Opinion |Address underlying problems to raise our growth trajectory
V. Anantha Nageswaran
Much hand-wringing is going on in public spaces over the fact that India’s real gross domestic product (GDP) growth printed at 4.5% year-on-year in the second quarter of fiscal 2019-20. Before we dive deeper into the implications of the figure, it is important to put it in context. An economic recession has commenced in Mexico. In China, the underlying economic growth is deemed far lower than the reported figure of 6% (China’s True Economic Growth Could Be Half Of What Everyone Thinks, argued the columnist Dominique Dwor-Frecaut on 29 November,businessinsider.in), and auto sales have plummeted there too. Declining economic growth seems to be a phenomenon of emerging economies.
Ten years after the debilitating financial crisis of 2008, developed nations are watching the travails of developing nations with some smugness. They are also now using the bogey of climate change to keep the economic divergence alive. Part of the reason is that developing countries became too complacent about their own economic growth after the boom years of 2003-08. They did not hunker down to consolidate the gains of those years. These have been frittered away. The purpose of this column is to suggest that the current economic slowdown is another opportunity—like the one that the crisis of 2008 presented to the world and was squandered by almost all countries—to fix underlying problems and not just address a short-term growth slowdown.
GDP growth data is somewhat dated, given that we have higher frequency indicators. Also, this data undergoes revisions at least three times, often four. One indicator that is making the rounds on WhatsApp is the story of power demand in October. This demand has slipped in almost all four regions of the country. Further, Neelkanth Mishra of Credit Suisse has noted the persistence of weak demand for electricity in November too.
It may signal weak demand for electricity from end-users, or it may reflect weak offtake of power by distribution companies (or discoms), due to their weak financial situation. Therein lies the tale of India’s slow recovery from the financial dislocation caused by the rise of bad debts in the banking system and the collapse of a few non-banking financial corporations as an outcome of their bad lending practices and governance drawbacks.
The inability of discoms to evacuate power stems from their inability to charge end-users—farmers and residential users—the true economic cost of power. They overcharge industrial users to compensate, and with these users now facing weak demand conditions for their goods, their need for electricity has declined. It is more than a double-whammy.
The Ujjwal DISCOM Assurance Yojana was supposed to draw a line on these practices. State governments have taken over the accumulated debt of discoms and issued bonds. But, if discoms are not to accumulate further losses, tariff revisions would have to happen. Transmission and distribution (T&D) losses would have to come down. They have, but glacially. In industry jargon, they are called Aggregate Technical and Commercial Losses (AT&C). In Punjab, for instance, AT&C losses have ballooned to over 30%. The state was supposed to reduce its AT&C losses from 16.66% in 2014-15 to 14% by 2018-19 (See Delhi Air Pollution Crisis: Money, Political Will, Clear Data Or Steadfast Public Attention—What Really Matters? by Mridula Ramesh, 10 November, firstpost.com).Tariff revisions for power consumed by farmers have hardly happened, if at all.
The non-pricing of power supplied to farmers results in its excessive use to run motors that draw water out of the ground. Too much water is pumped. Water is not paid for, either. Therefore, water guzzling crops continue to be cultivated: rice, sugarcane and wheat, in that order. Efficient or excess procurement of rice by Food Corporation of India (FCI) in Punjab and Haryana actually leads to overproduction of rice and wheat in these states. Farmers from other states bring their produce to Haryana to sell to FCI there. FCI procurement of grains in other states like Uttar Pradesh and Bihar is woefully inadequate, in contrast. The inability to pay for power renders the economics of power production suspect. Banks take a hit on their exposure to such producers. There is also the excessive application of fertilizers, which depletes the fertility of soil. According to Mridula Ramesh, the water table in Punjab is being replenished at one-third its rate of displacement. We have not reckoned with water salinity as another side effect. This is the state of affairs, and it is unsustainable. These are the structural issues that need fixing urgently. What the pundits think of as “structural reforms” and what the economy needs are different.
India’s next phase of reforms thus requires state governments to get the message. Efforts to forge a consensus with them on the key issues afflicting factor markets will be worth it. The stability of the financial system, too, is intertwined with the resolution of above issues. Resolving them will set the economy on a firmer course towards $5 trillion and $10 trillion levels.
*V. Anantha Nageswaran is the dean of IFMR Graduate School of Business, Krea University. These are the author’s personal views