Last month, the International Monetary Fund (IMF) cut its GDP growth rate estimate for India in 2019 from 7.3% to 6.1%. However, most observers will find this to be on the higher side as well, considering that the growth rate between April and June was just 5%. In reality, India’s $5 trillion economy sounds rather far fetched, as sector after sector is reporting slowdowns and stagnations.
Under the ‘Research Festival’ organised by the Economics Society, SRCC, on the 9th of November, 2019, Dr. Pulapre Balakrishnan had an interactive session with students around the theme of ‘Economic Slowdown,’ wherein he covered a wide gamut of topics ranging from monetary policy to resource management.
According to Dr Balakrishnan, the global slowdown is not to be blamed for the current stagnation of the Indian Economy. Rather, the stalling agricultural sector and the lack of public investment are the main culprits. In his opinion, it is because of the monetary conservatism policy being followed by the NDA government for the past 5-6 years that the agricultural sector has been observing a zero, and even negative, growth rate (-0.2% in 2014-15). He further explained that the agricultural sector is not suffering from a cyclical slowdown but a structural one, proposing that the only way out of it was through public investment.
During the course of the lecture, Dr Balakrishnan explained the steady decline in both public and private investments from 2011. He did this by establishing a link between the level of output and investment, wherein he introduced the concept of the “accelerator effect”, which means as demand rises so does net investment spending by firms, creating a positive cycle of growth and capacity building. For example, let’s assume that the government increases its expenditure, leading to increased cash flow in the economy. This cash ultimately reaches the public, empowering them to consume more goods, leading to an increase in demand and thus an increase in private capital investment to meet the new demand. Sir then cited the example of the United States, which was the only economy that became wealthy after World War 2 because of huge public investment, proposing that the same course of action should be taken by India’s current government.
It was quite interesting to hear Dr Balakrishnan talking about how the slowdown is not sudden and is not something to be surprised by since it was already in the tracks for the past 5-6 years. This could be deduced by the high real interest rates or the difference between the lending rate and the inflation rate. In the past years, India’s real interest rate stands at roughly 5.65%, which is way above its peers, consequently making Indian exports uncompetitive.
Coming to the decline in commercial bank credits to industries, Dr Balakrishnan claimed that the reason for this is not known and could be either from the supply side or the demand side. The supply-side rationale is that because of high NPAs, banks are reluctant to give credit. Meanwhile, the demand-side rationale is that because of high pre-existing debts, firms are not in a position to take further credit. This has created an unhealthy cycle of low private investments being weakened further by low bank credit.
The lecture was followed by an interactive Q&A session with the students. Dr Balakrishnan highlighted the importance of creating more jobs by stirring up sectors that have high production elasticity, like the agricultural and rural sector. Coming to the question of skill development, sir is of the view that the NDA government has not paid adequate attention to the matter. Talking about resource management, Dr Balakrishan expressed the need for India to take a more serious approach to its resource usage and pay more attention to managing its resources judiciously.
During the Q&A session, Dr Balakrishnan stressed the importance of public expenditure to bring the economy out of the current slowdown. He insisted that public investment should have been given a priority over the Pradhan Mantri Kisan Yojana, which he believes is a discriminatory policy towards the urban poor.
Perhaps, the solution lies in India’s past. When the economy was facing a similar slowdown in the early 2000s, the Atal Bihari Vajpayee-led government undertook huge public investment for the Golden Quadrilateral Project. This triggered a cycle of infrastructure-led growth, which reinvigorated the private sector and gave new vitality to the Indian economy. An ambitious public investment project seems to be the need of the hour.
By Saksham Singh
1st year undergraduate student, Shri Ram College of Commerce