The US Federal Reserve has cut the interest rates so many times that there is now a joke on the Fed: What will the US Government do when they find aliens? Simple, the Fed will cut the interest rates even further.
No doubt, India should also cut the interest rates and apply fiscal measures to propel the economy, but we can also use the current crisis to forge an identity that will help India ricochet through the future crisis. The identity here is the economic identity of India. India, a populous nation of 1.3 billion, relies primarily on its people to buy and consume goods and services.
Industries produce, consumers buy it, workers get paid, and the consumption cycle keeps going. There are other levers of growth like the government spending money on welfare schemes, India exporting goods that it has in surplus like hydroxychloroquine (no pun intended) and private companies investing to grow further in India. Our primary identity, however, is that of a consumption-driven economy unlike that of China or Japan which are centred around exporting surpluses to other countries in the world.
India’s primary reliance on consumption has made it the world’s fifth-largest economy of about $3 trillion. The government aspires to be $5 trillion economy by 2024. For that to happen either Indians need to consume more or Indians who have not been a part of the consumption economy need to participate. Unfortunately, given the income inequality, the Indians who have not been a part of the consumption story are fairly large.
As a result, the demand for goods and services is confined to a thin upper-crust of Indian households, which by some accounts is limited to 35 per cent of the total population. Ironically, this thin upper-crust cohort is facing a double whammy. It has not been expanding rapidly and has been borrowing from banks like never before, thanks to low-interest rates. Borrowing is great if you can pay back EMIs through your running income but if you are selling your gold trinkets to finance a car then the whole consumption-led growth story of India becomes questionable.
Unfortunately, that is what is happening as our household borrowings have doubled since the start of the decade and household savings have tanked by more than 6%. Now, think of an Uber/Ola driver who took a car on an EMI but due to extended lockdown may just default as he had only limited savings. More so, the easing of the EMI burden that used to happen over time due to jump in paycheques is now absent as inflation has been low and salaries have not kept pace. Further, because interest rates too have come down, people are pushed to save more for their senior years and spend less now.
Remember your father telling you, “Let us save some money so we can buy a house later”. For the Government to aspire to reach it’s $5 trillion goal, the “other India” needs to step in: The cohort which is the thick middle-crust of Indian households which is not buying the leading indicators of the economy like automobiles, housing etc., and is not a part of the consumption story. To spur economic activity for this cohort, one idea is to manufacture garments and export.
I get all excited going to the US but to my dismay, I end up buying garments with a “Made in Bangladesh or Vietnam” tag from the Time Square in New York. Don’t get me wrong, the cloth is of great material and relatively inexpensive. The same approach can help India migrate from a minimum wage country to a living wage nation. Manufacturing is more employment-intensive than any other large industry, employs higher women percentage as seen in Bangladesh and importantly a large part of the industry’s turnover goes towards wages which helps boost consumption of this cohort.
Manufacturing is not a new idea and any implementation would require us to depreciate our currency to be competitive with exports from other countries. Another idea could be for private enterprises to harness the demand at affordable prices for the thick middle-crust of Indian households. Private enterprises invest when there is a demand for the leading indicators of the economy like automobiles, consumer durables, aviation etc. If there is demand, there is an investment, else they sit back and economy stalls.
Now, if the private enterprises were somehow incentivised to not just respond to urban demand but also to latent rural demand by innovating low-cost-must-have-rural-essentials like housing, education and healthcare we may be able to bring the two India’s together. It will not be easy and is not a panacea but will require the might of the state and the will of the enterprises. Like a startup, we need to have a fail-fast-innovate-rapidly approach to enable this. The government should be open to giving seed funding to private enterprises to enable low-cost innovation.
Any private enterprise that wants to participate should be eligible for tax rebates, fast track loans and even if it fails it should not be stigmatised as a non-performing asset. Enterprises should be allowed to monetize CSR if they are to double the CSR contribution and efforts through CSR were diverted in these areas. A structural shift to meet the demand for affordable health, housing and education of reasonable quality for those earning at least a minimum wage would increase economic activity, aid employment and propel the economy.
We are in the midst of a crisis and like many previous ones, we will somehow come out of this one also. But as someone rightly said, never let a crisis go waste. The choice is ours: We can either forego an identity and steer into a middle-income trap where one cohort subsidises the other one and the inequality persists or we can forge an economic identity to promote affordable production that is able to meet the demand of millions of Indians. If we choose the latter, we can put those hands to work rather than those hands just figuring out where the next meal is going to come from. Let’s make India proud again.
(The author is a management graduate from IIM-Calcutta and a freelance writer. Views expressed are personal.)
