Special Report: It's time to give India's wealth creators a chance
If the worst contraction in recent history, the biggest reduction in GDP among peers cannot trigger a change that leans towards entrepreneurs, nothing ever will.
The contraction in India's gross domestic product (GDP) was predicted. A big fall, in tune with the rest of the world's economies, was expected. But that almost a quarter of the GDP would be shaved off in the first quarter of financial year 2021 is a shock. The exodus of migrant labour had brought us the images months ago. The data released on August 31 is a confirmation of those images and give a numerical precision of the economic woes - India's GDP has contracted by 23.9 per cent between April and June 2020. In other words, coronavirus and the resultant lockdowns has eaten Rs8.45 trillion worth of economic activity in the first three months of the financial year.
This is an economic devastation. But behind every statistic are millions of people below. With jobs gone, and in the foreseeable future no sign of them returning, there is economic agony ahead. The lockdowns may have saved lives in the short-term. But in the medium- to long-term, they have destroyed the economy. Unless the economy becomes the government's first and foremost task, through actions and not rhetoric, India will not recover. The Rs 20 trillion package the Union government announced in mid-May seems woefully inadequate.
On intent, the government has no shortages. On slogans, it has a surplus. But on execution, its hands are tied by two iron chains. First, a per capita income of $2,100. This gives it no room for economic manoeuvring, unlike say the UK or Germany that sit on per capita incomes of $42,300 and $46,259 and can deliver economic sustenance to citizens. Second, a broken healthcare system, the results of which are visible today. Crises are opportunities for investments in policy choices, they cannot create hospitals overnight. At best, these can be triggers for greater investment and catalyst for policies that invite private capital into the sector.
With this fall, the Indian economy not only joins but leads the global contraction underway. Among all trillion-dollar economies, only one - China - has shown a rise in GDP. Every other country, from the UK and the US to Japan and South Korea, has contracted. The biggest fall, after India's, has been in the UK (a quarter on quarter contraction of 20.4 per cent and a year on year fall of 21.7 per cent). As a trend, the West has fallen more than the East, with five countries - the UK, France, Italy, Canada and Germany - contracting by double digits over their 2019 quarter. In the East, only India and Japan (a fall of 10 per cent), are in the double-digit category. This fall will impact annual IMF projections from the current 4.5 per cent contraction.
If even after this economic calamity, the governments (union and states) do not clear the hurdles that stand before doing business, India's last decade from which a demographic dividend can be extracted will be over. Quarter to quarter, a decade looks long enough to let linger the economic status quo. But it will end faster than we can imagine. And before we know it, the opportunity would have passed India by.
Going forward, on the economic side there is only one policy India needs to follow: increases the per capita income to $10,000 by 2030. The time for incremental growth is over. India needs to draft policies that have to potential to deliver exponential growth. That growth needs capital, financial savings, and a larger number of Indians paying taxes. It also requires that the incremental capital output ratio, that has been ranging between 3.5 and 4.5 for the past three decades, needs to match peers that are attracting investments from across the globe - Vietnam (5.0), Thailand (8.1) and South Korea (9.9), if not the double digits of Mexico (11.2), South Africa (11.5) or Brazil (12.3).
While technology will do its bit to strengthen this ratio, policy will have to play an enabling role. The one advantage India has is the ability to produce public goods around technology, of which the JAM (the linkage of Jandhan account, Aadhaar, and mobile phone) trinity is one, the Pradhan Mantri Jan Arogya Yojana another. Coming up are several other innovations around finance and healthcare. These need to be leveraged, and expanded to serve the biggest value creators of India - the entrepreneurs. The entire compliance network, for instance, needs to be digitised and become faceless.
If the worst contraction in recent history, the biggest reduction in GDP among peers, the largest potential fallout in terms of unemployment cannot trigger a change that leans towards entrepreneurs, nothing ever will. The crisis of contraction will turn out to be only the tip of the iceberg if immediate and far-reaching policy changes that encourage entrepreneurs to take risks and create jobs are not delivered. This continued obsession with wealth redistribution and the underlying timidity if not outright aversion to wealth creation will be the greatest undoing of India. It's time to give India's wealth creators a chance.
Gautam Chikermane is Vice President at ORF.
-This article was first published on ORF
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