Trends in foreign trade 2002-2013

India’s Place in global trade

• One of the fastest growing economy in the last decade.

• Merchandise trade growth expanded more in tandem with global trade.

• Trade showed remarkable improvement , it’s share in world trade went up from .80% in 2002 to 2.13% in 2013.

• But unlike some of our neighbors, total trade volumes grew more in terms of imports rather than exports.

• As a result , trade deficit which was in near balance around 2000-01 went up to become $191 billion in 2012-13.

Trade outlook for now

A Before the financial crises (2002-09)

• Working out elasticity of trade growth to GDP growth for India and world for the concerned period shows that our trade growth is less responsive to our GDP growth compare to the world.

• This tell us that even when 1 % increase in our GDP was not contributing much for our trade growth that is most of it was for domestic consumption vis-à-vis world, then also, it was possible for us to increase our share in world trade because our GDP growth was higher compare to world average which resulted in more trade in absolute terms if not in relative terms.

• B After the crises (2009-13)

• But after the crises our relatively low trade elasticity further came down to 1.9% from 3.8% in the pre-crises period. This was accompanied by fall in our GDP growth rate which is now more or less converging to world GDP growth rate.

• So the situation is pretty worrisome now.

Our trading partners

• Data on trade reveals that we are now trading with 230 countries .

• But much of the trade volume (60%) in $ terms, is concentrated with 23 countries. In that , we depend heavily on four countries for almost 51% of our trade . Such a trade performance makes us vulnerable to the developments taking place in these four countries.

This includes UAE, CHINA, US & SAUDI ARABIA.

• We have consistent trade deficit with our top trading partners. In terms of trade volume top 10 countries in their order of importance in 2012 were:

• UAE, CHINA, US , SAUDI ARABIA,SWTIZERLAND,GEMRNAY, SINGAPORE, HONGKONG, INDONESIA & JAPANwhich accounts for 48% of total trade volume.

• We have negative trade balance with 6 of these countries.

• CHINA, SAUDI ARABIA, SWITZERLAND, GERMANY, INDONESIA & JAPAN. Far greater than positive balance we have with other 4 countries.

• Of the 23 countries occupying 60% of our trade in $ terms , we are having a trade deficit with 14 of them.

• China is now our one of the most important trading partner but the benefits are heavily in favour of China. In fact in the first five month of the year 2013, our deficit with china reached $ 12 billion , 34% increment.

Direction of exports

• Our exports have become more diversified with a shift from more developed economies to developing ones , with china becoming one of top three trading partners.

• Our exports to commonwealth nations, America , Europe and Baltic shrunk after the crises , on the other hand it went up for Asian & African countries after the crises.

• Thus for the export part we are looking for more diversification to safe guard our interest which could very well explain why India signed many regional agreements recently.

Direction of imports

• It turns out that our import basket is now drastically change. Asia has acquired a significant share in it, particularly north east Asian countries ( consisting of China, Japan & Hongkong).

• In 2002 share of Asia was 29.22% which went up to 60% of our import basket in 2012-13 . Share of north east Asian countries has remained steady around 12%.

• Imports from European union and North America decline after the crises on account of augmented imports from latin America.

Composition of exports

• Our exports have shifted from traditional labour intensive sectors like textless, leather, handicrafts , and carpets to capital & skill intensive sectors.

• Share of primary products fell from 15.90% in FY 2001 to 14.20% in 2013.

• Top 10 commodities in our exports were contributing on an average 60% of our total export earnings from 2003 to 2013.

• Some of these are : petroleum (crude & products), gems & jewelry , transport equipment , machinery , instruments & electronics goods.

• Around 60% of our export earning are from four commodities : garments , gems & jewelry, engineering goods & petroleum products. All these witnessed slowdown after the crises

• Gems & jewelry went down from 17% to 14% being a import based industry it depends on sufficient level of foreign currency for the availability of raw material.

• Share of engineering goods fell from 21% in 2008 to 18% in 2013.

• Exports of ready made garments saw substantial fall after the crises , it dipped to 4% from 12% due to competition from China, Bangladesh , Turkey & Vietnam.

Composition of imports

• On imports front we are net importer of crude for our energy needs and over the years this has been increasing.

• In 2013 petroleum imports occupied 35% share of our total imports. Share of hi-tech capital goods was 18% the same year which is expected to increase more. This is a good sign since every developing country need to update its technology for it to become successful in global trade.

• But the recent increase in the share of gold imports is a cause of worry. It went up from being 7% to 11% in the year 2013 causing import bill to surge from $ 4 billion to $ 58 billion in 2013 , putting excess pressure on govt. foreign reserves.

Economic survey 2017-18

• The Government of India's Economic Survey 2017–18 noted that five states — Maharashtra, Gujarat, Karnataka, Tamil Nadu and Telangana accounted for 70% of India's total exports. It was the first time that the survey included international export data for states.

• The survey found a high correlation between a state's Gross State Domestic Product (GSDP) per capita and its share of total exports. With a high GSDP per capita but low export share, Kerala was the only major outlier because the state's GSDP per capita was heavily influenced by remittances.[14]

• The survey also found that the largest firms in India contributed to a smaller percentage of exports when compared to countries like Brazil, Germany, Mexico, and the United States. The top 1% of India's companies accounted for 38% of total exports.

• “There is one caveat which could help explain the atypical Indian distribution: unlike in other countries, Indian data includes exports of services, where concentration ratios tend to be much lower than in manufacturing,” the survey said.

• India was the eighth largest exporter of commercial services in the world in 2016, accounting for 3.4% of global trade in services. India recorded a 5.7% growth in services trade in 2016–17

Top Ten Exports 2018

Items Value (share in total exports)

Mineral fuels (including oil) $48.3 billion, 14.9%

Gems & precious metals $40.1 billion, 12.4%

Machinery $20.4% billion, 6.3%

Vehicles $18.2% billion, 5.6%

Organic chemicals $ 17.7 billion , 5.5%

Pharmaceuticals $14.3 billion , 4.4%

Electronic equipment's $11.8 billion , 3.6%

Iron & Steel $10 billion , 3.1%

Cotton $8.1 billion , 2.5%

Clothing $8.1 billion , 2.5%

Top Ten Imports 2018Items Value (share in imports )

Mineral fuels (including oil) $ 168.6 billion, 33.2%

Gems & precious metals $65 billion, 12.8%

Electronic equipment's $52.4 billion, 10.3%

Machinery $43.2 billion, 8.5%

Organic chemicals $22.6 billion, 4.4%

Plastics $15.2 billion, 3%

Iron & Steel $12 billion, 2.2%

Animal/vegetable fats & oils $10.2 billion, 2%

Medical , technical equipment's $9.5 billion ,1.9%

Inorganic chemicals $ 7.3 billion, 1.4%

• A Rethink on India's Foreign Trade Policy, K KANAGASABAPATHY, VISHAKHA G TILAK and R KRISHNASWAMY, Economic and Political Weekly, Vol. 48, No. 31 (AUGUST 3, 2013), pp. 137-139

Foreign trade policy Changing course of policy

Before the reform

• Before the 1991 reforms , exports and imports were heavily restricted. Much of the trade was based on import substituting trade strategy. Only the essential like food grains, machinery & defence equipment's were purchased from select partners.

• Average tariffs exceeded 200 percent and there were extensive quantitative restrictions on imports. Foreign investment was strictly restricted to only allow Indian ownership of businesses. Since the liberalization, tariff on lot of items has been reduced significantly with year wise revisions.

EXIM POLICY (1992-2004)

The EXIM policy was first announced in 1992 to bring stability and continuity in the Indian economy. Its main objectives were :

1. Deriving maximum benefits from expanding opportunities in the global market

2. Stimulating economic growth by providing essential raw materials, components, and capital goods for production

3. Enhancing the efficiency of agriculture and service sector and improving their competitiveness

4. Generating new employment

5. Encouraging the attainment of internationally accepted standards of quality

6. Providing quality products at reasonable prices

• These objective were sought to achieve through relaxing capital import restrictions (reducing tariffs & quantitative restrictions) , providing incentive for new markets and product diversification for exports and facilitating technical upgradation of different sector.

• In general it translated into a policy of facilitating exports and recalibrating imports by mainly focusing on procedural domains of exports & imports, with commerce & industry department formulating it.

• It was announced after every five years and updated on 31st of March every year. The EXIM policy (export-import policy) aims at regulating and managing imports and promoting and maintaining exports. It does not allow exporting the goods that are scarce and needed within the country

Foreign trade policy (2004 -2014)

• UPA -1 announced a shift toward foreign trade by announcing for the first time foreign trade policy of India in 2004 , replacing export-import policy.

• This does suggested a change in understanding toward the foreign trade . It was understood the policymaking for external sector cannot be continued in terms of procedural domains only. That overall environment need to be made favourable for exports by reducing transaction costs and improving ports & storage facilities .

• Production inefficiencies was sought to be reduced which required a collaborative efforts from different ministries coming together on a single platform .

• But despite its intentional change, actual practice that was followed failed to reflect significant departure from EXIM policy of the past . Much of the focus remains on export – import rules & procedures.

• Ministry of commerce & industry was the sole agency dealing with it.

Foreign Trade Policy 2015

• NDA reflected a new approach toward foreign policy. While it detailed on usual export- import procedures, it also articulated govt. overall thinking on external sector.

• Once can observed three significant changes from the past in terms of thinking:

• 1. It was realised that it not the sole responsibility of a single ministry to deal with the issue of export-imports. Policy talks of engaging various stakeholders like different states , ministries & institutions together to initiate a “whole of the government approach” towards export promotion and imports control.

• 2. It talks of setting the “domestic house in order” by which it meant resolving long terms issues in export facilitation. Three issues highlighted for the same are as follows:

• A. Making better use of telecommunications & IT infrastructure for trade related transactions.

• B. Remove the tax cascading by reforming indirect tax system which is already been done now, GST.

• C. liberalization ,simplification & rationalization of labour laws.

• 3. Lastly , the government has given some idea about its thinking on the ways in which it would make trade and economic integration agreements with major trade partners work better for Indian enterprises.

• This dimension is most important because India has concluded a number of economic integration agreements with trade partners over the past decade, but most of them have not delivered the expected results.

Objectives of FTP 2015

• India’s Foreign Trade Policy (2015-20) aims to

• (1) increase the country’s share of global trade from the current 2.1 percent to 3.5 percent

and

• (2) double its exports to $900 billion by 2020.

• Biswajit Dhar commented on FTP 2015 by pointing out that it is not clear how government will established this “whole of govt. approach”.

• States are not in position to curb import of any items since custom duty is with the centre. Not only states , centre has little scope for subsidizing exports or restricting imports as we are member country of WTO and after 2001 onward, we don’t have any quota to restrict imports considering weaker balance of payment situation.

• He also points out that it is not clear how setting up of “export promotion council” would help the states.

• Lastly , issues pointed out for “setting domestic house in order” are not reflecting any significant attempt on the part of government to understand what facilitates trade.

• India's New Foreign Trade Policy, Pluses and Minuses, Biswajit Dhar, 18 April, 2015, EPW

Great Reversal : A Macro Story , 2003-13

What changed between 2003 -13 ?

Two period classification of last decade

• The period from 2003-04 to 2013-14 can be divided in two different phases

• First – a period of high growth and low inflation (2003-08)

• Second – low growth with high inflation (2008-13)

• Before the crises period was coined as the period of “great moderation” because of reduced volatility for OECD countries.

• In the similar tune we can say the after crises period for India turn out to be a period of “great reversal”

• This significant turn around in the growth and inflation need some explanation.

• And in this reading pulper Balakrishnan provides one.

Facts

• It was expected that we will breach two digit number for growth in a short span after observing 9% growth rate for three years straight till 2007-08.In the past, it happened in late 1980s, that too for a single year, so it was considered anomaly at that time.

• But this expectation didn’t materialize and all of sudden after the crises, we see growth is settled around less than 5% mark.

• Somewhere in the middle inflation changed gears . Since 2008-09 wholesale price index (WPI) inflation has mostly been much higher than in the first half the decade.

Observations

• In this context Balakrishnan makes following observations:

• First, steady decline in growth since 2008-09, except over the period 2009-11 when it was possibly shored by “Mukherjee Stimulus” suggests something systematic at work.

• Second , the pattern of slowing growth and rising inflation hints at the possibility of third factor linking both.

Role of global climate

• It is quite evident that slowing of growth from 2008 onwards was much in alignment with financial crises. But a closer examination tells that this may have been a coincidence as well.

• Balakrishnan compares the growth and inflation statistics of India with US, China and other emerging countries to substantiate this:

• 1. He finds that with respect to growth , growth declined in all the countries but more so for china and even greater for India. This is despite the fact that India share in world trade is nowhere near to China. So while the China has rightfully witnessed slowdown in growth being a export based economy same can’t be argue for India.

• 2. Coming to inflation , it has fallen for all the countries but has risen substantially for India after 2008 onwards.

• It can be said that global factor had played a role in overall macroeconomic slowdown but clearly domestic factors are responsible for it too.

• It appears as far as inflation is concerned, clearly it was driven by domestic factors entirely as it has declined elsewhere.

• It is difficult to argue same for the growth part as we know slowing of growth more in India vis-a vis other countries itself not a evidence for ruling out that it is all due to global factors since there are multiple channels through which external climate effects growth.

FDI Inflow & Outflow channel

• This is because global factors don’t only effects exports, it can hampers overall investment in domestic country as inward FDI flow is a part of our investment. But considering the low share of FDI inflow in domestic investment and no significant reduction in FDI inflow. We can rule out this possibility.

• In fact only in one year 2010-11 , that FDI inflows register a decline otherwise it is increasing year on year but rate of inflow is certainly reduced after the crises but then also, India is still one of the most preferred destination for FDI inflows.

• Recently lot of academicians have pointed out that due to “policy paralyses” that is ,stagnation in terms of policies of the Indian government, many domestic companies are now investing abroad resulting in outward flow of FDI.

• But if we look at data on FDI outflow after crises we see that, it has fallen from its peak of 2007 and reduced to half. Also the trend is also downward. So once again this possibility is also ruled out.

• So now, by & large, it can be said that even for growth part it is not possible to explain all of it due to reversal in global climate.

Great Reversal: A Macro Story , 2003-13

Centrality of Agriculture

Downward swing in agriculture

• Balakrishnan proposed that third factor which possibly can linked simultaneous slowing of growth and rising of inflation for the period after the crises , could have been “Agricultural growth”.

• Two observations on data of annual agricultural growth for this period are as follows :

• First , latter half of the decade (2008-13) started with two consecutive year of near-zero agricultural growth. To be precise first year witnessed negative growth in output and second managed to attain a bare positive one.

• Second , this five year period was also of high fluctuation in agricultural output. Period ended with low growth after having a recovery in midway.

Mean & Median estimates for Agri-growth

• When having larger fluctuation in data, it is necessary to look both mean & median estimate to asses average performance.

• Comparison of agricultural growth for two periods gives us following:

• 1. If we go by mean estimate , annual agriculture growth was 5.4% for the first period and 3.2% for the second period.

• 2. But if one go by median estimate , difference accentuated . It is 5.51% for the first period and only 0.91% for the second period.

• Also there was only one bad year in the first phase while there was 3 bad years in the second phase. So clearly , second phase was distinctly a period of downward swing in agricultural growth.

Supply shocks in agriculture

• In economics we generally treat agricultural growth to be dependent on exogenous factors (factors that can’t be changed all of a sudden) that is to say, it depends on productivity levels in agriculture , availability of land, area under cultivation , rainfall pattern etc. . All of which is expected to not change drastically or can’t be influenced at will.

• So it can be infer , that this downward swing in agricultural growth could be a result of consistent shocks in supply side factors which the agriculture observed in the second half of the decade.

Theoretical insights (what to expects ?)

• We know from macroeconomic model developed in the 1970s , that when an economy witnessed a supply shock in agriculture and if there is a presence of real wage resistance in the non-agricultural sector , it gives rise to a permanently high inflation (Gordon 1975)

• Another insight can be drawn from Kaldor (1976) , that slow growth of agriculture in relation to demand generated from other sectors may leads to inflation and slow down of latter sector.

• According to Balakrishnan this is what happened in the second period. In this context he pointed out that data on industrial output does shows a steady decline after 2010-11.

• So far we discussed that slowing down of agriculture reduce demand for industrial output but that reflect one of the way through which supply shock in agriculture can affect industrial output.

• There is another channel through which adverse shocks in agriculture can affect industrial growth. In case of rising food prices , households at the lower end of income distribution may need to substitute some of their demand for industrial commodities toward food purchases which can crowd out expenditure on industrial goods and reduce demand for them.

• This is particularly important if we consider that it is this income bracket which has higher marginal propensity to consume over the higher end bracket of the income distribution. Also this becomes more important when we look at the sustain increase in food prices after 2008-09.

Centrality of agriculture

• Balakrishnan points out that if it is surprising to buy his explanation that average annual growth rate of agricultural output does exert such strong influence in India even as its share is continuously declining in GDP .

• One can look at Balakrishnan (2010) to understand that how annual growth rate of economy is much closely aligned with annual growth of agriculture output than with any other factors for the first 17 years after the adoption of reforms.

Great Reversal: A Macro Story , 2003-13

Role of macroeconomic policy & inflation targeting

Role of Macroeconomic policy

• As we know macroeconomic policy has two instruments one is fiscal policy of the govt. and other one is monetary policy of the central bank.

• Let us know analyze the role played by fiscal policy in second half for correcting the downfall in growth.

Fiscal policy (expenditure-taxes)

• In this context it can be said that even though deficits was distinctly higher after 2008 onwards but it appears to have no significant affect in restricting downfall except briefly . This is because when we look at the composition of fiscal deficits we find that most of it went into financing consumption of the government & private sector via subsidies not in creating public capital

• In particular fiscal deficit doubled after 2008 but public capital formation remained depressed. It is worthwhile to point here before the crises public capital rose sharply up to 2007-08 thereafter it went downward.

• The steady decline in public capital formation signals that either the government seriously misjudged the growth dynamics in assuming that growth would continue regardless of the composition of spending, or it cared only to increase consumption regardless of the consequences.

• If the latter is true, then, the strategy failed to reckon with the truism that for the economy as a whole consumption cannot continue to grow without growth in income and that income does not usually continue to grow without investment.

Importance of public capital formation

• It is of interest that private capital formation did not fall as steeply as capital formation in the public sector. In fact, in no year-to-year increase did it fall to a level below the lowest one registered during the period of fast growth over 2003-08.

• Overall, there is strong evidence to suggest that the public sector contributed to the growth decline by reducing its capital formation after 2007-08. In fact , it was less than half of its share of GDP of 2007 level, in 2012.

• This is important as we have seen that in the second period having decline for some part , private investment mostly recovered . In fact it exceeded its first phase peak by 20% in the second phase but then also growth was not recovered. This suggest that in Indian context much hyped narrative of public capital crowding funds available for private sector and thereby having a dampening effect on overall growth are misplaced at best.

• Balakrishnan analysis points that it may not be “crowding out” phenomenon but “crowding in” effect of public capital that was missing for reviving growth in the second phase.

• This becomes more obvious if we look at striking closeness between annual growth rate and public capital formation (as share of GDP).

Note : “Crowding out” is a theory that argues , more funds for public sector raise the cost of borrowing for private sector and dampens its investment.

“Crowding in” is completely opposite to this viewpoint , it suggests that more expenditure by public sector essentially creates more income and thereby more saving in the economy and thus promotes more investment by complimenting private sector investment.

Overheating of economy – excess aggregate demand • Some economist blames higher fiscal deficit in the second period for the rise in food prices after 2008 onwards. Their explanation is that higher expenditure by the government caused the aggregate demand to create a inflationary gap in the economy.

• Balakrishnan refutes this explanation on the ground if it had been true , it would have affected all prices simultaneously not the food prices in a manner that changed the relative price structure between food and non food prices.

• According to him rising food prices reflects inflation originating in sectoral imbalance rather than inflationary gap like situation. He further substantiate –that correlation between fiscal deficit and inflation is in negative in second phase. Also, year on year change in inflation are most closely associated with agriculture output rather than fiscal deficit.

Inflation targeting (monetary policy ) • Indian central bank though very recently incorporated inflation targeting but it has always been concerned about that.

• This time repo rate was raised 13 times in succession to control rising inflation. It was first raised in march 2010 in response to second bad year for agricultural growth . Since then it has been raised 13 times in a span of 20 months but then also it was unable to prevent an acceleration of inflation in the year 2010-11. It did relax a bit but remained far higher than first period level.

• Some part of inflation can be attributed to government hiking of minimum prices of cereals . This was observed clearly when atleast in phases inflation was led by cereals when in fact FCI (food corporation of India) is hoarding more than buffer stock norms.

• This suggests that while UPA 2 have been unlucky with weather conditions , it also bought the inflation in an effort to woo the support of farmers.

• This means that diagnosis perform was incorrect . It was based on a understanding of economy getting overheated because of higher fiscal deficit incurred by government in an attempt to reverse the fall in growth causing inflationary pressure due to excess aggregate demand.

• But in reality inflation was due to supply shock in agriculture and wilful acceptance of higher prices of cereals in an attempt to woo the farmers.

Restrictive monetary policy & its impact

• Economy theory tells us a monetary solution for the inflation which is caused by supply shock will eventually lead to output loss.

• The sector of the economy mostly likely to have been affected by the increases in the policy interest rate - the repo - is manufacturing. The growth of industrial production has steadily contracted from 2010-11 onwards, and has been barely positive in the past two years.

• While this bears the unmistakable signature of restrictive monetary policy following a supply shock, we cannot be sure as to how much of the impact can be credited to monetary policy

• Contraction of public capital formation may be expected to have an even more immediate impact on industrial production than a restrictive monetary policy, as it had been in place for at least two years by then, and continued apace.

• As already stated, by 2012-13, annual public capital formation had more than halved.

• However some effect of restrictive monetary policy may be assumed since it does raise the weighted average lend rate in 2011-12.

• Moreover, the repeated cries of industry bodies following the interest rate hikes as and when they have occurred suggests that monetary policy has had a role in the growth slowdown

Concluding thought

• Handling this reversal of trend in output growth and inflation by UPA 2 suggest following lesson to be learnt in terms of macroeconomic policy.

• If macroeconomic policy has brought a decline in the inflation rate by engineering a growth slowdown, then the inflation rate maybe expected to rise as growth resumes. Supply-side inflation must be tackled at the source. Aggregate demand management cannot serve permanent solution in this context.

• The Great Reversal: A Macro Story by P. Balakrishnan , EPW, May 2014.

Economic slowdown Part 1- Boom & its aftermath

Dream Run

• A decade ago, India was a rising star in the global economy, with its annual growth rate touching 8-9% between 2003 and 2008, with price stability and modest fiscal and balance of payments deficits. It was hailed as one of the fastest-growing large economies, nipping at China’s heels and reckoned as the emerging global back office as against China being the world’s factory.

• That boom is associated with a sharp upturn in the investment rate peaking at 38% of GDP in 2007-08, with rising domestic saving financing (most) of this investment.

• Unprecedented foreign capital inflows – foreign direct investment (FDI), foreign portfolio investment (FPI) and external commercial borrowings (ECBs) – at close to 10% of GDP supplemented domestic resources

• A rising share of short-term financial inflows caused concerns about financial fragility. However, as the capital inflows were reportedly put to productive use, the criticisms against the inflows were muted.

• The ‘Dream Run’ was also a debt-led growth with bank credit to the private corporate sector (PCS) burgeoning at an unprecedented pace; a large share accrued to big business and politically connected firms. These resources went into infrastructure projects such as roads, ports, coal, and thermal power plants.

• Public-private partnerships (PPP) was the preferred mode of investment in infrastructure as the Government cut down on public investment to adhere to fiscal orthodoxy in line with the Washington Consensus that was the guiding star of economic policy.

• The Global Financial Crisis in 2008 upended the boom, though it affected India only modestly for two reasons:

(i) its stricter financial regulations and

(ii) relatively large and closed domestic markets.

• After a brief dip in 2008-09, India, thanks to accommodative monetary and looser fiscal policies witnessed a V-shaped recovery that lasted until 2011-12.

• Quantitative easing (QE) by advanced economies meant renewed capital inflows into emerging markets in search of better yields (that is, higher returns), until the wake-up call of the ‘Taper Tantrum’ (in May 2013) when the US Federal Reserve hinted at raising interest rates – took place, reminding India of the perils of fickle capital inflows.

• For the protagonists of the reforms, the ‘Dream Run’ was a period of virtuous growth, with accelerating growth and poverty reduction. There were a fair number of sceptics, however.

• In 2006, at the height of the boom, political scientist Atul Kohli cautioned against the impact of the reforms that were not so much pro-market (as promised) but pro-business in reality, with the benefits accruing mostly to powerful business groups.

Rise of Crony capitalism

• Substantiating the idea, Kohli's 2012 book, Poverty Amid Plenty in the New India, demonstrated the unequal distribution of the fruits of market-oriented reforms and growth.

• Amit Bhaduri argued how in the name of liberal reforms, rural land and forests were ravaged by powerful businesses, decimating the livelihoods of the poor and marginalized in agriculture and the informal economy.

• He characterized the decade's economic boom as ‘Predatory Growth’ (2005). Journalist James Crabtree's account, The Billionaire Raj (2018), documented how India's super-rich (The Bollygarchs, as the author called them) quickly made their way into the Forbes’ list of global billionaires. And how the liberal economic policy era cemented the nexus between business people and politicians, substantiating the idea of crony capitalism operating under the guise of impersonal markets

• As the boom petered out at the turn of the previous decade

(2011-12) , a revolt against cronyism and capitalist exploitation of land, labour and scarce natural resources came out into the open.

The judiciary played its part in putting an end to these exploitative relations. There were massive protests across the country against land acquisition (in Nandirgam, West Bengal, for instance), there were court cases against corrupt business houses for getting scarce natural resources at allegedly throwaway prices (2G, for example).

The aftermath of the boom

• By the middle of the 2010s, the euphoria about reforms got muted with economic growth distinctly lower than in the previous decade; domestic saving, investment, and capital inflows likewise trended downwards. IT exports were tapering off as the US imposed taxes on outsourcing and because of technological changes.

• Inflation, however, ruled high on account of international oil prices, and the balance of payments (BoP) deficit became precarious for a while.

• Decelerating output growth affected the earnings of corporates and hence their ability to service the enormous debt they had accumulated during the boom. Corporate bad debts got translated into the banking sector’s non-performing assets (NPAs) as firms could not repay loans, restricting banks’ ability to offer new loans.2

• The lower output growth has translated into job losses, withdrawal of workers from the labour force (due to a lack of employment opportunities), a sharp rise in the open unemployment rate, and a stagnation in real wages in rural India

Economic slowdown Part 2-Departure from the past / beginning of NDA-1

Departure from the past

• Realising the deteriorating economic situation and the discontent with the previous political dispensation, the National Democratic Alliance (NDA) government came to power on the agenda of development (modelled after Gujarat's supposed success), eradication of corruption and enforcement of the rule of law.

• The collapse of Kingfisher Airlines and then Vijay Mallya fleeing the country leaving behind the public sector banks bleeding, was, in the public imagination emblematic of everything that was wrong with economic management of the previous regime.

• The incoming Government vowed to use financial regulation (including enforcement of strict tax laws) to probe and punish financial wrongdoings. This was an agenda with a broad popular appeal.

• In its political campaign, the new ruling coalition had also advanced the idea of "minimum government and maximum governance," seemingly inspired by Margret Thatcher and Ronald Reagan to consciously promote free-market ideals. These views resonated well with global financial elites and the globalized Indian community.

• True to its beliefs the Government sought to adhere to fiscal orthodoxy, promoted inflation targeting, and claimed to enforce the rule of law. To illustrate, the Government devoted its considerable administrative capital to improving India's ranking in the World Bank's Ease of Doing Business (EDB) index to win over global investors. The ranking did move up to the 63rd position in 2019, from the 142nd position in 2014, a widely publicisedaccomplishment.

• Yet, in parallel, the Government nurtured nationalist projects such as Make in India to raise the manufacturing sector's share in GDP to 25% by 2022 and create 100 million additional manufacturing sector jobs.

• And populist, targeted, welfare programmes were promoted such as the provision of free cooking gas connections to women of below poverty line families (under the Pradhan Mantri Ujjwala Yojana), and no-collateral small bank loans for poor and unemployed (called Mudra loans).

Policy shocks

• To eradicate black money and also to encourage greater use of digital transactions, in November 2016 the Government demonetized the large-valued currency notes of Rs.1000 and Rs. 500, accounting for 86.4% of the total value of the currency in circulation.

• It was indeed a macroeconomic shock, devastating the informal/unorganized sector (which mostly runs on cash transactions), employing up to 90% of the workforce and contributing nearly half of the domestic output.

• There is near unanimity among economists about demonetization's adverse effects (Ramakumar 2018). Many believe that it contributed to a contraction in economic activity. Nor has the policy shock led to reduced usage of cash: as a proportion of GDP it is inching back to its pre-demonetization level, as per the RBI Annual Report, 2018-19

• The Goods and Services tax (GST) to replace various indirect taxes has been in the making for quite a while. However, its introduction in 2017 was the second shock in less than a year, welcomed in principle but widely criticized for its poor design and implementation.

• Besides adversely affecting small and informal enterprises (which find it hard and expensive to comply with GST’s numerous computerized filings and procedures), thus leading to a severe shortfall in tax collection, it has affected government finances and the sharing of revenue between the Centre and the states.

Change in economic statistics• Changing the base year of the national accounts every 7 to 10 years is a routine matter for statistical offices everywhere. The revision helps account for the changes in the economic structure and relative prices; and, it also allows for using better statistical methods and improved databases.

• In early 2015, the then Central Statistical Office (CSO) — now the NSO —introduced a new GDP series with the base year 2011-12, replacing the earlier one with the base year 2004-05.

• Surprisingly, the absolute GDP size for 2011-12 in the new series was marginally smaller (by 2.3%) than that in the earlier series. But its annual growth rates in the following years were significantly and systematically higher than in the older series. As the new GDP growth rates were out of line with many economic correlates, there was widespread criticism that the new series seemed to systematically overestimate the GDP growth rate.4

Two examples best illustrate this problem.

1.With the demonetization in November 2016, output and employment contracted, especially in the unorganized or informal sector. Economists widely believe it to be so based on theory, empirical analysis and numerous field reports. Yet, the official GDP estimate for 2016-17 showed an 8.2% growth, the highest in a decade!5

2.For the same year, according to the actual tax returns filed by companies in the private corporate sector, the fixed investment to GDP ratio fell to 2.8% from 7.5% in the previous year, as per Ministry of Finance’s Report on Income Tax Reforms for Building New India (September 2018).

The fall in the ratio seems understandable as demonetization led to a contraction in economic activity. Surprisingly, however, the corresponding ratio according to the CSO’s National Accounts rose to 12% of GDP in 2016-17, compared to 11.7% in the previous year. The divergence between the two sets of estimates suggests that the national accounts-based corporate investment estimates are out of line with reality

• Claiming that the National Sample Survey Organization's (NSSO) five-yearly Employment and Unemployment Surveys (EUS) – conducted since 1972-73 – are too infrequent and failed to capture the functioning of the urban labourmarket adequately, the Government replaced the EUS, with a re-designed, Periodic Labour Force Survey (PLFS).The decision was based on the recommendations of the report of the task force chaired by Arvind Panagariya (Ministry of Labour and Employment 2017)

• Earlier, consumer expenditure surveys (CES) and EUS were conducted simultaneously with the same sample households. But with the introduction of the PLFS, a separate CES was conducted, also undertaken in 2017-18.

• Regrettably, PLFS and CES survey results for 2017-18 have failed to find favour with the Government. The PLFS data, released after considerable controversy and delay, has been officially rejected as it is claimed to be not comparable with 2011-12 EUS data, though most knowledgeable experts have dismissed the official objections.

• Similarly, as the CES results for 2017-18 are at variance with the administrative data, the CES data has been scrapped and not released. However, many experts find the leaked CES data to be credible, and a few research reports with insightful findings are now available in the public domain.

Economic slowdown Part 3- Official estimates & caveats to be taken

ECONOMIC OUTCOMES

• We now discuss economic outcomes during 2010s, mostly using the official data sources, subject to the qualifications mentioned earlier.

• Following indicators will be used for assessing economic outcomes :

• 1. GDP growth

• 2. Inflation

• 3. Saving & Investment ratio

• 4. Exports

• 5. Make in India outcomes

• 6. Labour market outcomes

• 7. Consumption estimates

• 8. Poverty estimates

GDP Growth• Real annual growth rate, which shows GDP growth rising steadily from 5.5% in 2012-13 to 8.2% in 2016-17, declining after that to 5% in the last year (2019-20), as per the official Advanced Estimates.

• If these estimates are correct, the economy has slowed down only after 2016-17, probably on account of the shocks of the demonetization and shoddily implemented GST.

• However, as already discussed, the GDP growth rates are overstated on account of the kind of methodological changes used and the newer data sets that have been used.

• To illustrate, the annual GDP growth rate for 2013-14 went up sharply from 4.8% in the old series to 6.2% in the new series. Similarly, the manufacturing sector growth rate for same year swung from (-) 0.7% in the old series to (+) 5.3% in the new series.

• Statistical exercises to validate the official GDP estimates have indicated a sizeable overestimation of the growth rates. Arvind Subramanian, using cross-country growth regressions, inferred that "Official estimates place annual average GDP growth between 2011-12 and 2016-17 at about 7%. We estimate that actual growth may have been about 4.5%, with a 95% confidence interval of 3.5 - 5.5%.” (Subramanian, 2019).

Inflation

• The inflation rate, measured by the consumer price index (CPI), has declined sharply from 9.5% in 2013-14 to 3.4% in 2018-19, with an average annual rate of 5.3% during the period. The fall largely mirrors a decline in international oil prices, an exogenous factor.

• As India imports nearly 80% of its commercial energy requirements, oil prices perhaps remain the best predictor of the domestic inflation rate (besides food prices).

Saving & Investment

• The investment rate peaked at 38% of GDP in 2007-08 (just before the global financial crash) and thereafter, steadily declined to 30% of GDP a decade later in 2017-18. Corresponding figures for the saving rate are 36.4% and 29%, respectively.

• Such a decline in saving and investment rates is unparalleled in modern India, implying a deep dent in the economy’s potential output growth.

• If one accepts the stylized fact of economics that a sustained rise in the domestic saving rate is a prerequisite for economic take-off (as happened in all of Asia in the 20th century), the observed fall in India in the saving rate of such a magnitude portends ill for India’s economic progress.

Exports

• A sharp rise in exports during the 2000s was the principal contributor to the incremental output growth. The Global Financial Crisis followed by the Great Recession witnessed a reversal.

• India, too, has seen its exports, as a percentage of GDP, fall from 25% in 2012-13, to about 19% in 2017-18 . However, the reduction in oil prices contracted the import bill; hence the ratio of net exports to GDP has not changed much.

Outcomes of Make in India

• In 2015, the flagship initiative Make in India was launched, whose outcome shows the following dismal picture:

• A stagnation is evident, if not a slight decline, in the manufacturing sector’s share in GDP.

• The industrial sector lost 3.5 million manufacturing sector jobs between 2011-12 and 2017-18 according to the NSSO employment surveys . A secular decline is discernible in (i) industrial capacity utilization since 2011, and (ii) a rise in the value of stalled investment projects, especially in the private sector since July 2015 .

• Hence, contrary to the official view of a temporary setback, there has been a deep industrial slowdown spanning almost the entire decade of the 2010s.

Labour market outcomes

• It would be right to categorize the current growth episode is one of "job-loss growth" (to use Kannan and Ravindran's phrase), compared to the phenomenon of "jobless growth" earlier, with most of the burden faced by socially and economically vulnerable groups.

• A rising unemployment rate and the decline in labour force participation rates, expectedly, have adversely affected wage growth in the rural economy.

• Agricultural labourers – defined as those earning the majority of their income by doing wage work – represent the bottom of rural society. According to the 2011 Census, India has 107 million agriculture labourers constituting 26.5% of the country's workers, and close to half of the agricultural workforce.

• Between December 2014 and December 2018 , the real average wages of agriculture and rural workers grew at a rate of 0.5% per year compared to a rise of 6.7% per year during the previous five years of 2009 to 2013 (Damodaran, 2019).

Consumption

• If domestic output growth has decelerated, millions have lost jobs and rural wages have practically stagnated, it is reasonable to expect a decline in personal consumption (unless, of course, workers can borrow to maintain their current level of living, an unlikely possibility).

• This is precisely what the leaked (but officially scrapped) NSO report finds. For all-India, between 2011-12 and 2017-18, per capita personal consumption expenditure in real terms has declined by 3.7%. The decline is 8% in rural India, but a 2 percentage point rise in urban India during those years.

Poverty

• The observed decline in per capita personal consumption, expectedly, translated into a rise in absolute poverty. For the first time in a quarter of a century, absolute poverty went up by nearly one percentage point, from 21.9% in 2011-12 to 22.8% in 2017-18.

• Though the rise in poverty rate is modest, shockingly, this represents a reversal of a long-term declining trend, translating into 30 million people falling back into the ranks of the poor in six years. The poverty rate went up by four percentage points in rural India and declined by five percentage points in urban India.

• The states that have borne the brunt of the increase are mostly the poorer states like Bihar, Jharkhand, Orissa, but (surprisingly) Maharashtra as well. The states showing a decline in poverty rates are the southern states and Gujarat

Aggregate picture

• So what is the picture that emerges by piecing together the available aggregate evidence?

• Sadly, the picture that emerges is sharp and scary: an unmistakable story of economy in distress. The suffering is not just about a declining growth rate in output compared to the previous decade.

• The lower output growth has translated into job losses, withdrawal of workers from the labour force (due to a lack of employment opportunities), a sharp rise in the open unemployment rate, and a stagnation in real wages in rural India.

• Weak output growth and poor labour market performance show up in a fall in per capita personal consumption and a rise in absolute poverty, and loss of social welfare (by all standard indicators). Hence, unambiguously, the 2010s have been a decade of an unheard of economic distress and a reversal of past outcomes.

Economic slowdown Part 4- Policy suggestions

Reason for slowdown

• What could possibly explain such a swift and the sharp change in India's economic fortunes?

• There have been no major political threats or natural calamities disrupting normal commercial activities. The country has witnessed orderly changes in governments following national and regional elections. Globalization is on the retreat closing many opportunities, but as India is a domestic-oriented economy the adverse fallout is relatively modest. The fall in international oil prices has kept the external balance under check.

• Hence, the reasons for the economic regression during the 2010s are entirely domestic and policy-induced.

• Demonetization in 2016 was a disaster is now widely acknowledged. As GST unravels, its glitches are coming to light with rising revenue shortfalls.

• From a macroeconomic point of view, the slowdown in output growth is from the demand side. Between 2011-12 and 2017-18, the only item of aggregate demand which has fallen is gross capital formation. It fell from 36.2% to 32.5% as a proportion of GDP (according to the new National Accounts series).

• If we measure the change from the peak of the boom in 2007-08 when it was 38% of GDP, then the fall until 2016-17 was close to 7 percentage points. The fall is principally on account of the decline in the private corporate sector.

• But this fact is obscured by the overestimation of the sector’s size and growth in the new GDP series – on account of the use of contested methodologies and the databases of questionable quality.

• Policymakers defended the official growth record by claiming that India is a consumption-led success story and therefore the decline in investment will not matter for output growth.

• Government sources sought to dismiss the results of official nation-wide economic statistics (such as the Labour Bureau’s employment surveys, NSSO/NSO surveys) claiming that they fail to capture the changing economic reality of growth in the newer platforms and the digital economy (such as Ola and Flipkart).

• One wonders how the narrative of a consumption-led growth success would square with the observed decline in per capita personal consumption in 2017-18, based on comparable NSSO consumer expenditure surveys.

• No country has secured sustained economic growth and acquired industrial maturity without stepping up the domestic investment rate to around 40% of GDP for a few decades (with the domestic saving rate at 2-4 percentage points less than the investment rate).

• China is an extreme example of this with an investment to GDP ratio that has been sustained at over 50% for three decades now, and private consumption has correspondingly reduced to one-third of GDP.

• Reviving private corporate investment was constrained by an unserviceable debt burden and, correspondingly, by rising bank NPAs as a proportion of total bank advances. However, the NPAs admittedly resulted mainly from an unexpected reversal of the economic boom (and changed economic conditions such as rising oil prices and high domestic inflation), and not on account of firm or bank-specific reasons. In such a situation, a suitable policy package for specific sectors and industries would help reverse sagging fortunes.

• Instead, policymakers viewed NPAs as an outcome of

• (i) the banking sector's inefficiency in loan screening and lending practices, and (ii) deep-rooted crony capitalism.

• Such an understanding of economic reality echoed the anti-corruption agenda of the Government. Following such a diagnosis, the RBI sought to route out inefficiency in banks by making the rules for NPA recognition stricter, resulting in a sharp rise in the NPAs as ratio of gross advances, from 4.3% in 2014-15 to 11.2% in 2017-18, as per RBI data

Policy suggestions

• Reviving investment growth should now get priority. The private sector is not in a position to make new capital investment due to a lack of aggregate demand despite declining interest rates.

• High levels of debt in the private corporate sector, the banking crisis on account of NPAs and the collapse of large shadow banks (for example, of the Infrastructure Leasing and Financial Services (ILFS) and DHIL-Punjab and Maharashtra Cooperative Bank crisis) have squeezed fresh lending for capital investment.

• Food price inflation is currently high, which is a seasonal and temporary problem apparently caused by weather factors.

• Public investment can be expected to crowd-in private investment to boost the overall level of domestic demand, and hence revive output growth. Public expenditure can be on large infrastructure projects (highways and railways) and rural road connectivity.

• Even after 70 years of independence, it is an appalling fact that a motorable road does not connect over 20% of 6 lakh villages. The evidence reported earlier shows that rural unemployment and poverty have gone up. Hence there is a crying need for public assistance

• What better policy to address agrarian distress than a massive push to the National Rural Employment Guarantee Scheme (NREGS)?

• These suggestions will face resistance as it goes against deeply ingrained fiscal conservatism. It is worth remembering that the obsession with controlling the fiscal deficit during 2010-15 in developed countries has left deep scars on their economies and politics, as Paul Krugman (2019) recently lamented.

• Such an orthodoxy surely has a place in times of inflation and external imbalances. But, for now, at a time of low real interest rates, an aggregate demand constraint and the private sector's inability to make new investments, public infrastructure investment can have a sizeable multiplier effect on output and employment growth.

• A temporary suspension of the fiscal deficit target and devising unorthodox means to turn around the economy are possible (subject to keeping inflation modest and stable). A rise in public debt in domestic currency, held by resident Indians, and used for productive purposes is a sensible policy in such times.

• Understanding India’s Economic Slowdown : Need for Concerted Action, R Nagaraj, 25 JAN 2020.