India risks losing them.
India suffered a particularly acute economic collapse in 2020. Despite the rebound, its economy is still 13% below its pre-Covid trajectory (using past International Monetary Fund projections), or what might be broadly considered as its “normal” level of operation – one of the largest such gaps among major economies. None of the top economists I spoke to thought India would be able to bridge the gap (neither is the IMF). Many also suggested that they wouldn’t be surprised if growth was much slower over the next few years, say 5%. High debt, a large budget deficit, accelerating inflation and rising global interest rates mean India has little room to manoeuvre.
5-7% growth can still look pretty good. But most economists think India needs more than 7% growth to create enough decent jobs for its young and growing workforce. Especially after the setback caused by the pandemic which has destroyed many better jobs and sent migrant workers back to the countryside. A major concern is that participation in the labor market, especially among women, seems to fall since before Covid-19 hit.
India has always struggled to create enough decent jobs, despite rapid economic growth. The explanation lies in its unique growth model driven by relatively highly skilled sectors (IT but also within manufacturing) as opposed to the exports of low-skilled, labour-absorbing manufactures seen in most other fast-growing non-resource-based economies (in East Asia and more recently in Bangladesh).
To deliver better jobs and faster economic growth, Indian manufacturing will likely need to grow much more significantly.
Economists generally believe this requires greater openness to trade and foreign direct investment (FDI), especially as a means of integrating into global value chains. It is of great concern as the Modi government has instead raised tariffs while rejecting the Regional Comprehensive Economic Partnership. Trade talks with select partners, including Australia and the European Union, seem driven more by diplomacy than economics, and a poor substitute for broader liberalization in any case. India has joined the US-led Indo-Pacific Economic Framework, but the deal is not about opening up the market, at least for now.
Distrust of China and worries about supply chain resilience are driving factors, but also cover long-standing protectionist currents â now strengthened as the world appears to be converging on the more skeptical views of China. India on globalization. Lost though is that most other major economies are much more open than India to begin with, although they may be reducing that. Other countries are therefore likely to retain most of the benefits of greater openness. India risks losing them.
The government, however, has not given up on manufacturing. He is just pursuing his own strategy. First, he hopes that domestic reforms and infrastructure investment can themselves improve India’s manufacturing competitiveness enough to make a substantial difference. Second, for some sub-sectors, the government has put in place âproduction-linked incentivesâ (subsidies) aimed at closing the remaining competitiveness gap and inducing the relocation of global supply chains â with some success to date, for example in attract iphone contractors like Foxconn to settle.
Proponents point to increased merchandise exports and FDI inflows as justification. But a broader view suggests that this is less significant than it appears. Commodity trade has exploded globally during the pandemic. India has only slightly outperformed the global average and global trade is expected to slow as demand conditions normalize (or worsen). FDI inflows increased significantly until mid-2021, but have since declined. India is big, so any improvement in manufacturing will be noticed. However, relative to the size of the Indian economy, merchandise exports and FDI continue to hover around the average levels seen over the past decade, at 13% and 2% of GDP respectively.
As Amita Batra, professor of economics at Jawaharlal Nehru University, recently wrote for The interpreter, a starting point for doing better would be for India’s trade policy to prioritize deeper integration with ASEAN. Indeed, this was a key suggestion by several regional experts at the Delhi Dialogue on India-ASEAN relations (which is why I was in New Delhi in the first place).
India’s economy will likely continue to grow at a reasonable pace. Moreover, digitalization offers the promise of a double win by boosting business dynamism at the top and fostering greater inclusion through digital services and social transfers at the bottom. Whether India can generate enough decent jobs for its people, however, remains the big concern.
Roland Rajah’s trip was funded by the Research and Information System for Developing Countries (RIS) to attend the Delhi Dialogue on India-ASEAN Relations.