India, with its self-image and identity itself in transit, is clearly not doing enough to exploit its opportunities. Its preference for gradualism may be counter-productive. It is not paying heed to the ‘middle income trap’.


We are now just days away from the results of the 2019 general elections. Narendra Modi is widely expected to win a second term. But the Indian economy is slowing down. Even a virtue like low inflation over the last nine months is suggestive, not of health, but recession.

The biggest idea in economics since the days of the city state is that government can enable and stimulate growth via its policies. But increasingly, in a globalised world, external forces, such as the ongoing trade war between the US and China, do have their effect. Nevertheless, building the strength of a nation’s economy is of paramount importance, and the time has come to think out of the box.

The world is at a tipping point. Broad-based economic power is slipping away from the West. All of it is experiencing low growth or recession. Save the potential of its over-arching technological leadership, there is little left to leverage. This is because of excess capacity, relatively low population bases, and saturation of demand.

India and China, the most populous nations on earth, are still growing. China, not always on the same page strategically, has recently mooted a cartel with India to negotiate better terms with the oil producing nations.

India, with its self-image and identity itself in transit, is clearly not doing enough to exploit its opportunities. Its preference for gradualism may now be counter-productive. It is not paying heed to the possibility of a “middle income trap” even as more and more signs of it are beginning to appear. The trap is tentacular. Once in, it is not easy to get out of, as South Africa and Brazil are finding out.

Present demand for goods and services from a not large enough middle class, is slowing. How then are we going to get to near double-digits for years?

As consumer fatigue sets in, new business entrants are projecting profitability only over the long term, while old players are looking at shrinking sales and margins.

The need to accelerate the rate of capital formation and return on investment, private money put into a wide swathe of industries and services, and increased domestic consumption, is acute.

This entails policies that bring millions of new people into the educated and relatively affluent middle class from the financially restricted lower middles. It must also lift the remaining population out of extreme poverty.

How can this push towards a developed economy be accomplished? The government must channel massive investment into better nutrition, education and health infrastructure. A small socialist economy that was indifferent to growth, inflation, and large deficit financing, had to change drastically at the point of near bankruptcy in 1991.

The Modi government today knows the pitfalls of being one-sided about expenditure without paying attention to income. In Modi 2.0 it should move urgently to balance growth and the fiscal health with welfarism.

But this must mean more than the somewhat impersonal state funded massive infrastructure building that has propped up the growth rates in Modi 1.0.

The other aspects, from myriad services that account for over 50% of the economy, to manufacturing, agriculture, exports, real estate, the stock markets, the banks, have all done quite badly.

So if we have contained inflation and met fiscal and current account targets, we have done so with a lop-sided economy, which some have unfairly labelled “jobless”.

Emphasising dynamic growth strategies is doubly difficult in India because the entire “ecosystem” that must implement it has long had a Soviet influenced Marxist bias. They may typically plump for labour intensive activity that may have to be replaced instead with multiple clusters of high technology enterprise employing modest numbers of people.

Do nothing new however and the problems will worsen. Subsidies and doles won’t stave off the crisis to come. Such welfarism is proving impossible to sustain even in the developed but no-growth West, and in once oil rich Arabia. This despite their small to tiny populations.

We must remember the financial inertia that threw the USSR into the vortex of history. The collapse, when it comes, can be sudden.

India, unlike China, has never been export-led. Today China wants to invest in manufacturing in India along with others, who wish to relocate. But we need to stay attractive.

What can we do? Do we need a Ministry for Investment headed by a technocrat as Andy Mukherjee, the Bloomberg columnist, has suggested? Mukherjee, also concerned about the economic attrition of late, has not pointed towards a sovereign fund. Instead, he advocates free ingress of Japanese and American capital, as in sell-it-instead of-trying-to-save-it. This, in the face of a number of spectacular collapses ranging from Anil Ambani’s Reliance Group to IL&FS and Jet Airways.

Is Rathin Roy, the erudite Prime Minister’s Economic Advisory Council member right in blowing the war conch on the looming middle income trap? Is the ever widening gap between the few rich and the many poor growing unbridgeable?

Can Niti Aayog identify inclusive high growth areas, if the Finance Ministry is bogged down with concerns on revenue generation and the expenditure it must undertake?

Build it and they will come, is paraphrased from the 1989 Kevin Costner baseball movie Field of Dreams. But it is perhaps epitomised by massive state-funded infrastructure projects. Infrastructure, often the best suit of right-wing, nationalist governments, can count the BJP amongst its adherents.

From the A.B. Vajpayee administration’s Golden Quadrilateral and nuclear weaponisation, to Narendra Modi 1.0’s emphasis on the connectivity and empowerment provided by highways, tunnels, bridges, ports, new railway lines, electricity, cooking gas, rural roads, banking and medical insurance for all, Aadhaar, direct subsidies; it is a long list.

Unfinished work for Modi 2.0 includes multiple freight corridors, bullet trains, the Sagarmala programme, linking of rivers, mega cleaning of the Ganga, more tunnels, all-weather high altitude train lines, redirecting the Indus Treaty waters. Modi 2.0 intends to spend $1.44 trillion on infrastructure, a fourth of the $4.5 trillion estimated necessary by 2040.

But what else can we do? The rural scenario is certainly a flashpoint of discontent and misery. The FMCG sector in the country must be incentivised with loans and tax holidays to set up dozens of agri-based joint ventures and cooperatives to modernise and add value to farm produce.

It is unsustainable to support 60% of the population in rural India without sufficient localised activity. Farming, especially as it becomes highly mechanised, does not need more than 10% of the population.

The loss making PSU sector, the bulk of it, must be sold off piecemeal via asset sales. Nobody will want to absorb its losses and much of what it makes is out-of-date.

Surplus land with the railways, port authorities, defence establishments, and yes PSUs, needs to be, likewise, sold off. “Land use” particulars and permissions must be changed to release its commercial value, often running into thousands of crores.

The public sector banks, a disgrace of corruption and mismanagement, must be privatised, so that the government can cease bailing them out year after year.

Doesn’t speculation need to make a comeback to release those “animal spirits”? The languishing real estate sector can well run without cash, but then the capital gains taxation must go.

For transactions in crores, the temptation to dodge at least a proportion of the taxes is just too much. Not to capture all that cash into the official economy is foolish. Modi 2.0 must curb its propensity to use the stick on the relatively small man in the absence of carrots. If it must punish, it would be instructive if it manages to jail some of the corrupt rich and powerful on a priority basis.

Real estate, sadly ignored in Modi 1.0, is a massive employer and user of goods and services. The new “smart cities” in small towns are a low-cost housing work in progress, and do not fit as a substitute.

Similarly, the taxation on equity and debt markets, including short and long term capital gains taxes must be abolished. Limits on overall foreign capital invested in the debt market need to go, even as a cap can be retained on individual instruments.

This government has done a great deal to bring indirect taxation into a unified framework via GST. But droves of capable millionaires have quit the country, “ease of doing business” notwithstanding.

The next government must make sure that the tax base grows and flourishes by attending to the carrot.