India’s economy has been a subject of discussion for the last several years and this discussion gained momentum as several domestic constraints began to bind the India Growth Story. To be fair, India’s economic growth has not been impressive in the previous decade. The early 2010s saw significant macroeconomic stability which impacted growth adversely while the latter years of the decade saw stress in NBFCs spilling over to other sectors.
Incidentally, a similar story is also true for the first decade of the 21st century as the early 2000s saw sluggish growth just as the post-global financial crisis years.
In the present context, India’s growth momentum slowed following the ill-advised rate hikes by the RBI in 2018 and the collapse of IL&FS in the second quarter of 2018-19. There was a lack of confidence in the system as many other NBFCs too were under stress, and this had an impact on credit availability across multiple sectors.
The 2019 post-election budget was one that was criticised by all – including yours truly. The budget did have some bold ideas, but the hike in surcharges and the compulsion to use CSR funds did hit the wrong nerve. The post-election budget always comes with its own challenges as there is little time to undertake major changes – which is why it is mostly a ‘business as usual budget’.
The difference in 2019 was that with a slowing economy, the government immediately swung into action as it began an extensive consultative process. The process was geared to identify binding constraints that were affecting the economy across sectors. Thus began a series of announcements aimed at the revival of the economy.
In late 2019, the economy did gain momentum as there was a genuine pick-up in all high-frequency numbers. There was a sense of optimism around the last quarter of 2019 and subsequently, the expectation was that in 2020 Indian economy would surprise many on the upside. This optimism was largely an outcome of the resolution of issues in the financial sector that were acting as constraints on economic growth.
Moreover, towards the end of 2019, we had a monetary policy that was well aligned with the domestic economic situation – this is in contrast with the conduct of monetary policy since early 2018. Thus, all the necessary preconditions were met and there were signs that India could have reverted to a 6.5-7 percent growth rate in 2020.
Alas, the pandemic struck the Indian economy in 2020, with trade flows beginning to disrupt from February while economic activity slowing substantially from March onwards. Then there was the lockdown(s) in most of the world, including India. There was a need to revisit the extent of support provided to the economy which was bound to contract due to the large exogenous shock. The series of announcements began again, some focussed on providing relief while others focussed on providing a stimulus.
Luckily, unlike other countries, India focused on providing a stimulus only once the lockdown restrictions were lifted. This ensured the maximum possible impact on the growth recovery process. The announcements also brought with them reforms in various sectors that would create new economic opportunities in the post-pandemic world. India’s growth rates did recover – but yet again, the recovery process was disrupted by the second wave. However, this time around, we had a policy template that restricted the impact of the second wave on the economy.
TN Ninan’s assessment about the finance minister has focussed on her policy interventions, largely on issues such as taxes, privatisation and banking sector reforms. He opens his column by stating that the present finance minister is proving to be better than expected by people in her early days. That is largely correct, as the finance ministry has been like a steady hand in handling the economy during high uncertainty amid turbulent times.
It is a steady hand that was much needed to ensure a consistent approach while dealing with all that ailed the Indian economy. This is also manifested in the fact that in the last three years, Madam Minister and her team have successfully managed to revive the economy successively in all of these three years.
The extent of exogenous shocks faced by the economy could have overwhelmed any policymaker – and many have even cracked across the world. Yet, India managed a policy response that has led to both a fast revival of economic growth and at the same time ensure that this growth is largely sustainable in nature. The latter part is important as this is what distinguishes the growth recovery process that is underway in 2021 from the one, we experienced in the post-2008 years.
Focusing on temporary fiscal interventions that will be easily reversed shows the sense of responsibility with which fiscal commitments were made during the pandemic. That they were aided by several reforms such as farm laws, labour reforms, changes to the insolvency and bankruptcy code, a greater role for private and foreign capital in new sectors and the new factoring regulations further illustrate the commitment of the government to ensure a recovery that can be sustained.
Therefore, they have managed to focus on fixing the present economic challenges without sacrificing future growth and that is a big difference between the growth recovery process in 2021 and the one we experienced in post 2008. This also implies that India will have much better macroeconomic fundamentals during the next couple of years which will be in contrast with other emerging markets as the world unwinds the policy support extended to their economies.
Global Investors have recognised to some extent the policy support extended by India and they are perhaps confident of the prospects of stable macroeconomic fundamentals even as they deteriorate in other emerging markets. This is perhaps why those who put their money where their mouth is are continuing to invest in India. Many may still not recognize all that has transpired over the last few years, and they may still not acknowledge the successful handling by Madam Minister – but perhaps, a sustained high economic growth will help them wake up & smell the coffee?
The author is a New York-based economist. He tweets @karanbhasin95
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