Cyclical Overlay on Structural

The words, ‘cyclical’ and ‘structural’ have been massively overused in the last month or so in India. Some recent analyses are here (Shankkar Aiyar), here (Niranjan), here (Neelkanth) and here (Ashima Goyal +1).

Dr. Arvind Panagariya bats against sops to specific sectors. I would agree with him. In fact, there is far too little critical commentary on the private corporate sector’s contributions to their own misery. Barring a few exceptions (I hope), how rigorous are they in their growth and demand projections? Do they have scenario planning and do they subject their financial and demand projections to stress tests? What buffers they provide for themselves?

That is why this piece by Sundeep Khanna is important. How much have they brought this upon themselves?

Collectively, with lack of rigour and with malfeasance (an example) abound, the Indian private sector is very much a source of the problem.

Shankkar Aiyar tries to provide specific answers, as he usually does. That is a good thing. Niranjan bats for further monetary policy responses. I am sceptical. 135 basis points of rate cuts and counting.

Neelkanth, as his wont, sees the glass as half-full although the account of his presentation by the CFA Society leaves room for both interpretations – cyclical slowdown or a structural growth challenge.

The column by Ashima Goyal and her co-author gives the impression that Arvind Subramanian’s work has contributed to the growth slowdown although, I am sure, that is not their intention.

My joint work with Gulzar Natarajan, ‘Can India grow?’ makes the case for India’s structural growth problem. Rather convincingly, in my view. It is manifesting itself, post-2008 crisis. The 8% growth numbers for 2016-17 and for 2017-18 are not credible. The post-crisis recovery seen up to 2011 was based on unsustainable fiscal and monetary stimulus. We paid the price in 2013 and are still continuing to pay the price in terms of non-performing assets in the banking system. I had mentioned this on numerous occasions.

India’s growth spurt between 2003 and 2008 was due to an extraordinary combination of global factors, an investment boom by a de-leveraged and lean corporate sector turbocharged by global capital inflows and the consequent domestic credit boom, partly as India sought to mute the exchange rate impact of the wall of capital descending on India.

In general, post-1979, India had grown faster but not for too long, at a stretch. It is a highly fragmented economy – in many sectors (services and manufacturing) – incapable of achieving scale (due to regulatory disincentives against scale and perverse incentives that encourage staying small) and hence sustaining high growth for long without displaying all classic overheating symptoms.

This structural growth problem has been with us and is still with us. We have not arrived. What is currently happening is a cyclical slowdown that has been overlaid on the structural growth constraint. The proximate cause has been the problem in the Non-Banking Financial Corporate Sector coupled with corporate malfeasance. But, this is a serious problem and it cannot be wished away as though it would self-correct. Structural constraints would impede a cyclical recovery because the current cyclical factors would worsen structural constraints. They can now mutually reinforce each other.

Bold policy leadership is needed to break the vicious circle and the leadership has to be both substantive and symbolic. Optics too matter.

The NDA government has not contributed to the structural growth challenge. If anything, it can be argued that some of its policy decisions – PMJDY, JAM, IBC and RERA – could be seen as boosting structural growth prospects. But, by when – no one knows.

However, it has exacerated the cyclical growth slowdown with the following:

  • Demonetisation: short-term growth negative with potential for long-term gains (perhaps, too long-term)
  • GST: rates inhibit economic activity
  • Tax collection: much has been said and written here and elsewhere.
  • This has been informed a moralistic streak in policymaking which is not credible since it is selective. Both of these two – pursuit of tax revenues and excessive morality in public policy have compounded investment uncertainty already in train due to deleveraging.
  • Excessive fiscal consolidation in the earlier years of 2014-16 because of the fetters imposed by perceive pressure on credit rating, if fiscal targets are missed. UPA handed down a high fiscal deficit target than the official estimate in 2014. NDA II had done the same to NDA III in 2019.

This column I had written in 2017 still remains relevant. See here and here too. India needs Yanis Varoufakis’ pragmatism as Greek Finance Minister despite his strong Marxist leanings.

Naushad Forbes calls for a presumption of honesty on the part of the government, with respect to the private sector. Tough given the track record but the government has no choice. It now has the information and tools to zero in on the recalcitrant rather than pursue blanket strategies.

The answers to India’s growth stasis have to be structural and powers to do so reside with the state governments. The Union Government can take the intellectual lead. Shankkar Aiyar has some answers and I had provided some here and here. Gulzar and Somanathan provide some detailed prescriptions for vertical urban growth here.

A good friend of mine worried that the government appears clueless. Frankly, many experts are not clue-full either. Most pieces I read are mighty impressive on the diagnosis but woefully short on implementable ideas. These are not easy problems to solve. Many low-hanging policies and recommendations have already been plucked.

Traditional monetary policy tool has been applied. Many reasons why it is not gaining traction. Therefore, it is good to retain some firepower for the global economic, financial and political meltdown that looks highly plausible in 2019-20.

2 thoughts on “Cyclical Overlay on Structural

  1. Sir, experts and commentators can be clue-less in their diagnosis but the Govt cannot be clue-less, it has access to information (tax receipts, spending etc) which are not available to people outside the Govt.


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