IPF Webinar on Indian Economy: Challenges and Opportunities
Date : 12-Jul-2020
Indian Economy: Challenges and Opportunities
July 11, 2020
Prof Bhagwati Prakash Sharma
Vice Chancellor, Gautam Buddha University, Greater Noida, U.P.
Shri Gopal Krishna Agarwal
National Spokesperson, BJP
Dr Kuldeep Ratnoo
I welcome you all on behalf of India Policy Foundation in today’s webinar on Indian Economy: Challenges and Solutions.
As we are well aware of, Indian economy is now dealing with a lot of challenges. Some challenges had appeared even before spread of Corona virus and due to lockdowns everywhere, new challenges have come up.
We have observed that despite attaining an impressive growth rate of GDP for years, our employment growth rate didn’t rise as was required for our populous nation. Unemployment remains our biggest challenge.
So, first issue is whether GDP growth rate helped in generating enough employment opportunities.
Secondly, have we been able to achieve requiredgrowth in savings rate, despite an impressive GDP growth rate?
Thirdly, have we been able to balance economic growth and sustainability? Could we grow economically without destroying environment?
Other important issues are related to our rural economy, our agriculture and growth in labour wages, particularly in the unorganized sector.
So, there are several challenges which have been troubling us even when our economic growth was impressive. Now, growth has slowed down in the last few years, and this year our GDP might shrink, instead of growing.
There are new challenges due to slowing down of economy, and we might see more difficulties if Corona virus continues to spread for few more months.
Today, we have with us Prof Bhagwati Prakash Sharma, renowned economic thinker, Swadeshi ideologue and academician. Presently, Prof Sharma is Vice Chancellor of Gautam Buddha University. Earlier, he was Vice Chancellor of Pacific University, Udaipur. For decades,Bhagwati Prakashji, as we know him, has been spreading awareness among people about socio-economic and development issues through his lectures, articles and papers. People and organisations active in social and political fields regularly consult him to plan their activities, policies and programs. He has written several books and booklets on different issues related to economy, swadeshi, WTO, globalization, culture and other issues of national interest. He has also delivered hundreds of lectures in almost all states of India on diverse topics. and today we are lucky to have him with us to enlighten us on Indian Economy: Challenges and Opportunities.
Along with Prof Sharma, we also have ShriGopalAgarwal with us. He is a chartered accountant by profession, has been director on boards of various prominent companies and banks, but we know him as an economist and political activist. He is a well-known face since he regularly appears on TV channels as spokesperson of BharatiyaJanata Party. He also writes articles in newspapers and websites on regular basis. ShriGopalAgarwal is also a Trustee of India Policy Foundation. We welcome him and look forward to his valuable insights on Indian Economy.
Now, I request Prof Bhagwati Prakash Sharma to address us and guide us.
Prof Bhagwati Prakash Sharma
There are definitely a number of challenges facing both the Indian economy as well as the global economy at present. The one silver lining that India has is that more than 50 per cent of its population is dependent on agriculture and that is one sector which has not been adversely affected yet due to Corona virus and lockdowns. But Indian economy has been facing a lot of challenges even before the current crisis. If we look at the past few years, we can see that manufacturing has almost been wiped out and only assembly lines are present in the country. Even in that, the equipment manufacturing is also being outsourced now. Forexample, in pharmaceutical manufacturing, we used to make almost80%APIs required in India.But then China started dumping its products and India failed to impose any countervailing duties because of which now we have to outsource 70 per cent of APIs from China. Another instance is how we have to import 25-30 per cent of our automobile components from China. There was also a time when India had 6.5 per cent of share in the global textile exports, but that has now been reduced to less than three per cent. It needs to be noted that after agriculture, textile industry is one of the biggest employers but due to technological obsolesce, the industry like many others have suffered. For example, in Firozabad, there were close to 500 glass industries. Now only about 150 are left and this has happened due to lack of protection in global price competitiveness.
Much before the Covid-19 crisis, India’s manufacturing sector was severely affected. If we look at our trade, there is close to USD 160 billion trade deficit. We also have close to USD 40-50 billion deficit in investment income. So when it comes to the whole balance of payments, India has to worry about deficit that is nearly USD 200 billion. In the last 29 years, we have attracted a good number of FDIs, but our outbound investments have not matched the inflow. The FDIs are much more than repatriation of profits and dividends from Indian investments abroad. So, there is an income deficit and due to this, we were getting blackmailed to accept more and more FDIs. Since 1997, we have been under pressure to open new sectors for FDI due to the balance of payment crisis. We were bridging around 30-40 per cent of this gap by export of services. Another 40 per cent, we were bridging by private remittances made by Indians working abroad. This may fall by 20 per cent due to the on-going crisis.
Our new economy requirements and components are huge. For example, we have put a target of 100 Gigawatts in solar power but we couldn’t save our domestic players. Few years back, there were 49 original equipment manufacturers in the field of solar panel and all these started shutting down one by one due to Chinese dumping. Our cost of manufacturing was at par with China, Japan and US. Our manufacturers were exporting almost 70 per cent of their solar panels to Europe and America. So, quality wise also, they were doing well. But when China started dumping at prices that were 40 per cent less, America imposed 107 per cent anti-dumping duty and Japan imposed 100 per cent anti-dumping duty. But we did not impose any duties under the belief thatexpensive Chinese imports would increase costs of solar park developers. To protect solar park developers, we destroyed domestic solar panel manufacturers. Because of this, now we have to import 90 per cent of our solar panel requirements worth nearly 20 thousandcrore rupees every year and as a result there are close to 2 lakh jobs being generated daily in China in this sector alone.
Before assessing the post Covid-19 impact on the economy, we need to understand that India’s contribution in the world manufacturing is only three per cent at present whereas China’s is almost 28 per cent while population wise both the countries are at par. ThencomesUSA with a share of 17.6 per cent. Japan, which has a population share of only 1.6 per cent,has a share of around 8 per cent in global manufacturing. So, the major challenge in front of India is to revive manufacturing sector. In 1986, China’s per capita income was 15 per cent less as compared to India and in purchasing power parity, it was 20 per cent less. Now they have increased their share five times and a major reason for this was the strengthening of their manufacturing sector.
The next big challenge is that India imports almost all the technologically intensive components and only assembling happens in the country. China has almost 30-fold high technology exports than India. India ranks 22 in technology exports whereas even a small country like Singapore is at the fourth place.
The Cobid-19 crisis has definitely affected India. There is a loss of almost Rs 35000-40000 crore per day from the GDP due to the crisis. There is a loss of income for salons, taxi drivers, airlines and even large-scale manufacturers.The interest on loan repayments will become unaffordable for a majority of the population. Due to such a huge impact, the transaction velocity of money has come down. And because 57 per cent of India’s GDP is based on local consumption, it will be affected as demand cannot be revived due to lack of disposable income. Demand revival will be a huge problem.
It is necessary to augment the income of the people. Till now, the relief package that the government has given is not fiscal stimulus. You have to put money in the hands of the people. If the transaction velocity is restored, there will be quick revival of the economy. I think it will take at least two years for the revival to happen.
Another challenge I see is that despite being at the threshold of Fourth Industrial Revolution, we are not yet prepared for it. For example, we had become the second largest market for solar panels but did not do anything to establish a domestic ecosystem. Even the existing establishments had to close down as the government failed to impose countervailing duties on dumping from China. One more thing I want to make clear is that China has launched an aggressive war on the Indian economy in the past few years. For example, in the pharmaceutical industry, folic acid needed to produce Vitamin C tablets used to be sold for Rs 7000 per kilogram. China started dumping their product at Rs 4500. We should have imposed anti-dumping duty at that time, but we didn’t do it. Because of this all our pharma manufacturers started buying folic acid from China and our domestic producers had to close down their operations. They became non-performing assets for the banks. And then China between December 2016 to November 2017, increased the prices of the folic acid seven times to Rs 50,000 per kilogram. So, China is trying its best to de-stablise us in every possible manner.
We have said that by 2030, we would not allow fossil fuel cars to be manufactured and sold. So, the production of petrol and diesel cars will be stopped which required around 2000 auto parts in its manufacturing. Around 1000 companies that are involved in this business from Coimbatore to Gurugram will become redundant. Now when it comes to electric vehicles, only 20 parts are involved in its manufacturing. But we have not developed any home-grown technology for this and neither have we developed a domestic ecosystem for this. It is estimated that due to the electric vehicles, the market for Lithium batteries will be around USD 300 billion in the next 10-15 years. But we have not even thought of establishing an ecosystem whereas China has already invested heavily in Latin American countries that are rich in Lithium. India should also think about choice of technology in order to be prepared for Industrial Revolution 4.0. Should we not think of a sodium ion battery? It is more eco-friendly when compared to Lithium ion batteries.
We are also badly missing the train of Artificial Intelligence (AI). We have made small budgetary allocations, but there is no focus on product development. Chinese companies have developed simple algorithms which by looking at the lung x-ray of a person can predict if he/she is susceptible to lung cancer. If we are also going to import the AI based solutions, we will have a bigger balance of payment crisis. In 90 per cent of the Indian universities, the computers used there have only 4 GB RAM. If we have to teach AI, 16 GB is required and for AI product development, 32 GB is required.
Machine-based predictive analysis is being used in many sectors now across the world, but India has not been able to develop those capabilities. Even in software industry, Indians are involved in software development but when it comes to the global export market, India’s share is less than one per cent. In the meantime, China has developed its own operating systems to the extent that 40 per cent of their systems are operating on unified operating systems of Chinese origin. India will have to focus on Made by India products and brands.
In the Make in India initiative, Chinese companies do just four per cent value addition in India and give the products the label of Made in India. We have to launch more and more Made by India products. Till the time, we don’t do it, no progress can be made on the downstream manufacturing chain in India. It is also important to tap export markets. Farukkhabad is Asia’s biggest market for potatoes, but there are hardly any value-added supply chains anywhere near the area. We need to think about export quality value addition. Next, we need to reduce our import dependence by creating a manufacturing ecosystem in India. Even if a fiscal stimulus is required for it, we will have to give it.
Next, we need to establish the sunrise sectors and sunrise technologies with a vision. In India, only 13 per cent of the cars are Made by India and the rest are all foreign cars. In Japan, an economic patriotism can be seen because of which the population there only buy Made in Japan products. Because of this, Japan has a huge advantage when it comes to economic growth. We have to think of techno-nationalism. For all the products that are manufactured in India, we need to develop the technology domestically. The policy formulations should popularise home-grown technologies. Only then we will be able to grow.
One example I can think of is how well we were doing in the first-generation telecom technology. BSNL had developed corDECT,but all of a sudden, we left this home-grown technology and moved to GSM which is a European technology. When it came to the third-generation technology, China set aside a huge fund for this and even though they were not completely successful, they insisted that they will release the 3G spectrum only for their home-grown technology. Due to their techno-nationalism, they were able to develop the fourth and fifth generation technologies before anyone else and they managed to capture the global market. China while pursuing the policy of techno-nationalism has attained the goal of techno-globalism. The same way, India will have to make techno-nationalistic interventions in futuristic sunrise sectors and create a manufacturing ecosystem. For this, we will have to go towards heavy fiscal stimulus with the goal of developing manufacturing capacities domestically.
Dr Kuldeep Ratnoo
Thanks a lot, Prof Sharma for your insightful address! You explained in detail the issues related to economy, technology and manufacturing. Now I would request ShriGopalAgarwal, who is BJP’s spokesperson and also advises party on economic issues. Gopalji, Prof Bhagwatiji has raised some very critical points, and one of these is about fiscal support. You have been working in the field of finance. There are talks about huge reduction in money circulation in the markets. Banks have tightened the credit outflow and started recovery of existing loans with firmness. So, the money is coming to the banks with interest, but it is not going back to the sectors where it is required, particularly in the sectors which generate employment. India’s crisis is of rising unemployment and at the same time rising fiscal deficit and resulting borrowings will also pose new challenges. So, Gopalji, kindly address these issues in detail and help us understand the possible scenario.
Shri Gopal Krishna Agarwal
The first and foremost challenge post Covid-19 is how to restart the Indian economy. Next is to generate employment while also addressing the issues of underemployment and disguised employment. Shri Deen Dayalji had given a famous slogan, “work for every hand and water for every field.” Our focus is to create employment in the agriculture sector before any other. In 2014, when the BJP government came to power, we had seen that though there was economic growth in the country, the distribution of wealth was very uneven. In 2016, a global report had come that there was a huge concentration of wealth in India.
It was clear to the government that India’s manufacturing sector will have to be developed for the country to progress. The next big challenge before India is to choose whether to integrate Indian economy with the global and regional supply chains orresort to protectionism. It is necessary to debate on this issue and come up with a resolution. If we look at it from the historical perspective, India has witnessed maximum economic growth when it liberalized its economy. Prior to the British rule, India was economic super power for nearly 3000 years and our share in global trade was 27 per cent. If India has to become an economic superpower, then like China, it has to turn itself into a global manufacturing hub. Some of the biggest multi-national companies had established their manufacturing outlets in China. India will have to integrate its manufacturing sector with the global and regional supply chains. Only then will India be able to achieve its true potential and grow as an economic superpower. Right now, India has only a share of two per cent in global trade.
So, if we analyse the Prime Minister’s concept of self-reliant India and see it in the context of the situation that was in 2016 and the current Covid-19 crisis, it is clear that the focus is on manufacturing. The five pillars of self-reliant India rest on the principle that India’s manufacturing will have to be strengthened. The first pillar is economic development. Second is infrastructure, third is technology, fourth is demography and fifth is demand. To achieve the dream of a self-reliant India, it is important to give the country’s manufacturing sector, a level playing field.
The manufacturing sector is at present uncompetitive to meet many of the global challenges. The rate of interest used to be very high before. But the government has systematically intervened to reduce the rate of interest and bring the focus on fund infusion thereby increasing liquidity in the system. Another challenge is with respect to our logistics costs. It is impossible for the manufacturing sector to grow without transportation. So, the government has been continuously striving to bring down the costs of transportation. The contribution of logistic industry to India’s GDP is 14 per cent as compared to the global average of 9-10 per cent. To address this, the focus has been shifted to various projects like Sagarmala, ports development etc. This has led to ease of living, ease of doing business and has also reduced the cost of manufacturing. By 2022, our government’s efforts are in the direction of bringing down the logistic industry’s contribution to India’s GDP in line with the global average of 9-10 per cent.
So, the self-reliant India initiative should not be viewed just as a policy measure to address the Covid-19 crisis. The government has been trying to give a push to the manufacturing sector since 2016 and the idea has always been to absorb people who are displaced from the agricultural sector into the manufacturing sector. To give the MSME sector a level playing field, several policy measures were taken like reducing the land costs.
Today, no country manufactures a product fully. The raw materials and parts come from various parts of the world, it is assembled in one country and sold in another. We need to keep this in mind when moving forward.
The Covid-19 crisis has presented an opportunity in terms of risk diversion strategy. Now a lot of companies have started feeling that they need to take out their manufacturing from China and look for alternatives. Most of them see India as a good option. But they do need hand holding in some areas like land, labouretc. The state governments play an important role here. For example, Uttar Pradesh has identified a cluster of land that is set aside for development. After the Galwan aggression, some of the Chinese products have been banned. It needs to be noted that the disengagement with China started in 2019 when India walked out of the RCEP negotiations. We had signed an FTA with ASEAN because of which our products were not getting a level playing field and there was lot of dumping happening from the ASEAN countries. We had to impose some protectionist measures to give our domestic manufacturers fair conditions and that is why we reworked that FTA with the ASEAN countries. There was a lot of pressure from China to get into an FTA with all the RCEP nations but we were able to resist it.
This budget has increased the import duties of eight items out of the 26 listed as most of these were non-merit items and can be produced in India. The earlier governments did not take this into consideration because of which we conceded the market space to China. The current government has been formulating a new strategy which includes imposing non-tariff barriers. It is two-pronged strategy which provides protectionism to domestic industries while also opening up factors of production to make our industries competent for the global market. We are getting results for this. For example, Apple has recently announced that they will invest USD 5 billion in India and they will take their manufacturing out of China.
We have also identified those sectors where there is a comparative advantage and the goal is to increase their contribution towards GDP. There are also efforts to develop the agriculture sector. The government is taking all the bold decisions that are needed to ensure India’s growth. As far as BJP is concerned, we believe in market economy but also find it necessary to develop a social ecosystem.
The government has indeed taken some bold decisions which include opening up the coal sector for private investments, disinvestments of PSUs, reducing corporate tax and also mulling over privatizing some railwayservices.
When it comes to fiscal stimulus, it is true that there is a shortage of capital. So, borrowing is not the solution. It is better to fulfil the capital requirements of the large industries as well as of the MSME sector. The central government has taken on this risk and the results are now showing. On the liquid fund with the government, wherever there is high velocity of money, the government must ensure that there is direct transfer of funds for those in need. For example, those in the rural economyknow how schemes like MNREGA and GareebKalyanYojnaare helping those in need.
At the end, we need to realise that we will have to impose protectionism to protect our domestic manufacturers till they get a level playing field while also making them competent for the global market.
Q & A session
Q: What are the options that will be left with Indian pharma industry if China stops the import of APIs?Where does India stand with respect to China on its expenditure on Research and Development? What are the steps India should take for commercialization of knowledge?
Prof Bhagwati Prakash Sharma: For nearly 40 years, India in the name of socialism did not allow the industries to manufacture even 20 per cent and the government never used to issue licenses because of which there was a shortage of products in India. We cannot term this as protection. It is myopic vision of Jawaharlal Nehru and Indira Gandhi. They never let Indian industries grow. So as far as protectionism is concerned, right now Indian industries do not have enough faith that they will get protection in cases of dumping. Nascent industries are often taken over by global players.
With regard to APIs, there is no doubt that India would be able to sustain. We have already been manufacturing these products. It was China which targeted us and started dumping their products. Because of this, the companies manufacturing APIs were turned into Non-Performing Assets. At that time, we did not have the vision to protect our industries. This situation can be reversed if we relax the rules of NPAs and ensure that our domestic industries are protected.
When it comes to international supply chains, we do not have any price negotiated exports. We are only assembling products made by other countries in India. It needs to be noted that despite having one of the largest coastlines in the world and a robust steel manufacturing industry, our contribution to the ship building industry is just 0.5 per cent of the global average. So, we need to think about what have we actually achieved from globalization. We have not been able to bring companies to India or raise our exports. In fact, what we have done is to attract global invasion. Right now, 80 per cent of the manufacturing sector is foreign owned. This invasion has happened even in the agricultural sector. We have to support made in India products if the economy has to develop. Here, economic patriotism plays a major role.
Next, we have to give fiscal stimulus if we have to develop home grown technologies. We have to form an industry consortium. In America, almost 80 per cent of the expenditure is borne by the government through the consortium route.
Q: With the revenue seeing a downfall, what are the effects on Indian economy?
Prof Bhagwati Prakash Sharma: There is no dearth of resources. Banks have parked nearly Rs 8 lakh crore with the RBI despite a low reverse repo rate because there is nobody to take loans.
As far as fiscal resources are concerned, all the nations have taken the help of money expansion. Our money supply to GDP is 77 per cent. China’s is 124 per cent. Japan’s is 180 per cent. America during 2008 recession had done quantitative easing of USD 4 trillion. During the Covid-19 crisis, America has again done quantitative easing of USD 700 billion. Likewise, we have to invest in Special Purpose Vehicle and think of expanding money supply. We have to do this in a calibrated way where we focus on developing our manufacturing industries. We have to think of increasing domestic manufacturing capacities owned by Indians. Otherwise, we will become a country of just assembly lines and there will be no exports or imports.
Dr Kuldeep Ratnoo: What are your views of fiscal stimulus?
Somehow, our focus is on finding employment instead of encouraging entrepreneurship or technology driven manufacturing. Because of this our economy has not got a strong foundation which it should have. Have we focused too much on the growth of service sector that the agriculture and manufacturing industry have suffered? Or can all these three industries grow in tandem?
Shri Gopal Krishna Agarwal: All of us agree that there is a need for fiscal stimulus. The question here is who exactly needs fiscal stimulus in our society? We have always believed that those who work in the agriculture sector or are poor and downtrodden will benefit the most out of a fiscal stimulus especially if it is in the form of direct cash transfers. The government is already allocating maximum resources for this purpose in the form of MNREGA and various other policies.
The next question that has been raised is how to give fiscal stimulus to the middle class and the MSME sector? For this, we can give fiscal stimulus only through economic revival. The Central government also agrees to this. When it comes to manufacturing sector, debt financing may not be the solution as none of the companies want to move forward with an over leverage balance sheet. They have low debt absorbing capacity. The instruments for equity infusion is limited with the government. Also, only liquidity will not propel growth as demand is low in the economy. The government is already trying to stop imports from China to protect the domestic industries. In addition to this, we have to make the products competitive and think in terms of consumer experience. Only when demand increases in an economy will we be able to attract investments. At the end, we will have to integrate our products with the global supply chain. If we have to achieve our target of increasing the contribution of manufacturing sector to 25 per cent of the GDP, then we will have to open our economy to global market and also reply on technological import. We will not be able to generate employment only from service industry. Even when it comes to agricultural industry, we have to acknowledge the fact that beyond a point, it does not have potential for growth. The population that is currently engaged in agriculture will have to be diverted to alternate investment mechanism.
So, we have to give the manufacturing sector a level playing field and reduce the costs of production. Fiscal stimulus is necessary for all strata though in different forms. In the top strata, the government is ensuring this through credit availability.
What is unfortunate is that there is a shortage of ideas in our country when it comes to Research and Development. There may be ideas coming from universities and other institutions, but there is no commercial conversion of those ideas. Educational institutions will have to step in here if the industries have to benefit. This will also lead to entrepreneurship and create avenues for self-employment.We have to change the mindset of youth and make them understand that beyond a level, the government won’t be able to provide white collar jobs and they have to think in terms of self-employment or entrepreneurship.
Q: Will there be any special incentives for middle class who have been the worst affected by the Covid-19 crisis?
Shri Gopal Krishna Agarwal: Government has made provisions for loans for those who run small businesses. When it comes to giving subsidies to companies to help pay salaries, the government is not right now in a position to do so. Government is ready to do liquidity inducement in the economy through infrastructure development. And the government is also lending a helping hand in the form of ration distribution to 135 crore people.
Dr Kuldeep Ratnoo: There is a feeling amongst people that the various economic policies of the government have not exactly brought about positive development. Where are the gaps and how can it be plugged?
Prof Bhagwati Prakash Sharma:I believe that instead of giving ration to people, we need to make them capable of buying their own ration. We need to focus on investment that can generate employment. We need to give fiscal stimulus to ensure that a manufacturing ecosystem is developed in our nation. We need to get into original equipment manufacturing. If you see, China invited foreign investment only after a robust domestic ecosystem.
We have to ensure that MSMEs contribute a greater share to manufacturing in India. Universities will have to focus on AI development and we need to ensure that it has the resources to do so. We need to make a choice where we have to continue acting as a surrogate for the international supply chain or have our own.
Dr Kuldeep Ratnoo: In order to help the middle class, can banks think of interest subversion?
Shri Gopal Krishna Agarwal: The capital adequacy ratio of the banks is not very strong in the present economic situation. Though we have improved the ratio in the last 5-6 years, there is still the threat of NPAs that is looming large. The money that is there with the government is that of tax payers. The government together with RBI is trying to reduce the interest rates in a systematic manner. For example, the government has reduced the repo rate by 135 basis points, the money that banks need to park with the RBI has been brought down, has reduced the risk premium etc. The government has also taken the guarantee for NBFCs when the latter issues loan to small industries. The government is implementing interest subversion for agricultural sector and for those in the industrial sector, the government has implemented insurance schemes.
As already discussed, unless and until manufacturing sector is strengthened, long-term solutions will not emerge for our country’s economic problems. Along with investment generation, there is also a need to boost demand. For this, government is choosing the path of protectionism, is reducing the factors of production and is also infusing money into the economy through infrastructure development and direct benefits transfer. Right now, our focus should be on strengthening MSME sector and manufacturing and also give the Indian companies a level playing field.
Indian economy is reviving despite the challenges. We will have to attract FDIs and focus on liquidity infusion. We are short of capital and technological resources. We have demand and labour resources.
(Report prepared by Lekshmi Parameswaran. Inputs by Vikrant Tyagi)