Market economies are well-known for their cyclical ups and downs. Sometimes, recoveries from a downturn happen on their own. At other times, policymakers have to intervene through tax-expenditure changes or interest-rate adjustments to manage aggregate demand in the economy. However, it is not often that the early warning signals of fluctuations get compounded wherein multiple vulnerabilities appear simultaneously. The present situation facing the Indian economy is one such instance. Market analysts, economists across the ideological spectrum, industrialists, and policymakers all seem apprehensive about looming uncertainties.
The two most obvious signals that have everyone worried are the rise in the price of fuel and the sharp slide of the Indian rupee that appears to be hurtling towards Rs 100 per US dollar. The Indian rupee is now the worst-performing currency in Asia. The increase in the price of fuel is being felt by all Asian countries but their currencies have stood stronger against this shock. If we have to pay more for a barrel of oil, the demand for dollars goes up and, hence, its price in rupees. Over and above this rise in the demand for dollars, foreign investors are exiting the Indian economy rapidly and steadily. Not only that, many big Indian investors are buying dollars to invest abroad. The net inflow of foreign exchange has dwindled sharply. This is the other source of the increase in the demand for dollars held in the Indian economy as reserves, leading to an additional pressure on the exchange rate.
The implications of these two events, and how they might adversely affect India’s economic performance, need to be understood separately. Consider the sharp and continuing rise in energy prices. The price of oil and hydrocarbons in general will raise transportation costs as well as the costs of other productive inputs, especially chemical fertilisers. These could lead to large inflationary pressures as food and fuel represent the most important items in an Indian consumer’s basket of purchases. On the food front, add the El Niño phenomenon expected this year. That is likely to make climate and rainfalls much more erratic. Agriculture has to be prepared for a supply-side shock.
The phenomenon of the flight of foreign investments is not all about seeking the safe haven of gold or the US dollar in a time of uncertainty. It is more about dwindling investment opportunities in India. The clue to this is that even Indian investors are shy of investing at home. The global economy is undergoing a structural shift in production and technology. The sunrise industries are Artificial Intelligence, quantum computing, chip-making, and the processing of rare earth elements. India has very little investment opportunities in these areas. It also makes the economy vulnerable in terms of import dependencies for these products and services that are now becoming essential for any economic activity.
On top of this deficiency lies the uncertain future of the information technology enabled services. The rapid advent of AI is making coding and other related jobs obsolete. Large-scale lay-offs have already begun, and new job openings are much scarcer than what they were some years ago. The biggest success story of modern India is heading for a sunset by the next two or three years. A sector that employed large numbers of even mediocre engineers is set to transform to one with a handful of new jobs requiring very specific, top-drawer skills. The two-pronged squeeze on the economy is, therefore, going to be inflation and unemployment leading to slower growth, perhaps even recession. Stagflation is a possibility that cannot be ruled out. Under a situation of stagflation, the standard macro-economic fiscal and monetary policies do not work.
Some of the root causes of the uncertainties lie outside the control of the Government of India, such as the war in West Asia and the choking of fuel supplies. However, there are many issues for which the GoI could be held accountable. These are the issues that have put India in a worse-off position than other nations, which are also facing fuel shortages and related supply-shocks. India, along with Turkey, is currently considered to be economically the two most fragile nations in the world. It is a serious matter when a usually vocally confident prime minister warns the nation to tighten belts on spending and travel.
Ever since the recovery from Covid-19 began, the Indian economy has experienced a K-shaped recovery. The super rich have gotten richer very fast. However, a lot of people in the middle-classes have become poorer on account of uncertain incomes and livelihoods. The salaried class has shrunk, the gig economy has widened, and start-ups have been encouraged to distract labour market entrants into not thinking about stable jobs. They are told that their fate and future lie entirely in their own hands. The middle class is rapidly shrinking with not much opportunity for stable employment. With savings falling in the household sector, there is a rising accumulation of personal debt. Reports suggest that a large number of males are exiting tertiary education for gig work. Questions are being raised about the value of a college education. Other reports suggest that more and more females are going back to agriculture to work as farm hands. Little wonder then that the GoI has to offer free food rations to more than 800 million citizens — a little over half of India’s population.
In this context, there is one issue in which the GoI could have done more. Over the last 10-12 years, the quality of India’s macroeconomic data has become much less credible. Data are either missing, infrequent, or altered in a manner that makes it difficult to compare them with the past. India was renowned for the quality of its economic data despite having a large informal sector. Now, even the International Monetary Fund has remarked on the inadequate quality of India’s data. A former economic adviser to the GoI has demonstrated through extensive research that India’s growth data are overestimated. Apart from being an issue of national credibility in the international arena, any policy decision or government intervention based on inaccurate data will not have the desirable economic consequences.
Finally, in the emerging world order, India seems isolated. We are trying to please the American administration. We also feel we cannot alienate Russia. Israel is a friend for ideological reasons. Iran has been a reliable economic partner. India is not close to a single neighbouring nation.
India is structurally a weaker economy than is made out to be by the many official narratives of prosperity. The large aggregate size of the economy does not mean much when we look at the per capita income numbers. India ranked very low in terms of the Human Development Index and the hunger index. India was placed 100 out of 179 nations on the democracy index and, hence, classified as an electoral autocracy. The country occupies the 157th position out of 180 nations on the Press Freedom Index. And on this World Environment Day, we are ranked 176 out of 180 nations in terms of environmental performance.
The storm clouds are gathering. Even if they pass by with just a drizzle, the cracked earth will remain.
Anup Sinha is former Professor of Economics, IIM Calcutta