Raghuram Rajan (University of Chicago Professor) – India’s Economy (Oct 2019)


Chapters

00:00:09 India's Economy: How Did We Get Here?
00:06:00 Indian Economic Growth, Fiscal, and Debt Challenges
00:14:15 Understanding India's Fiscal Challenges: Rising Debt, Contingent Liabilities, and Falling
00:16:50 Economic Reforms in India: A History and Analysis
00:27:10 Reforms and Challenges in India's Economy
00:29:40 Reforms and Challenges in India's Financial Sector
00:34:32 India's Financial Sector: Challenges and Opportunities
00:39:39 Economic Reforms in India: Successes, Challenges, and Shortcomings
00:47:50 Challenges in India's Power and Banking Sectors
00:51:20 India's Economic Reforms and Challenges: A Review
01:02:44 Indian Economic Slowdown: Causes and Consequences
01:07:22 India's Economic Malaise: Diagnosis and Explanation
01:15:43 India's Banking Sector: Recognizing, Resolving, and Recapitalizing St
01:19:44 Challenges and Bottlenecks in the Indian Financial System
01:25:22 Assessing Modi Government Policies
01:31:01 Post-Global Financial Crisis Assessment of India's Economy
01:37:34 Assessing India's Economic Policies: A Discussion
01:39:37 Economic Impacts of Demonetization in India
01:42:41 Impact of Demonetization and Corporate Tax Cuts
01:44:50 Political Implications of India's Demonetization and GST
01:50:18 Political Welfarism and India's Fiscal Future
01:52:53 Political Capital and Coherence in Economic Reforms

Abstract

Navigating the Economic Challenges and Opportunities of India: A Comprehensive Analysis

This comprehensive analysis integrates expert perspectives from economists Raghuram Rajan and Arvind Subramanian, along with an assessment of the Modi government’s policies, to delve into India’s economic landscape. The article scrutinizes critical obstacles faced by India’s economy, including substantial growth slowdown, fiscal deficit persistence, rising debt levels, and distressed sectors. The impact of demonetization and the execution of the Goods and Services Tax (GST) are evaluated. Despite these challenges, positive advancements have been witnessed in fields like direct benefit transfers and healthcare reforms. The article presents a balanced perspective, recognizing both successes and persisting issues in industries ranging from banking and finance to agriculture, power, and manufacturing.

1. Economic Slowdown and Fiscal Challenges:

India has seen a notable shift in its economic growth, transitioning from a consistent 7% over the past 25 years to a significantly lower rate in recent times. Consumption, which had been relatively robust, shows signs of decline. Since the global financial crisis, investment has been on a downward slope. Exports have not significantly contributed to growth, lagging behind GDP growth. India’s fiscal deficit stands officially at 7%, but this figure masks larger issues, including optimistic revenue projections and the impact of corporate tax cuts. Additionally, off-balance sheet borrowing, like that of the Food Corporation of India, adds to the fiscal deficit but is not accounted for in official figures.

The roots of these problems can be traced back to the absence of significant economic reforms since 2004, which has hindered economic expansion. The reforms of the early 1990s and those under the Vajpayee government spurred growth, but the momentum wasn’t capitalized upon after the Vajpayee government’s loss in the 2004 election. The subsequent Congress-led UPA government focused on populist policies and expenditures at the expense of growth-enhancing reforms, leading to high levels of inflation and fiscal deficits. Supply constraints, land acquisition challenges, and banker risk aversion further contributed to the downturn.

To correct course, the Congress government initiated fiscal consolidation to address macro stability concerns, with the RBI playing a role in reducing inflation. The transition from UPA 2 to Modi 1 marked a shift towards macro stability and economic reforms. However, stressed balance sheets in the banking sector, only fully recognized following the asset quality review in 2015-2016, have been a significant bottleneck. This issue, initially involving banks, has now expanded to include non-bank finance companies and real estate firms.

Effective resolution and recapitalization of banks are critical. This involves recognizing bad loans, cleaning up company balance sheets, and recapitalizing banks to strengthen their financial position. Enhanced regulation and reforms, particularly in public sector banks, are necessary to prevent future problems.

2. Banking and Financial Sector Reforms:

Public sector banks are burdened with increasing bad loans, highlighting the need for governance reforms and stronger regulatory oversight. The implementation of the Insolvency and Bankruptcy Act and the Asset Quality Review has brought the extent of bad loans to light but has also faced challenges.

Public sector banks have been plagued by stalled projects and increasing bad loans. Often, these banks have concealed or postponed recognizing these loans to maintain short-term profitability. A common practice has been ‘evergreening,’ where banks extend new loans to struggling projects instead of restructuring them. The RBI’s Asset Quality Review forced banks to acknowledge their bad loans, leading to a surge in NPAs and encouraging banks to address these loans. Recapitalization initiatives were also launched to provide banks with capital for new lending. The Insolvency and Bankruptcy Act was introduced to address difficulties in recovering money from borrowers. Initially, it drove borrowers to repay their loans, but later, some found ways to bypass the law, and the involvement of the judiciary made the process more protracted and expensive.

Despite various reforms undertaken by the RBI, such as expanding branching and licensing opportunities and enhancing retail electronic payments like UPI, addressing bad loans and strengthening the financial sector remain significant challenges.

3. Demonetization and GST: Politically Successful but Economically Flawed:

The implementation of demonetization in 2018 led to a cash shortage and adversely affected the informal sector, causing GDP loss and job cuts. GST, while conceptually sound, suffered from poor implementation and market uncertainties. Demonetization, poorly planned and executed, led to short-term economic pain without achieving its aims of reducing black money or increasing electronic payments. It caused a growth setback of 2-3% of GDP for a few quarters or annually and resulted in job losses in cash-dependent sectors, particularly real estate. GST, though a well-conceived concept, faced disruptions due to unprepared computer systems and frequent changes in rates.

4. Agriculture and Power Sector Challenges:

Agriculture in India faces low productivity, agricultural stress, and periodic loan waivers that primarily benefit wealthier farmers. Investment in agricultural extension, seed provision, and technology upgradation is essential. Reducing fragmentation of agricultural holdings and eliminating middlemen are also crucial steps to improve farmers’ income. The power sector, despite having the potential to meet the population’s needs, struggles with inefficient distribution companies leading to unreliable power supply.

5. Manufacturing and Trade:

The slow growth in exports and manufacturing, hindered by infrastructure issues and a lack of skilled manpower, is a concern. Fluctuating tariffs and regulatory changes have deterred foreign investment and hindered integration into global supply chains.

6. Successes and Critiques of the Modi Government:

The Modi government has achieved notable successes in direct benefit transfers, healthcare, and financial inclusion. However, critiques focus on the lack of significant economic reforms and a reliance on populist policies. Investment has been low since UPA II, and inflation has been brought down from double-digit levels to low levels under the Modi government. The Modi government’s reforms have been mixed, failing to revive investment, and many projects initiated in the past are now highly stressed with high debt levels, leading to an increase in stalled projects.

Public sector banks, post-financial crisis, expanded lending but later faced trouble with loans and reduced lending. Non-bank financial companies also increased lending but faced issues due to developer loans and the collapse of ILFS in 2018. Legacy issues and demonetization in 2018 caused disruptions in the informal sector, especially in real estate. Rajan praises the government’s initiatives like Jan Dhan, Aadhaar, mobile phones, and cooking gas connections for improving people’s lives but notes concerns about the functionality of toilets built under the Swachh Bharat program.

Discrepancies in various economic indicators, including GDP, employment, and fiscal data, have led to questions of credibility and impacted the urgency for reforms in areas such as the banking system. The speaker expresses skepticism about the effectiveness of governance reforms in public sector banks and introduces the ‘4C problem,’ referring to the hyperactive nature of investigative institutions in India. This leads to decision-making paralysis in public sector agencies, including banks.

India has a cognitive benchmark of high growth based on its performance in the 2000s, but there is a need for a more realistic growth trajectory. Understanding whether the exceptional growth of the 2000s was normal or an aberration has implications for policymaking and expectations. The speaker questions the coherence of the Modi government’s broader economic vision and points out inconsistencies in government policies, such as the simultaneous push for exports and increased tariffs.

7. Land Acquisition Reform and Coherence

in India’s Policies:

Land acquisition reform is politically sensitive in India, with the Modi government’s attempt at reforming the Land Acquisition Act facing political backlash. The current Act makes land acquisition for infrastructure projects difficult, and political influence often prevents landowners from receiving the highest possible price for their land. Solutions include sharing land revenues and developing land to give people back a portion of the developed land. The government needs to invest political capital to find solutions that balance the interests of developers and the poor.

There is a lack of coherence and vision in India’s economic policies, leading to inconsistent and impulsive decision-making. The government’s handling of agriculture policy and interventions in trade policy without a clear rationale discourages businesses from investing and expanding. Corporate tax reform was driven by political pressure and a need to show action, having been rejected in the past due to political considerations.



India’s economic policies lack coherence and vision, leading to inconsistent and impulsive decision-making. The government needs to invest political capital in finding solutions to land acquisition reform and other challenges, while also ensuring a coherent and strategic approach to economic policy.


Notes by: crash_function