Did Covid disentangle India’s economic advances after the reforms?

Then came the world’s fastest wave of coronavirus, which left hospitals overwhelmed, pushing back dying smoke and the crematorium darkening the city sky.

Years, and perhaps decades, of progress have unfolded in a matter of months, as many Indians who had escaped poverty face grim employment prospects and accumulate heavy debts to get themselves out. and their loved ones, of the pandemic. The devastation has highlighted how poor healthcare and infrastructure – often overlooked in the post-liberalization boom – is holding back the nation and its people.

More than 200 million people have returned to earning less than the minimum wage, or $ 5 a day, according to calculations by Azim Premji University in Bangalore. The middle class, the engine of the consumer economy, shrank by 32 million in 2020, according to the Pew Research Institute. This means that India will regress on vital fronts just as its global importance increases.

This decade India is expected to become the most populous nation in the world, taking this mantle from China, which for years has been the engine of global growth. But India’s economy faces great threats even as it is home to the kind of young working-age population that has led to long booms in other countries.

“We are talking about a decade of lost opportunities and setbacks,” said Arvind Subramanian, a researcher at Brown University and former chief economic adviser to Prime Minister Narendra Modi’s administration. economic policy is over, you won’t be anywhere near what we saw in the boom years. A lot has to happen to get back to the 7%, 8% growth that we desperately need. “

Even before the pandemic, cracks had started to appear. Modi came to power in 2014 amid voter frustration over scandals and political paralysis that had contributed to bad loans from banks and threatened to derail Indian growth. Yet the economy has faced other hurdles in recent years, including the Modi’s cash ban in 2016, which upended the informal sector, and a hastily implemented new tax system.

Modi had pledged to turn India into a $ 5,000 billion economy by 2025, but the pandemic is expected to postpone that for years. The International Monetary Fund expects India to grow 6.9% in the next fiscal year starting in April 2022, below the more than 8% needed in the long run to meet Modi’s ambitious target. and create jobs for the millions of people entering the labor market.

Jim O’Neill, chairman of Chatham House in London – who coined the term BRIC to describe the emerging markets of Brazil, Russia, India and China while being a leading economist at Goldman Sachs Group Inc. – is cautious about India these days, in large part because the government has failed to make many of the long-term structural changes it believes are necessary for it to reach its full potential. .

While still at Goldman Sachs, O’Neill says he presented a document to Modi in 2013, before becoming Prime Minister, recommending 10 things that would make India’s economy 40 times bigger than ‘by 2050. The list included substantial improvements in some areas. such as infrastructure, education, the introduction of better public-private partnerships in areas such as health care, further liberalization of financial markets and work on environmental issues. Modi did not fully pursue these ideas, O’Neill said.

“India has these fantastic demographics, which should have given it the potential to grow much more sharply, perhaps at the same type of double-digit rate that China has known for a long time,” O’Neill said. to suffocate quite often, as we have unfortunately seen a few times during the Covid pandemic, “he said.

A government spokesperson did not respond to the request for comment, but the Modi administration has recognized in recent weeks the need for longer-term changes. “If we are looking to bring growth – from 8 to 10 percent – to a sustainable path, we need to think not only of an ongoing recovery,” Sanjeev Sanyal, the government’s chief economic adviser, said at the India World Forum on June 30th. Structural changes are needed and to this end the government is constantly opening up new sectors of the economy, he said.

Once the fastest growing major economy, India experienced its sharpest contraction on record last year – down more than 7% – after a tight national lockdown. Just as the economy started to show some momentum, another wave of infections hit the country. This year, the central bank expects India to grow 9.5%, well below the double-digit rebound many previously expected. This estimate is strongly reinforced by the comparison with the sharp contraction of the previous year, and many economists expect it to be even smaller.

Foreign direct investment jumped 19% last year, but even that remains lower as a percentage of GDP compared to countries like Singapore and Vietnam. And much of the foreign investment has gone to the digital platforms of billionaire Mukesh Ambani.

Some pundits, including former central bank chief Duvvuri Subbarao, have warned of a K-shaped recovery for India, where the rich get richer and the poor get poorer. “Growing inequalities are not just a moral issue,” Subbarao said. “They can erode consumption and hurt our long-term growth prospects.”

Asia’s two richest men – Ambani and port tycoon Gautam Adani – are Indians, and their net worth has risen as stocks have rallied thanks to cheap global liquidity and cutbacks. taxes for businesses even as economic growth collapsed. Meanwhile, India’s aggregate wealth – or the value of financial and real assets held by households minus debt – fell $ 594 billion, or 4.4%, in 2020, according to Credit Suisse Group AG .

Thirty years ago India was forced to rebuild its economy. A huge trade deficit and plummeting foreign exchange reserves necessitated a loan from the International Monetary Fund. On July 24, 1991, then Finance Minister Manmohan Singh announced important measures to reduce tariffs and encourage trade, essentially opening the economy to the outside world.

In the boom that followed liberalization, growth surpassed 8%. Tech giants like Infosys have been born and start-ups worth billions are now springing up like mushrooms in Bangalore. A new middle class emerged that watched Netflix and made online purchases on Amazon. In the south, the Wistron plant obtained special economic advantages for assembling Apple iPhones. India has become the world’s largest supplier of generic drugs and the Serum Institute of India has become the world’s largest vaccine manufacturer. An Indian stock exchange now manages the largest number of derivative contracts in the world.

Still, there were signs that India was not reaching its full potential. The average GDP growth of 6.2% over 30 years was lower than the 9.2% of China and even lower than the 6.7% of Vietnam. For years, Indians have lived shorter lives and now earn less on average than people in smaller countries like Bangladesh.

Vast inequalities have developed. Researchers found that the wealthiest people in urban areas and upper castes were taller in India, a sign of development favoring already advantaged groups. The percentage of women entering the workforce increased from 30.3% in 1991 to around 21% in 2019, according to data from the International Labor Organization. The Indian government was spending less than 2% of GDP on health care before the pandemic.

“If the health system had not been so neglected for so long, India would have been prepared to face the Covid-19 crisis,” said Jean Dreze, Indian economist of Belgian origin and senior lecturer at the University of Delhi. “If India had built a more robust social security system, the humanitarian toll of the crisis would not have been so dire.”

Unlike the old guard of 1991, Modi turned the economy inward, focusing on self-sufficiency and local businesses. Although he has championed free trade in global forums, he has increased tariffs on products, especially electronics and medical devices, in part reflecting global trends.

Some of these decisions came back to haunt India when citizens struggled to import vital products like oxygen concentrators during the pandemic. Senior scientists have written to Modi, asking him to reverse protectionist tariffs imposed on key elements needed to study the coronavirus and its variants, including the delta, which now threatens the world.

After pledging to contribute to global immunization programs, the Modi government has slowed exports of Covid-19 vaccines, derailing the immunization program from an initiative backed by the World Health Organization.

“India’s ambition to be seen as a major player on the world stage has taken a huge hit as the pandemic exposed weaknesses in its government’s capacity and competence,” Eswar said. Prasad, professor of trade policy at Cornell University.

The key question for global investors now is whether India will age before Indians get rich. Netflix relies on India for its next 100 million customers. Bezos is pouring billions of dollars – and even defying Indian courts – to fight India’s richest man, Ambani, for a slice of the only open retail market with more than a billion people. “The pandemic set us back tremendously, and we were already on a slowdown in growth when that happened,” said Indira Rajaraman, economist and former board member of the Reserve Bank of India. “In the future, it all depends on how intelligently we see how we come out of this slump.

This story was posted from an agency feed with no text editing. Only the title has been changed.

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