India: Pivoting From the Pandemic to Economic Reforms

India: Pivoting From the Pandemic to Economic Reforms

Timothy Taylor 02/03/2021 3
India: Pivoting from the Pandemic to Economic Reforms

Each year, the Economic Division in India's Ministry of Finance publishes the Economic Survey of India (January 2021).

The first volume is a set of chapters on different topics: the second volume is a point-by-point overview of the last year's developments, in fiscal, monetary, and trade policy, along with developments in main sectors like agriculture, industry, and services. Here, I'll cherry-pick some points that caught my eye in looking over the first volume. 

Of course, any discussion of a country's economy 2020 will start with the pandemic. All statements about what "worked" or "didn't work" during 2020 are of course subject to revision as events evolve. As a country with many low-income people living in high-density cities, and high absolute numbers of elderly people, India was clearly a country with what looked as if it might experience large health costs in the pandemic. But the report argues that at least for 2020, India's COVID-19 response worked well. (For those not used to reading reports from India, "lakh" refers to 100,000, and a "crore" is 100 lakh, or 10 million.)

India was amongst the first of the countries that imposed a national lockdown when there were only 500 confirmed cases. The stringent lockdown in India from 25th March to 31st May was necessitated by the need to break the chain of the spread of the pandemic. This was based on the humane principle that while GDP growth will come back, human lives once lost cannot be brought back. 

The 40-day lockdown period was used to scale up the necessary medical and para-medical infrastructure for active surveillance, expanded testing, contact tracing, isolation and management of cases, and educating citizens about social distancing and masks, etc. The lockdown provided the necessary time to put in place the fundamentals of the '5 T' strategy - Test, Track, Trace, Treat, Technology. As the first step towards timely identification, prompt isolation & effective
treatment, higher testing was recognized as the effective strategy to limit the spread of infection. At the onset of the pandemic in January, 2020, India did less than 100 COVID-19 tests per day at only one lab. However, within a year, 10 lakh tests were being conducted per day at 2305 laboratories. The country reached a cumulative testing of more than 17 crore in January, 2021. ... 

The districts across India, based on number of cases and other parameters were classifie into red, yellow and green zones. Across the country, ‘hotspots’ and ‘containment zones’ were identified – places with higher confirmed cases increasing the prospect of contagion. This strategy was increasingly adopted for intensive interventions at the local level as the national lockdown was eased. ... 

India was successful in flattening the pandemic curve, pushing the peak to September. India managed to save millions of ‘lives’ and outperform pessimistic expectations in terms of cases and deaths. It is the only country other than Argentina that has not experienced a second wave. It has among the lowest fatality rates despite having the second largest number of confirmed cases. The recovery rate has been almost 96 per cent. India, therefore, seems to have managed the health aspect of COVID-19 well.

India's economy seems to have experienced a V-shaped recession, with a sharp decline during the 40-day lockdown period but then a return to pre-pandemic levels by the end of 2020. 

Other chapters in the report look at other issues that have become more salient as a result of the pandemic. For example, India's economy has labored for years under what has been called the "license raj," referring back to the British colonial period for a metaphor to describe how an extraordinarily instrusive level of licensing and regulation limits flexibility and growth in the India's economy. 

Element of the "license raj" still exist. As one example, the report notes: 

International comparisons show that the problems of India’s administrative processe derive less from lack of compliance to processes or regulatory standards, but from overregulation. ... [T]he issue of over-regulation is illustrated through a study of time and procedures taken for a company to undergo voluntary liquidation in India. Even when there is no dispute/ litigation and all paperwork is complete, it takes 1570 days to be stuck off from the records. This is an order of magnitude longer than what it takes in other countries. ... 

The ‘World Rule of Law Index’ published by the World Justice Project provides cross-country comparison on various aspects of regulatory enforcement. The index has various sub-categories, which capture compliance to due processes, effectiveness, timelines, etc. In 2020, India’s rank is 45 out of 128 countries in the category of ‘Due process is respected in administrative proceedings’ (proxy for following due process). In contrast, in the category ‘Government regulations are effectively enforced’ (proxy for regulatory quality/effectiveness), the country’s rank is 104 (Table 1). India stands at 89th rank in ‘Administrative Proceedings are conducted without unreasonable delay’ (proxy for timeliness) and 107th in ‘Administrative Proceedings are applied and enforced without improper influence’ (proxy for rent seeking).

Another example looks back at some aftereffects of policies taken during the Great Recession back in 2008-2009. During that time, India's banking and financial regulators instituted a policy of "forbearance," meaning that they wouldn't crack down on financial institutions that were in a shaky position during a deep recession. This policy can make sense in the short-term: if regulators crack down on banks during a recession, it can propagate a deeper recession. But soon after the recession, this policy of forbearance needs to stop--and in India that's not what happened.  

During the GFC [global financial crisis], forbearance helped borrowers tide over temporary hardship caused due to the crisis and helped prevent a large contagion. However, the forbearance continued for seven years though it should have been discontinued in 2011, when GDP, exports, IIP [international investment position] and credit growth had all recovered significantly. Yet, the forbearance continued long after the economic recovery, resulting in unintended and detrimental consequences for banks, firms, and the economy. Given relaxed provisioning requirements, banks exploited the forbearance window to restructure loans even for unviable entities, thereby window-dressing their books. The inflated profits were then used by banks to pay increased dividends to shareholders, including the government in the case of public sector banks. As a result, banks became severely undercapitalized. Undercapitalization distorted banks’ incentives and fostered risky lending practices, including lending to zombies. As a result of the distorted incentives, banks misallocated credit, thereby damaging the quality of investment in the economy. Firms benefitting from the banks’ largesse also invested in unviable projects. In a regime of injudicious credit supply and lax monitoring, a borrowing firm’s management’s ability to obtain credit strengthened its influence within the firm, leading to deterioration in firm governance. The quality of firms’ boards declined. Subsequently, misappropriation of resources increased, and the firm performance deteriorated. By the time forbearance ended in 2015, restructuring had increased seven times while NPAs [non-performing assets] almost doubled when compared to the pre-forbearance levels.

But with these kinds of ongoing issues duly noted, India has also seized the opportunity of the pandemic to carry out some long-promised structural reforms. For example, one change is that farmers are now allowed to sell their crops to anyone, anywhere, rather than being required to sell only to a designated local agency.  Another issue of long-standing is that India has long offered a range of subsidies to smaller firms,  which sounds OK until you realize that if a small firm thinks about growing into a larger firm, it realizes that it would lose its government subsidies. These kinds of labor regulations have been substantially loosened, and the number of regulations pared back. 

The increase in the size thresholds from 10 to 20 employees to be called a factory, 20 to 50 for contract worker laws to apply, and  100 to 300 for standing orders enable economies of scale and unleash growth. The drastic reductions in compliance stem from (i) 41 central labour laws being reduced to four, (ii) the number of sections falling by 60 per cent from about 1200 to 480, (iii) the maze due to the number of minimum wages being reducing from about 2000 to 40, (iv) one registration instead of six, (v) one license instead of four, and (vi) de-criminalisation of several offences.

In the next few years, it will be interesting to see if these changes make a real difference, or if they have just rearranged the furniture, with the same regulatory burden reconfigured. 

Another aftereffect of the pandemic is to raise the visibility of public health programs in India. These were already on the rise. For example,  there "an increase in public [health care] spend from 1 per cent to 2.5-3 per cent of GDP – as envisaged in the National Health Policy 2017 – can decrease the Out-Of-Pocket Expenditures from 65 per cent to 30 per cent of overall healthcare spend." There are programs to expand telemedicine and the infrastructure needed to support it. 

Also, India's government launched a program in 2018 aimed at providing more access to health care (which is mostly privately provided in India) to the low-income population. 

In 2018, Government of India approved the Ayushman Bharat Pradhan Mantri Jan Arogya Yojana (AB-PM-JAY) as a historic step to provide healthcare access to the most vulnerable sections in the country. Beneficiaries included approximately 50 crore individuals across 10.74 crores poor and vulnerable families, which form the bottom 40 per cent of the Indian population. The households were included based on the deprivation and occupational criteria from the Socio-Economic Caste Census 2011 (SECC 2011) for rural and urban areas respectively. The scheme provides for healthcare of up to INR 5 lakh per family per year on a family floater basis, which means that it can be used by one or all members of the family. The scheme provides for secondary and tertiary hospitalization through a network of public and empanelled private healthcare providers. It also provides for three days of pre-hospitalization and 15 days of posthospitalization expenses, places no cap on age and gender, or size of a family and is portable across the country. It covers 1573 procedures including 23 specialties (see Box 1 for details). AB-PM-JAY also aims to set up 150,000 health and wellness centres to provide comprehensive primary health care service to the entire population.

Finally, in India as in so many countries, there is often a policy question as to whether the country should be striving for additional economic growth or for a reduction in inequality: or more specifically, what the tradeoffs would be in prioritizing one of these goals over the other. The Survey looks at potential tradeoffs and data across the states. It finds that in the context of India, there doesn't seem to be a conflict 

[T]he Survey examines if inequality and growth conflict or converge in the Indian context. By examining the correlation of inequality and per-capita income with a range of socio-economic indicators, including health, education, life expectancy, infant mortality, birth and death rates, fertility rates, crime, drug usage and mental health, the Survey highlights that both economic growth – as reflected in the income per capita at the state level –and inequality have similar relationships with socio-economic indicators. Thus, unlike in advanced economies, in India economic growth and inequality converge in terms of their effects on socio-economic indicators. Furthermore, this chapter finds that economic growth has a far greater impact on poverty alleviation than inequality. Therefore, given India’s stage of development, India must continue to focus on economic growth to lift the poor out of poverty by expanding the overall pie. Note that this policy focus does not imply that redistributive objectives are unimportant, but that redistribution is only feasible in a developing economy if the size of the economic pie grows.

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  • Josh Holliday

    India is doing relatively well

  • Richard Ashton

    Excellent article

  • Andrea Keane

    It is time we acknowledge the slowdown in the economy

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Timothy Taylor

Global Economy Expert

Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.

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