Introduction:
The event is hosted by the Center for Contemporary South Asia at the Watson Institute, welcoming a crowd both physically present and online.

Speakers:
Arvind Subramanian, Mira and Vikram Gandhi Fellow at CCSA and Senior Fellow at the Watson Institute, will discuss India’s economic situation. Raghu, former colleague of Subramanian in government, is expected to join online.

Subramanian’s Opening Remarks:
Subramanian expresses gratitude for the introduction and anticipation for the talk, comments, and discussion. The work presented is a collaboration with Josh Feldman and has benefited from discussions with various individuals.

Title and Context:
The title “Is the Indian Economy Back?” reflects a topical inquiry into India’s economic status. Two years ago, Raghuram Rajan raised concerns about India’s economy, and Subramanian and Feldman described it as being in the intensive care unit (ICU) before the COVID-19 pandemic.

Main Question:
The central question is whether fundamental changes have occurred in the Indian economy, considering the apparent improvement since the ICU analogy.

Macroeconomic Situation:
Indian markets are optimistic, with the stock market booming and foreign direct investment (FDI) surging. This optimism is due to various factors, including a global boom, fiscal revenue buoyancy, and the possibility that the worst of COVID is over. There is also a sense that the government has an active reform agenda, including privatization, monetization of assets, production subsidies, and labor market reforms.

Infrastructure Development:
The government has made significant progress in building hardware, including physical infrastructure such as roads, railways, and digital infrastructure. The Unified Payment Interface (UPI), a digital non-proprietary platform, has seen rapid growth in usage. The government is also implementing a new welfarism policy, providing essential private goods and services and making direct transfers to beneficiaries.

New Welfarism Policy:
The government’s new welfarism policy has been a key factor in its political success. This policy involves providing tangible benefits such as cooking gas, toilets, bank accounts, rural housing, electricity, and direct transfers to beneficiaries. The government plans to expand this policy by providing piped water to every household.

Banking and Corporate Sector:
The banking and corporate sector, which has been weak for almost a decade, is showing signs of improvement. The government is addressing the twin balance sheet problem, which refers to the high levels of debt in the corporate and banking sectors.

Consumer Confidence:
Despite the optimism in markets, consumer confidence in India is at an all-time low, according to the RBI Consumer Confidence Survey.

Background:
India has experienced a significant slowdown in economic growth in the past decade, leading to widespread discontent and political tensions. This slowdown is not solely due to the current government’s policies but reflects a broader pattern of structural transformation challenges.

Economic Discontent:
Surveys indicate that a majority of Indians perceive a deterioration in their economic situation. Discontent is manifested in political tensions, such as disputes over fiscal resources and the resurgence of reservation politics. Job losses, particularly in agriculture, and increasing regional protectionism are also contributing factors.

Economic Dynamism:
India’s economic growth rate has declined since 2011, accompanied by a collapse in asset growth and a secular decline in employment. Deindustrialization has been occurring, with the share of manufacturing in the workforce falling significantly. Progress in child health has stalled, with indicators like stunting and anemia showing no improvement.

COVID-19 Impact:
The COVID-19 pandemic has compounded India’s economic challenges. High infection rates and excess deaths have occurred, along with significant economic devastation. Per capita consumption and per capita GDP have declined, likely leading to increased poverty. Ruralization of employment has occurred, and human capital formation has been set back due to school closures.

Causes of the Economic Slowdown:
The global slowdown following the 2008 financial crisis contributed to India’s economic downturn. India experienced a more significant slowdown than other countries, partly due to a slowdown in the pace of reforms. Macro mismanagement, corruption, and anti-investor actions by the previous government (UPA) also played a role. The current government’s policies, including demonetization, GST implementation, and centralization of decision-making, have also contributed to the slowdown. The twin balance sheet challenge from the excesses of the 2000s has remained unaddressed for a decade.

Software of Policymaking:
Centralization is a deficiency, but there’s a bigger issue in the government’s policymaking software. Data integrity and access have been compromised: GDP, consumption, employment, and health data have been withheld or not released. Fair decisions and perceived fairness between players have been lacking.

Twin Balance Sheet Challenge:
Many firms became indebted during the 2000s infrastructure boom. 40% of firms had debt, with 40% of total debt held by companies struggling to meet interest payments. The banking system held bad assets, as it financed the boom primarily through public sector banks. Both firms and banks were weak, leading to a lack of credit and investment for 10 years.

Stigmatized Capitalism in India:
India’s business landscape is characterized by two dominant business groups that have a significant influence on the economy. The government’s trust in the states, inclusive decision-making, rule of law, and tax enforcement need improvement. India introduced a bankruptcy code in 2016, but it now faces challenges and inconsistencies. The tax exemption limits for personal income tax have been raised, resulting in fewer taxpayers.

Assessment of Economic Situation:
The economy has improved but faces significant structural challenges, including unemployment, export decline, and investment shortage. The government aims to revive exports and investment through various strategies.

Atmanirbharta Strategy:
The government’s self-reliance strategy focuses on industrial policy, protectionism, and avoiding international trade agreements. Performance-linked production subsidies are provided to firms in specific sectors. India has increased trade barriers and opted out of key regional trade agreements.

Industrial Policy Concerns:
The new industrial policy resembles the old license raj, with arbitrary targets and monitoring challenges. The focus on tech-intensive sectors may not address the employment and labor-intensive sector issues. Exit strategies for subsidies and protectionism are unclear.

Protectionism and Trade Strategy:
India has increased tariffs on many products, affecting a significant portion of its imports. India’s labor-intensive exports have underperformed compared to its labor endowment. The protectionist approach may not help boost labor-intensive exports. Staying out of trade agreements limits access to dynamic markets and supply chains.

Conclusion:
The government’s export strategy, including protectionism and industrial policy, may not effectively address the country’s economic challenges. India’s exclusion from dynamic trade agreements and supply chains could hinder its ability to capture export opportunities.

Government’s Actions:
The government has been actively addressing the twin balance sheet challenge by creating a bad bank. It has taken steps to improve the investment climate, such as reversing the horrendous retroactive taxation enacted under the previous government. The government has also taken actions to provide breathing space in the telecom sector.

Promoting National Champions:
A distinctive part of the investment strategy is promoting national champions, which is a variant of stigmatized capitalism.

Challenges to Reviving Private Investment:
Reviving private investment will be difficult due to declining new project announcements, low capacity utilization, and the twin balance sheet problem.

Twin Balance Sheet Problem:
Some progress has been made in resolving bad assets on the firm side, but weak indebted firms still account for one-third of debt. Profits are not high enough to sustain investment. The small and medium enterprise (SME) sector has been devastated by COVID-19, and its impact on indebtedness and the banking system is yet to be seen.

Non-Performing Assets:
Non-performing assets on the bank side have come down but are still at 10%. This figure is likely to increase when the SME issue drops.

Indian Banking Sector:
The supply of credit and willingness of investors to invest in India have not significantly improved post-COVID. Public sector banks’ profits have increased but are still below pre-COVID levels. Non-performing assets (NPAs) have decreased, but the SME sector is still struggling with high NPAs. The effectiveness of the government’s bad bank initiative remains uncertain.

Two-Way Stigmatized Capitalism in India:
Private capital has flourished due to its proximity to the government and favorable treatment. Indian IT companies were seen as globally competitive and had good corporate governance. The government is promoting a few large companies, called “chai balls” and “zaibatsu,” to become national champions. This strategy aims to achieve efficiency, scale, and spillover benefits to the wider economy. However, there is concern about the concentration of power and market dominance of these large companies. The recent increase in valuation of these companies raises questions about their fundamental efficiency or regulatory favoritism.

National Champion Strategy:
Jio’s success in revolutionizing the telecommunications sector and democratizing digital access is recognized. However, most of the national champions are in non-tradable and regulated sectors, raising concerns about their global competitiveness and efficiency. The potential benefits of spillovers from these companies must be balanced against the potential negative impact on competition.

Impact on Competition:
There are examples of regulatory favors granted to national champions that have harmed their competitors. Reducing the tariff on man-made fibers, which benefits one of the national champions, would help boost labor-intensive garment exports from India. The adverse impact of stigmatized capitalism on competition is a cause for concern.

Long-Term View on India:
India has made significant progress in delivering hardware infrastructure, but there is a need to focus on software infrastructure, such as education, healthcare, and governance.

The Significance of Hardware and Software for Economic Development:
Arvind Subramanian emphasizes the importance of both hardware (physical infrastructure) and software (institutions, governance) for long-term economic development. India has made significant progress in hardware development, such as road construction, infrastructure, and welfare programs. However, software aspects, including rule of law, inclusion, and trust, need improvement for sustained economic growth.

China-India Comparison:
Subramanian presents a China-India comparison chart showing a long-term relationship between institutions and economic development. China has outperformed India in economic development due to its strong political software, while India has underperformed despite its political openness. Xi Jinping’s policies in China have led to a decline in entrepreneurial energy and economic openness, pushing China southward in terms of development.

The Imperative for India’s Structural Transformation:
India needs to address its defective software to achieve sustainable economic growth. The country faces challenges in rule of law, inclusion, trust, and policy consistency, which hinder structural transformation. The future of the Indian economy depends on whether these software issues can be remedied.

Conclusion:
In the short run, there are positive indicators for the Indian economy. However, in the long run, concerns remain about the country’s ability to sustain economic growth without addressing its software deficiencies.

Background of the Speaker:
The speaker is a renowned economist with extensive experience in banking, corporate finance, and economic development. He has held various positions, including Chief Economist at the International Monetary Fund and Vice Chairman of the Bank for International Settlements.

India’s Economic Progress:
India has made progress in certain areas, referred to as “hardware” by the speaker, but there are significant challenges in other areas, or the “software,” that hinder its growth potential. The speaker and other economists, including Arvind and Josh, express pessimism about India’s future economic progress due to the current policy regime.

Nitpicking and Criticisms:
The speaker acknowledges the need to examine the strengths of the government’s policies but cautions against taking them at face value. The speaker raises concerns about the buoyancy of the Indian stock market, suggesting that it may not fully reflect the underlying economic strength. Factors such as emerging market fund money fleeing China, easy monetary policy, and abundant liquidity may be contributing to the stock market’s performance rather than genuine growth prospects.

Concerns about Specific Sectors and Investments:
The speaker highlights the stagnation in passenger car sales for 10 years and Ford’s exit from India as indicators of limited growth expectations. He questions the extent to which unicorns and tech companies, while successful, truly benefit from Indian infrastructure and funding. The speaker emphasizes the importance of distinguishing between greenfield FDI, which creates jobs and real investment, and FDI involving foreign entities buying stakes in domestic firms. The privatization of Air India is seen as a positive step, but the speaker stresses the need for more privatization efforts.

Infrastructure and Private Sector Involvement:
While road building is visible, the speaker raises questions about the extent of private sector involvement and funding in infrastructure projects. He emphasizes the importance of relying less on a cash-strapped government for infrastructure development and encouraging private sector participation.

Conclusion:
The speaker concludes by expressing concern about India’s economic progress given the current policy regime and highlights the need to address the software issues in order to achieve sustainable growth.

Welfare System Breakdown During Pandemic:
The welfare system experienced a total breakdown during the pandemic. Urban workers migrated back to rural areas, relying on NREGA and the right to food, both established by the UPA government. Despite transfers made by the government, households struggled during the pandemic. Lower and middle-income households faced severe difficulties, and food scarcity became an issue.

UPA and Current Government Comparison:
The last serious reforming government on the growth side was Prime Minister Atal Bihari Vajpayee’s NDA. Both the UPA and the current government focused more on redistribution than growth. While redistribution is necessary in a poor country like India, growth is vital for surplus creation and redistribution. The decline in numbers is recent and pushing it back to the UPA is not entirely accurate. The UPA had acts of omission by not pushing forward the reform agenda on the growth side. The current government continued the UPA’s distribution-side reform agenda and added acts of commission that reduced growth potential.

Hardware and Software:
The use of hardware and software analogies is helpful for conveying points. However, it’s important to clearly define what is meant by hardware and software in this context. Hardware seems to refer to government programs like Jan Dhan Yojana or road building. Frameworks, like the Aadhaar stack, are distinct from hardware and play a crucial role in the effectiveness of government programs.

Hardware:
* Hard infrastructure, including roads, ports, airports, houses, and logistics, is essential for substantial fixed asset investment and growth.
* Progress has been made in road construction, but more needs to be done to match the pace of China’s infrastructure development.
* The Mumbai-Ahmedabad High Speed Link project, a government priority, has faced delays and is now expected to be completed in October 2028.
* Land acquisition and other challenges have hindered the progress of this project, highlighting difficulties in hardware development.

Soft Infrastructure:
* Soft infrastructure includes ease of doing business, tax structure, subsidy structure, tariff structure, and administration.
* Business-related factors such as the number of inspectors visiting businesses and the efficiency of the court and bankruptcy systems are important for business growth.
* Soft infrastructure also encompasses capability building, schools, colleges, health facilities, and financial institutions.
* This infrastructure is crucial for developing a skilled workforce and providing essential services to the population.

Conclusion:
* While hardware is important for economic growth, India needs to focus more on developing soft infrastructure to improve the business environment and provide necessary services to its citizens.

Economic Vision and Software:
India’s economic vision seems contradictory, with policies such as import tariffs hindering export-led growth. The government’s treatment of foreign investors, like Jeff Bezos, could be improved to attract investment. India’s main export, services, requires a framework for data privacy and security to gain trust from other countries.

Domestic Demand and Government Support:
Fixed asset investment is hindered by the lack of clear land acquisition policies. Industrial investment faces challenges due to low capacity utilization. The impoverishment caused by the pandemic limits consumption by the middle class and lower middle class. Reliance on government spending is limited by high debt-to-GDP ratio and revenue sharing issues with states.

Vision and Operating System:
The ruling establishment lacks a clear and consistent economic vision, focusing instead on a political and social vision. The creaky operating system is ineffective in checking the downsides of a determined leadership.

Emerging Concerns:
Authoritarianism: Centralization of power and use of central agencies to control critics and opponents. Cronyism: Favoritism towards particular individuals or groups in business and politics. Majoritarianism: The promotion of the interests of a dominant religious group at the expense of others. Pegasus Incident: Alleged use of software to spy on prominent opposition members, compromising national security.

Authoritarianism:
Sound fearless advice and receptivity to criticism are crucial for developing effective policies. An echo chamber of sycophants around a leader prevents course correction and avoids mistaken policies. Free speech is essential for generating ideas and nurturing innovation, which are critical for future success.

Cronyism:
Electoral bond scheme lacks transparency, encouraging corruption and cronyism. Unknown business donors can give to political parties without public knowledge, leading to potential quid pro quos. Cronyist economy fosters tariffs and subsidies, hindering economic growth.

Majoritarianism:
Despite economic underperformance, the government’s popularity remains high due to actions like building the Ram Mandir and suspending Article 370 in Kashmir. Majoritarianism trumps economic concerns, leading to crowd-pleasing policies. Trampling on the rights of minorities can exacerbate divisions and hinder national security and economic success. Divisive policies exclude a significant portion of the population, hindering growth and external engagement.

Economic Impact of Majoritarianism:
Majoritarianism creates instability and conflict, which are detrimental to long-run economic development. Negative perception in international media and among policymakers can hinder dialogue and engagement, affecting economic relations.

Long-Term Economic Consequences of Majoritarian Politics:
Majoritarian agendas and divisive politics negatively affect long-run economic development. This impact occurs through various mechanisms, including the allocation of public goods, deterring investment, and social instability. The timing of these economic costs is uncertain, but they are inevitable in the long term. Unintended consequences and backlashes can arise from majoritarian policies.

Short-Term Economic Impact of Majoritarianism:
There is uncertainty regarding the immediate economic consequences of majoritarianism. Some argue that majoritarian politics can provide short-term electoral benefits, potentially leading to neglect of economic performance. However, evidence suggests that majoritarian policies have not significantly influenced the distribution of essential goods and services.

New Welfarism and Majoritarian Politics:
The new welfarism, which focuses on improving the lives of the poor through initiatives like providing cooking gas, housing, toilets, and cash transfers, is distinct from majoritarianism. This new welfarism has gained popularity and has not been influenced by majoritarian politics. The question arises whether majoritarian politics and the new welfarism can coexist and whether resources will be sufficient to sustain both in the long term.

The Importance of Economic Growth:
The growth agenda becomes crucial in the context of majoritarian politics and the new welfarism. Economic growth can provide the resources to sustain the new welfarism and mitigate the negative economic consequences of majoritarianism. The impact of majoritarianism on the growth agenda and other government economic policies becomes significant.

Research Opportunities:
There is a need for research to investigate whether majoritarian politics has influenced the distribution of the new welfarism. Examining whether essential goods and services have been allocated in a majoritarian manner can provide valuable insights.

Arushi’s Critique:
Arushi believes that the government’s role in the short run cannot be ignored. She cites a PhD dissertation by a student at IIM Ahmedabad which was blocked from publication and faced pressure, alleging that it showed preferential allocation of public goods to upper caste Hindus in areas where the BJP is in power. Arushi also mentions research by Sam Asher, Paul Novosad, and Kalai indicating that Muslims are experiencing a decline in both income and education, suggesting a fall in intergenerational mobility for this group. She criticizes Indian economists for not taking a more vocal stance on political issues, particularly in light of recent statements by the former Chief Economic Advisor.

Arvind Subramanian’s Response:
Subramanian agrees that political incursions are generally undesirable. He cautions against making broad generalizations based on the thesis mentioned by Arushi, as it addresses caste divisions rather than the religious divide. He suggests that the Hindutva ideology aims to avoid intra-Hindu divisions in order to play the majoritarian-minoritarian card. Subramanian clarifies that the research by Sam Asher and others focuses on long-run mobility and that it is difficult to attribute any recent decline in Muslim mobility solely to the current government. He emphasizes the need to focus on a country-level perspective and to call out both positive and negative actions by all governments, rather than engaging in partisan comparisons. Subramanian acknowledges that there have been both positive and negative changes in terms of reforms and social welfare networks under different governments.

APA Discussion of UPA II and BJP Economic Policies:
Arvind Subramanian expressed skepticism about the Mandrega and PDS programs implemented by UPA II, but acknowledged that their success proved him wrong. Raghuram Rajan emphasized that economic policies cannot be discussed without considering the broader political and institutional context.

Cronyism and Industrial Policy:
Arvind Subramanian suggested that the return to protectionism and industrial policy may have a cronyist element but also has an independent ideological basis. Raghuram Rajan agreed that cronyism played a role, but also highlighted the ideological view that India can achieve growth through import substitution.

Educational Attainment and Welfare Policies:
A participant raised the issue of widening educational attainment gaps between Muslims and other social groups. Another participant questioned whether the new welfarism policies are at the expense of older programs like the PDS and NRGA.

Impact of Demonetization and Farm Laws:
A participant expressed concerns about the impact of demonetization and other policies on small businesses. Another participant asked whether the farm laws were substantively flawed or if the issue was procedural.

Hardware, Software, and State Governments:
A participant asked about the relationship between the hardware (institutions) and software (ideology) of economic policy in India. The participant also inquired about the influence of software thinking in institutions like the RBI and the Chief Economic Advisor’s office.

Additional Questions from the Internet:
Arushi, a participant from the internet, had several questions that were not addressed during the discussion.

Poverty Trends in India:
Fastest poverty reduction in India occurred from 2003 to 2011 due to gangbusters growth, particularly in agriculture and construction. Global agriculture prices rose during this period, boosting exports and farm employment. Infrastructure investment also contributed to job creation in construction. Between 2011 and 2018, poverty remained flat or saw a small reduction, but COVID-19 caused a significant increase.

Impact of Exchange Rates on Exports:
A competitive exchange rate is crucial for labor-intensive exports, especially for industries with thin margins. Productivity growth can reduce the importance of exchange rates, but when productivity growth is low, a competitive exchange rate is essential. An open capital account and foreign money inflows can limit the ability to maintain a competitive exchange rate. China’s export boom was aided by its relatively closed capital account for an extended period.

Institutional Rankings and Subnational Rankings:
Arvind Subramanian acknowledges the existence of institutional rankings and subnational rankings in India but expresses ambivalence about their usefulness. He cautions against potential manipulation and gaming of the system, leading to enactment of reforms that may not be fundamentally important. However, he recognizes that competitive federalism, driven by the success of some states and emulation by others, can be a powerful dynamic for positive change.

Importance of Software and Data:
Subramanian emphasizes the significance of “software,” referring to economic and political systems, and “hardware,” referring to physical infrastructure. He cites the example of overstated GDP data during his tenure as a significant influence on policy choices, highlighting the importance of accurate data for informed decision-making.

Culture of Openness and Dissenting Voices:
Subramanian advocates for a culture that encourages dissenting voices and openness, emphasizing its long-term benefits for leaders seeking advice. He expresses concern about the potential absence of such a culture and its negative impact on decision-making.

Exchange Rate Management and Capital Account Opening:
Subramanian clarifies that his difference of opinion with Raghu pertains to the degree of openness of the capital account, not the current account. He believes that the timing of capital account opening should be aligned with institutional progress, emphasizing the importance of strong institutions to manage a fully open capital account. Raghu agrees with this view, emphasizing the need for steady measures to open the capital account while ensuring that institutional progress keeps pace.