Indian Economy: Prognosis and Prospects

Written By: Shaurya Doval and Praket Arya

Editor’s Note: This article is an India Foundation initiative to examine the current state of the Indian economy post the COVID-19 outbreak and the challenges that are likely to be faced in resetting the economy over the short to mid-term. The transcript is from a conversation between Shaurya Doval, Member, Board of Governors, India Foundation and Praket Arya, Senior Research Fellow at India Foundation.

Praket Arya: If I can ask a simple question to a very complicated scenario, in one word, what do you think is the present state of the Indian economy?

Shaurya Doval: ‘Serious,’ would be the word.

Praket Arya: Despite a recovering stock market and growing employment numbers as suggested by data from the Centre for Monitoring Indian Economy, the size of the economy is in fact shrinking. Given the extent of our informal economy and the ongoing uncertainty because of COVID-19, to what extent can we rely on such projections for making informed decisions? And in your opinion, is the economy actually shrinking?

Shaurya Doval: I said serious to the previous question as these are unprecedented times. ‘Is the economy shrinking?’ – Yes. This phenomenon probably happened only once post-independence. We are in a serious situation, but this is a global phenomenon which is not just limited to India. The lockdown that followed the pandemic was an unprecedented response that governments all over the world took and this disrupted the economy. However, we must contextualise these facts. 2020 will be a year of contraction, even of major economies. The United States is expected to shrink by about 8%, the EU by about 10%, the UK by 10% and Japan by 6%. India, in comparison, is doing reasonably well, with its economy likely to shrink in the range of 4-4.5%. But, like most of the world, India will bounce back in 2021, and the recovery will be more than 7.5-8% as we see it today. As the world economies recover, so would the Indian economy. This year, in every possible sense, has been a Black Swan event. It is an unprecedented situation that emerged for reasons that were not foreseen, leading to lockdowns as a result of which economies worldwide have contracted. In light of the larger economies of the world, India has done a reasonably good job in limiting the extent of this contraction. The next natural phenomenon is a rebound because there is no structural breakdown of the economy. It’s not as if the factories have disappeared or the demand has disappeared. The factories just closed down which led to a contraction and hopefully things will bounce back next year.

Praket Arya: We have many noted economists making observations on India and their observations are not just limited to the economy. For example, Mr Kaushik Basu who was the Chief Economist of the World Bank and also the former Chief Economic Advisor of India recently noted that initiatives like ‘Make in India’ and ‘Atmanirbhar Bharat’ “will further close our economy to the World”. Moreover, he stated that “economic growth in 2020-21 will be the lowest since 1947” owing to a “trust deficit and divisiveness in the social fabric of the country”. What are your thoughts on such observations? Do they have any merit?

Shaurya Doval: Things become a little prejudiced when trained economics start talking about areas which are not in their domain. I respect Mr Kaushik Basu but I do not agree with his observations. I believe that neither the contraction in the Indian economy nor its revival in the coming years has anything to do with any major social disruptions in India. India is a civilisational fabric woven over centuries. I also do not agree with his assessment that Atmanirbhar Bharat will actually close India and the Indian economy to the world. On the contrary, Atmanirbhar Bharat is probably the first time since Independence that India has the confidence to build an economy that is completely self-reliant. The pandemic has exposed to the world the harsh reality that countries cannot outsource their core industries to others. The strategic risks of doing so are huge. During the pandemic, the US realised that their pharmaceutical industry was heavily dependent on imports for life-saving drugs. About 80 per cent of the active pharmaceutical ingredients (APIs) used to make drugs in the United States are said to come from China and India.[1] To correct this dependence, the US is now taking steps to make itself self-reliant in terms of essential drugs. In India, the defence industry, which is a core sector of our economy, should have become ‘Atmanirbhar’ a long time ago. To state that Atmanirbhar Bharat will lead to the Indian economy being insulated is therefore not correct. On the contrary, it will enhance India’s confidence to engage with the global economy on its own terms, not as a mere recipient or in an aggressor manner, but as a country which can work and contribute to the evolution of the global economy. Today’s India is not what India was ten years ago. India is today a USD 3 trillion economy and the fifth-largest economy of the world. In the next few years, it will move up the ranks with its growth rates. A country and economy of India’s size must be able to control as many variables as it can so that the global economic structure is stable. The Prime Ministers vision and goal of ‘Atmanirbhar Bharat’ is thus not only good for India but for the rest of the world too.

Praket Arya: The agriculture sector of the Indian economy is perhaps the most important and the largest sector that needs focus, given the sway it holds on the majority of the Indian population. The Prime Minister has now launched a Rs 1 trillion Agricultural Infrastructure[2] Fund to boost post-harvest management infrastructures and community farming assets such as cold storage, collection centres and processing units. Do you think measures like these that enable debt financing can pivot India to become a world leader in organic and fortified foods as the PM envisages? What is the growth potential of the same and what must new age Agri-innovators and Agri-preneurs do to make agri-business profitable and scalable in India?

Shaurya Doval: This step is a great recognition by the Prime Minister. Food security is a vital ingredient for any big power and it is good that India recognised this important imperative and has been working on it consistently since independence. As a result, we now enjoy complete food security. The pandemic, however, has exposed certain kinds of vulnerabilities which need to be addressed. About 60% of India’s population depends on agriculture for employment. It is also a core sector of India’s economy. The Indian farmer plays a vital role in India’s economic architecture, which is why the Prime Minister refers to the farmer as the ‘Annadata’ of India. Today the share of agriculture in the Indian economy is only 15%, and this number will further reduce with the growth of the economy. But that will not reduce the strategic importance of this sector. During this pandemic, where every other sector saw a recession, it is the Indian farmers who have ensured that we have a bumper harvest and so, despite the economic disruption, there will be no food shortage. Agriculture will remain vital for 1.3 billion Indians, and our economic planners must understand that.

Having achieved food security our next challenge is to substantially take this game to the next level. In the next few years, India must aim to become an exporter of processed foods. Under the WTO rules, pure export of agriculture will be difficult[3] because every country will be protective in this regard but there are many countries that can benefit significantly from India’s agriculture and food processing capabilities. Historically, we have underinvested in this sector and as a result, we today waste about 15% of our food production. We need to build capacities to not only process food, but also to convert this surplus into an advantage. The agro-startups can convert agriculture into a value-added sector. This gives us the headroom to absorb more and more people in the agricultural sector. As 60% of the population is dependent on agriculture which contributes only to 15% of the GDP, it leads to low wages and low incomes for those working in this sector. Through innovation and technology, we can raise our productivity in this sector, which will be very good news for the country. The Prime Minister and the government allocating more funds is thus a timely step.

Historically, India has underinvested capital in Agriculture. While work has been done in research and improvement of soil quality etc., but substantial CAPEX investments have not been made in this sector because the limited capital available was diverted to infrastructure development and manufacturing. I think this is the first government that is now recognising that a certain minimum amount of capital must go into productive capital investment in the agriculture sector. Today, as we are surplus in food production, we need to look into the food processing industry and in the next 10 to 15 years, aim to become a provider of high quality and nutritious food to the rest of the world. There is a big market for that.

Praket Arya: Recently there has been a lot of controversy regarding the MSP (minimum support price). The Central Government has issued 3 new ordinances, i.e. [Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Ordinance, Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance, and the Essential Commodities (Amendment) Ordinance]. Some State Governments allege that through these ordinances, the Central Government is seeking to end the MSP regime. Do you think that MSP as a measure has served its purpose and is now no longer required?

Shaurya Doval: I am not an agricultural economist so I would reserve my definite statement on this because people of that field may have a better idea. But what I do understand is that the limitations are the artificial interventions in the market. These have actually created a certain kind of demand and supply gap that has led to unnecessary distress in the agricultural sector. The Indian agricultural sector is now reasonably robust on its supply side. When we try to find its right equilibrium, we have to bring about changes in crop rotation, quality of crop production and processing to support farmers so that they can better meet the demands of the market, rather than trying to artificially intervene in the market through support prices. To that extent, the concept of MSP may have outlived its utility. There is also a political aspect to it; there is an element of educating the country and building consensus around it. It is very important to do that when you plan to take back something which you have already given. But maybe the time has come to have a relook at this policy. One of the inputs we have received in the last few years is that the MSP has really created supply gluts in the agricultural sector which has been to the detriment and not to the advantage of the farmers in substantive terms.

Praket Arya: After the onset of the COVID pandemic we see that agriculture and manufacturing are two sectors that have been able to sustain and rebuild because enough has been done by the government to cater to these two sectors. With respect to the service sector, the impact of the pandemic has been very asymmetric. Certain consumer-facing services like home delivery chains and online meeting spaces have seen irregular growth. Others like the hospitality industry are in complete doldrums. For a sector that is considered a Sunrise Sector and employs almost 10% of the total workforce in the country, what is the way forward? The Hotel Association of India, representing the organised Hospitality Sector is seeking a relief package from the Government and states that the sector is looking at a Rs 90,000 crore loss in revenue. What do you think the hospitality sector needs to do to revive itself?

Shaurya Doval: The unemployment numbers are now dwindling and we seem to have done better than anticipated. After the reversal of the lockdown, the unemployment numbers have shown a significant dip. In agriculture, it has come down to 6.6% and in urban employment, it is down to 9.5% from a high of 26% in May. Our overall unemployment rate today is lower than what it was in March as we went into the pandemic. Overall, as far as the manufacturing and agricultural sector is concerned, the unemployment rates are looking healthy and it means that the level of economic activity has indeed started.

With respect to the hospitality and the service sector, I think the government must continue to provide support for as long as it is needed to ensure that this sector does not get obliterated. This sector is a very important sector of our economy and governments all over the world right now are doing whatever it takes to support the core sectors of their economies. We are expecting that some parts of this sector will be able to bounce back owing to domestic demand, but in case the pandemic continues and the lockdowns and curbs on travel continue for some more time, I think it is but reasonable to expect that the government will need to continue its support to these sectors.

Because when we seek to become a solid economy, an economy that survives through cycles, we have to groom our sectors. This has been done by all the major economies in the world. What it means is that they have borne years of losses but not allowed their industries to collapse, so that when the cycle turns, their industries can move forward. As an example, in the financial service sector post the financial crisis of 2008, the United States did not let all of its banks go down. The Federal Reserve intervened and actually ensured that after one or two banks had gone down, the financial system of the United States did not collapse. I think the Indian government needs to recognise that the service sector will remain a mainstay for an upwardly mobile Indian population. It is the sector which has allowed us to reap the benefits of globalisation because it is essentially our service sector that has allowed us to accelerate our growth. There are limitations to what we can improve in the agriculture and manufacturing sector as they will take a long time. So, even if it means that the government has to actively support the service sector, particularly the hospitality sector and the air travel sector, then it must do so. And it has many instruments to do that such as monetary stimulus, fiscal help etc. In my view, the hospitality and aviation sectors seeking support from the government is legitimate, and it is my expectation that the government will do whatever it can for them.

Praket Arya: In a program held by the Institute of Chinese Studies in July 2020, China’s Ambassador to India pointed out that “92 per cent of Indian computers, 82 % of TVs, 80 % of optical fibres, and 85 % of motorcycle components are imported from China.”[4] How did India’s economy come to this extreme level of dependence on China? Is it, as Harvard Economist David Landes, who wrote Wealth and Poverty of Nations, suggested that technological superiority allows countries to enforce aggressive economics i.e. quote unrealistic prices to obliterate industries in unsuspecting companies/countries, manipulate currency, deploy prison labour to cut costs, follow few labour standards, artificially cheapen factor costs (esp. land), steal IPRs, and repeatedly use military power to browbeat one and all or is it something else?

Shaurya Doval: While India is partially responsible for allowing such a high volume of imports from China in certain key sectors, the Chinese have much to answer for. China joined the WTO in 2004 and told the world that it was a market-driven economy. This apparently was not so. Now, the European Union has brought out a legal case against China, on its claim that it is a market-driven economy. Between 2004 to 2020, we lost 16 years believing that China was playing by the same WTO rules that the rest of the economies of the world were following. India should not have fallen into that trap, but given the fact that India was one of the players in the market-driven economy, it had to abide by the rules of the organisation. As a result, India’s trade deficit with China rose to as high as USD 63 billion by 2017-18.

India became a victim because we were unaware of the subsidies provided to Chinese manufacturers and of the banking structures they had. China underpriced its goods and infringed Intellectual Property Rights (IPR), which consequently reduced the costs. Not just India but the whole global economic order became a victim, and it is only now that the world is reacting to it. India has done some kind of course correction in the last few years as a result of which the real trade deficit fell from USD 63 billion to USD 48 billion. But it’s still a pretty big number. It will take time for countries like India to recognise that there is a reason why we ended up with 92% computer components and 80% of TV components coming from China.

India will need to change course with respect to its core industries and build in these capacities so that this anomaly can be corrected. The lesson learnt is that democracies and open economies can compete only on a level playing field. When organisations like the WTO are unable to ensure that some large economies play by the same rules, it creates a level of disequilibrium in the market where those playing by the rules are placed at a disadvantage. India will now have to enable import substitution of these technologies while trying to build these capacities internally and join the global supply chain by the dint of its competitiveness, technological innovation, product superiority and not by underhand market practices.

Praket Arya: The first round of financial stimulus was around about 1 to 2 months ago now. India Inc is expecting a second round of a fiscal stimulus. One, how soon can we expect that? Two, what do you think are the sectors and social schemes that need particular emphasis in the second fiscal stimulus if and when it happens?

Shaurya Doval: I don’t know when the second stimulus can come but I think it need not be one or two financial stimuli. It needs to be as many stimuli as needed until the economy is back to being healthy and fully operational to its normal levels of activity. If this pandemic continues to disrupt the levels of economic activity for health or other reasons, then the government must continue to infuse a proportionate level of economic support so that whatever is disrupted, can be partially made up by government support.

Praket Arya: And it may not even be a cash stimulus because that would not be very great for the financial health of the economy?

Shaurya Doval: No, it can be a combination of stimuli. The government has all the instruments available to it to provide for this. It could even be a demand stimulus. Those are the instrumentalities, but philosophically the answer to the question is that there is no red line that the government should draw and this is what the government has been doing. In the first support package, the Finance Minister stated that this is an evolving situation and our reaction will continue to be proportionate and that India will continue to do whatever it takes to support our industries to come back to normalcy. So I think that message is by and large out there.

The economy in the manufacturing and agricultural sector front has started to revive. I think where we are stressed, is in our urban centres and in the service sector. And I think whatever the government can do in the short run will be very useful in supporting these sectors to enable them to overcome this situation. Some of them have been able to build their productivity through work from home and other measures, but it may not be enough. Government support can be much more direct, whether it is to the hospitality sector or to the aviation sector etc. where it can provide the kind of financial support that these sectors need. And there is even talk of having something like an urban NREGA so that the urban workers and the urban level of economic activities that were disrupted can be managed. This will infuse confidence and help in bringing back the rural workforce to enable the level of activity in our urban sectors to come back to its normal level. I do understand that some of it might be disrupted because of health reasons because these are dense clusters and we may have health outbreaks till a vaccine is found. It is important that the Central and State Governments direct the kind of support to the sectors that need it and not try to go for a very generic response with the economy.

The earlier financial packages have been focused, giving sector by sector support depending upon their need. The success of this stands validated by the fact that once the lockdown ended, the sectors were able to come back in a significant way. So I think the government just needs to keep doing what it is doing and it just needs to get past this crisis and as a body function, not let any parameter of the Indian economy fall to a level below which the revival of that organ may be difficult. Obviously, we will have to take some cuts but we can only take those cuts up to a level where once the situation is back, the organ can go back to its normal functioning.

Praket Arya: Like my first question, if you had to make a guess, how soon can we say that the state of the Indian economy is strong?

Shaurya Doval: As I said in the start, ‘serious’ would be the state today. Nevertheless, 2021 looks very promising, with the present indicators showing revival of the sectors and a drop in unemployment numbers, which are lead indicators. Also, with the race in the world towards vaccine development, the health issues related to the pandemic are likely to be addressed. India is good at developing response systems to be able to manage public health issues, and these are all signs of a positive change. We are now in the consolidation phase. I think the first quarter of the next financial year will likely witness a revival. And from some time in the middle of next year we should be back on our economic trajectory. Nothing really has been disrupted as our factories are there and so are our people. In a convoluted manner, the pandemic has allowed us to become more focused on the economy, to realise our infirmities and to look into any strategic mistakes that we may have made and apply correctives now. I think the Prime Minister’s rallying cry of Atmanirbhar Bharat should be the focus of our economic thinkers, our policymakers, our institutions, and our industries. We must be able to get import substitution not only to cater to our demand but to also the world’s demand. We must convert this crisis into an advantage. By next year we should, most definitely, be on course.

Shaurya Doval is Member, Board of Governors, India Foundation. He is an Investment Banker with over two decades of experience in New York, London and Singapore, working with firms like Morgan Stanley and GE Capital. An alumnus of Hindu College, Mr Doval has an MBA from Chicago Booth and London Business School. He is also a qualified Chartered Accountant.

Praket Arya is an economist by education. He is an alumnus of The University of Edinburgh, Scotland, and St. Xavier’s College, Mumbai.

  1. Huang,Yanzhong. “U.S. Dependence on Pharmaceutical Products from China.” Asia Unbound, Council on Foreign Relations, 2019. https://www.cfr.org/blog/us-dependence-pharmaceutical-products-china
  2. FE Online, “PM Modi Launches Financing Facility of Rs 1 Lakh Crore Under Agriculture Infrastructure Fund.” Financial Express, 2020.
    https://www.financialexpress.com/economy/pm-modi-launches-financing-facility-of-rs-1-lakh-crore-under-agriculture-infrastructure-fund/2049574/
  3. Mosoti, Viktor and Ambra Gobena. “International Trade Rules and the Agriculture Sector: Selected Implementation Issues.” FAO Legislative Study, 2007.
    http://www.fao.org/3/A1477E/a1477e.pdf
  4. WION Web Team. “Weeks After Galwan Clashes, Envoy Sun Weidong Says China Not a Threat to India.” WION, 2020.
    https://www.wionews.com/india-news/weeks-after-galwan-clashes-envoy-sun-weidong-says-china-not-a-threat-to-india-317255
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