Why doesn’t the prospect of long-term economic stagnation give us nightmares?


GDP numbers, like the Covid numbers, have become the subject of regular anxiety and contention. With both, there are now questions about what exactly we are measuring. There is relief, or official spin, if they turn out to be less worrying than expected. If GDP growth is close to negative 7.3 percent, there is a huge sigh of relief. After all, it could have been 10% negative. These are little mercies. But there is no denying that the Indian economy has been among the worst performers even in the South Asian region.

So here is the big picture we need to keep our eyes on. India envisions slower growth, increased poverty and a shrinking middle class. It is the first time in a generation that India has experienced something like this. Instead of becoming a high middle income country, we will be relieved if we do not descend lower in the global scale. Everyone understands that the Covid has been a shock to the economy, and we will, at some point, come out of this shock. But we are in completely uncharted territory in terms of psychological orientation towards economics.

In the first decade of this century, we saw average growth of seven to eight percent, a sharp decline in the number of poor people, and a growing middle class. But all of these trends are now in reverse. Growth has slowed down and it would be a courageous economist who would have an analytical basis to project what India’s trend growth rate will be over the next five to ten years. We are on a wing and a prayer. We don’t have authoritative consumption-based poverty figures since 2011. But Azim Premji University’s State of Working India report, 2020, estimated that nearly 230 million Indians had fallen back into poverty. poverty. For reference, the growth period from 2000 to 2016 saw an estimated 270 million people lifted out of poverty. A new report from the Pew Research Center, released before the Second Wave lockdown, suggested that India’s middle class had shrunk by about 32 million people in 2020. And we don’t have any serious numbers on falling incomes or on the possible long-term morbidity effects. This number could get worse.

There are signs of it all around. The latest CMIE unemployment figures released by Mahesh Vyas are sobering. The unemployment rate was 14.5 percent at the end of May; the rural unemployment rate had passed 7 percent. Participation in the labor market has not increased. As Jean Dreze has prominently pointed out in these pages, it is unlikely that nutrition levels, job wages even returned to pre-pandemic levels before the second wave struck; household savings are generally on a downward trend. This whole truth of economic concerns can be easily obscured by narrative wars.

The Sensex is on the rise, fueled by global free money. Unicorns generate a lot of enthusiasm; they certainly bear witness to the dynamism and ingenuity of entrepreneurship. But the idea that they are the backbone of a thriving economy is overstated. There could be limited progress on the distribution of public private goods like gas and water. But that can’t take away the fact that for the first time in a generation, young India sees a darker future than her parents in terms of jobs and income.

It is a remarkable fact that this fundamental triad of slower growth prospects, potentially shrinking middle class, and rising poverty has been kept out of public political consciousness. The poor in India have always been invisible. But the degree of economic and ideological obscuration is such that even the history of economic uncertainty of the normally influential middle class has become invisible. What should be of concern is not just the trends; but the fact that we do not care enough about disturbing trends. There is good reason to believe that unless there is a radical shift in national priorities, the very foundation of our future is undermined.

So, even as we fight against Covid, we need to think about what will really reverse this decrease in our economic fortunes. There are obvious things to do. An investment in health is an investment in the economy; but our investment in health is still in disaster management mode. For example, we are still not investing enough in long-term disease surveillance or in managing its side effects. The government has done the right thing by expanding the free food grain program and creating all kinds of credit facilities. But there will always be a severe loss of nutritional gains in rural India. And it’s hard to imagine that declining production, job losses and the unfavorable environment for small businesses will not justify another round of income support. As Uday Kotak argued, we need a major fiscal stimulus to support consumption. It is highly likely that during the pandemic India likely backed down on its education goals and targets.

Other measures such as regulatory reform and privatization are underway, but their effectiveness remains an open question. We will have to seriously review tax policy. This is not the place for technical details. There is no doubt that the range of investments – in health, education, infrastructure, income support, which the Indian economy needs, will require a new social contract. The richest 1% have benefited enormously from the current economy. Devesh Kapur has argued forcefully that taxing the super rich a little more, those who have made extraordinary gains over the past two years, even temporarily, to better meet the real needs of the economy, should not be seen as an act of redistribution. Much of the money that is made in the stock market, in real estate or in capital gains is due to the easy liquidity provided by governments; a little revenge as a gesture of solidarity or justice is not unjustified. The specter of our bad old days of socialism and 90% marginal tax rates will be trotted to mask the basic fact: we need to invest in our future, and we cannot do it without more taxation.

Over a million deaths from Covid is an extraordinary disaster. But the prospect of long-term economic stagnation should also give us nightmares. We are in completely uncharted territory.

This column first appeared in the print edition on June 2, 2021, under the title “Perspectives en decline”. The author is editor-in-chief, The Indian Express


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