Many people seem convinced that the India is on track to our becoming a developed nation. The untrammelled bullish case is that we have shed the vulnerabilities that were obvious until 2014 when the Indian economic renaissance burst forth. In this view, a steady gross domestic product (GDP) growth of 7%+, will transform India into a developed country or Viksit Bharat. The definite signs of this right now are a low level of debt-to-GDP ratio, a low current account deficit (heading towards a surplus) a strong banking system, a well-managed budget deficit and low inflation.
According to another minority camp, to which I belong, these are glib claims. A lot of positive factors may have temporarily created a favourable situation for now, but they only serve to hide many continuing core weaknesses. Besides, the data behind some of the positives is questionable. Let’s consider each of these positives one by one:
1. Debt-GDP Ratio: While the government claims that India’s debt-to-GDP ratio is low, according to the World Bank and International Monetary Fund, India’s debt-to-GDP ratio is above 82%, among the highest ever. The ratio rose continuously from the low of 2014, hit a peak of 89% during COVID-19 and remained above 80% over the next few years. The last time the figure was above 80% was in 2004, the peak of the previous 25 years being 83% in 2003, not too far from today’s level.
2. Current Account: The current account is mainly influenced by imports, exports and financial flows (from investors and remittances). Imports are growing and are largely inelastic (crude oil, electronics, gold). Exports are not growing fast enough. Exports as a percentage of GDP was 25% in 2013, collapsed after 2015 and are now 22.8% of GDP.
According to official data, between 2014-15 and 2023-24 India’s merchandise exports grew from US$310bn (billion) in FY14-15 to US$437 in FY23-24, which is a compounded annual growth rate (CAGR) of just 3.3%. Since this is far lower than inflation, and the rupee has been weak, it shows how uncompetitive India’s exports have remained. Meanwhile, imports were up by a CAGR of 4.67%.
What saved the day was services exports which have grown by 8.92% over the same period. The core of the current account—merchandise trade—remains weak. Of course, the weakness is partly compensated by capital flows from foreign investors and remittances; but here, too, the numbers are not strong, contrary to popular belief.
Capital transfer rose from US$65.7bn in FY14-15 to US$105.8bn in FY23-24, a CAGR of just 5.58%. The current account deficit as a percentage of GDP has remained between 1%-2% for the past ten years; there is no fundamental improvement.
3. Banking System: The third significant improvement claimed is the banking system. What this really means is that the public sector banks (PSBs) have cleaned up their balance sheets—since there was nothing much to fix in private banks which are fairly well-run and regulated. Unfortunately, there is a huge difference between a one-time clean-up of the balance sheet and a fundamental change in operations and management.
What is surprising is the continuing wilful blindness about the single biggest reason for previous bad loans: unchecked corruption of bank officers in sanctioning loans and behest lending. Nothing has ever been done to make banks accountable. Indeed, officials of the Reserve Bank of India (RBI), the ministry of finance, vigilance teams of banks, the central vigilance commission and bank chairmen, have all blamed the problem of bad loans on two external factors: genuine business failures and poor bankruptcy laws.
But the Insolvency and Bankruptcy Code (IBC) has shown us how wide and deep was such corrupt banking, as trillions of rupees have been written off without anyone being made accountable for it. What is the evidence that this has changed in any way?
PSB reforms were initially tinkered with at Gyan Sangams (which have stopped now), through Indradhanush, the bank boards bureau, recapitalisation, and bank mergers. As the ex-chairman of a PSB said about bank mergers: “If you combine two small messes, you will only get a bigger mess.”
All the tinkering studiously avoided the one thing that needed to be done: set up an apparatus of accountability which can happen through ownership change. But then, even the much-discussed lone privatisation of IDBI Bank has gone nowhere.
4. Budget Deficit: India’s budget deficit was 5.63% of GDP in FY23-24, which was higher than it was any time between 2012 and 2019. Only in FY10-11 was the fiscal deficit higher at 5.91%. There is no fundamental change in the state’s financial strength. The deficit figure continues to be controlled either by squeezing capital expenditure (which the Congress-led government did) or squeezing revenue expenditure (which the current regime is doing).
5. Inflation: Of the three reasons for the humiliating performance of the Bharatiya Janata Party (BJP) in the Lok Sabha elections a few months ago, one was high actual inflation, the other two being unemployment and lack of any real change in living conditions.
Official inflation is low but real inflation on the ground is not. The inflation number is different for different people. Food inflation is almost in double digits. Also, inflation is low because oil prices are low which India can’t claim credit for.
The fact is, only three-four countries in the past 100 years have transformed themselves to a developed nation—Japan in the late 19th and early 20th century, Taiwan and Korea in the mid-20th century and China in the 1990s.
Such radical transformation has three markers. One is farm sector reforms which would lead to a high rural surplus. Two, double-digit growth in manufacturing for years together. Three, trade surplus from higher value-added products. Have we even taken the first step on our journey towards any of these goals?
The economic change that these countries have achieved requires a lot of focused and detailed work at the ground level for many years together, led by technocrats, including continuous course corrections. It cannot be substituted by sloganeering and chest-thumping.
(This article first appeared in Business Standard newspaper)