Shortly after the British had left, we adopted the economic policy of Autarky. Shut off from the outside world, high tariffs and import licensing were imposed. The business environment was floated with tortuous licenses, regulations and red tape. In the early 90s, we adopted a free economic model by positively aligning ourselves with the global trend which led to accelerated growth in GDP- thus the construction of new India began which halted with the unparalleled shock that the Covid-19 pandemic delivered.
ECONOMIC SHOCK AND RESILIENCE: India is an Elephant
When will this recession end? Will GDP bounce back soon? A myriad of problems have unfolded ever since the outbreak of the COVID-19 pandemic. But do we have all the answers? To gain more insights, let us travel back in time.
The year is 1947, India emerges as a vibrant country after liberating from the British raj. We adopted a mixed economy and an inward-looking policy with protectionism, import substitution and central planning as the main pillars of our economy. Dirigisme was the face of Indian economy. The industrial policy of 1956 resolution assigned the state a dominant role to own and develop all industries of basic and strategic importance and public utility services leaving a smaller share for the private sector. The so-called Mahalanobis model focused on the development of basic industries to achieve a rapid long-term growth.
Contrary to what the policy makers believed, the country faced an unexpected turn of events. By the end of the first plan, India had a culminating trade deficit of 542 crore, leading to the first BOP crisis. The country witnessed the earliest negative growth rate of-1.21%. After a short recovery, the real growth rate plummeted to 3% from 7% following the event of Sino-Indian war in 1962 and a distressing growth rate of -3% due to Indo-Pakistan war in 1965.
India witnessed the 3rd negative growth rate of -0.32% resulting from the Oil shock in 1973 when the OPEC declared an oil embargo which quadrupled the price of oil to nearly $12 a barrel. This was followed by another Oil shock in 1979 where OPEC doubled the oil price as an outcome of Iranian crisis. This resulted in high energy cost of the economies and a surge in inflation. At this juncture, we hit the rock bottom of highest negative growth rate at -5.2%.
So far, India had already witnessed four economic shocks, leading to severe recessions.
From the 1950s to 1980s the growth rate remained at around 3%. During the same period, East Asian countries such as South Korea, Taiwan, Singapore and Hong Kong which shared the same GDP level with India in the beginning, consistently maintained a high growth rate of more than 7%. Unlike India, they adopted an outward looking model marked by export and market-oriented policy. By the end of the 20th century they had developed into high-income economies and global financial and manufacturing hubs. So much so that they earned themselves the name Four Asian Tigers.
Few attempts were being made to unshackle the economy from the License raj during the 1960s and 1980s, but it failed. Indian economy was in a clutter by the end of 1980s as there was a severe BOP crisis. Imagine having barely two weeks of Forex reserves to finance our import bills. In 1991 a new government led by P. V. Narasimha Rao as the Prime Minister and Dr. Manmohan Singh as the Finance Minister turned the dream of Economic Liberalization into reality. License restrictions and government permits were removed; foreign equity participation was increased up to 51%. It was a transition from a state controlled to free-market economy. The infamous License raj had come to an end. Opening-up the country to trade had a tremendous effect, and the highest growth rate was attained in 2005-06 at 9.48% making India the 2nd fastest growing economy of the world.
In 2008 there was a global recession following the subprime mortgage crisis in the US which had a ripple effect on the developing countries including India where the growth rate had a sharp decline from 7% to 3%.
The COVID-19 pandemic triggered the worst economic shock since the 2008 financial crisis. In India, it ended the nearly 3 decades of economic boom cycle which marks the 5th recession.
Even before the pandemic, the economy was staggering at a low growth rate. In 2016, the GDP was growing at around 8%, but it gradually declined to 4% in 2019. Few factors that contributed to the GDP decline were; low sales in the automobile industry; liquidity crunch as a side effect of demonetization which negated the curbing potential of the parallel economy and poor implementation of GST.
“5 percent! You don’t remember 5 percent?” replied P. Chidambaram to the reporter when he was in CBI custody over the INX media case. The reporter seemed baffled over this remarks as the Ex Finance Minister implicitly scoffed the Modi government for shrinking the GDP.
The pandemic shock has magnified the economic slowdown. So, what form of shock has been materialized? And is there a way to tackle it effectively?
The Great Depression 1929 was in the form of Demand Shock. There was a drastic fall in the GNP by 30% and the unemployment rate surged to 25% in the US. It paved the way for the birth of the Keynesian model in 1936 which advocated expansionary fiscal policy as a countercyclical measure. It remarkably lifted the economy out of depression.
The 1970s global recession caused by OPEC oil embargo was in the form of Supply Shock. Stagflation plagued the western economies which could not be solved by Keynesian demand side measures. Consequently, this resulted in a new macro-economic model, namely, the Supply-Side Economics, which solved the problem of stagflation.
The economic shock caused by the pandemic lockdown is in the form of simultaneous demand and supply shocks which is uncanny. It has baffled economists ever since the outbreak as the existing economic models cannot seem to put out the fire.
The Indian government is focusing on both expansionary fiscal and monetary policy to combat the recession which would possibly reduce the purchasing power of the people and hence offset the effects of expansionary policies.
So, is there a silver bullet? Should we wait for a new macro-economic model? Or should the government release the Kraken of deficit financing i.e print more money? If so, a surge in inflation rate is inevitable.
Be that as it may, it is worth mentioning a few things that we know. Firstly, a post-pandemic boom awaits us. Secondly, the current recession is transitory. Lastly, and perhaps the most important one; in his book The Elephant Paradigm, Gurcharan Das conveys that unlike the East Asian tigers, India is an Elephant. And far from a sprinting tiger that runs out of steam, the elephant has stamina.
Degree of Thought is a weekly community column initiated by Tetso College in partnership with The Morung Express. Degree of Thought will delve into the social, cultural, political and educational issues around us. The views expressed here do not reflect the opinion of the institution. Tetso College is a NAAC Accredited UGC recognised Commerce and Arts College. The editors are Dr Hewasa Lorin, Dr. Aniruddha Babar, Aienla A, Rinsit B Sareo, Meren Lemtur and Kvulo Lorin.
For feedback or comments please email: dot@tetsocollege.org