Indias Mediocre Economy Will Not Change

---TRANSCRIPT--- Now that the US Iran war seems to be seems to have come to some resolution and uh there is there’s positive uh some positive signals in the market oil price etc. But you you claim that that we are still we are we are still in the middle income uh trap or the middle income stagnation rut. The very bottom of the pyramid in your country are better off than they were before

and the top of the pyramid are very rich almost having lifestyles like a high income country in terms of private goods but the majority of the country let’s say 80% population is not significantly better off than when the country was poor by which I mean they are still afflicted by extremely poor public services. They live in shitty urban environments. They may have urbanized but they live in shitty urban environments. Their healthcare indicators are poor. Healthcare is expensive. Education indicators are poor. Education is expensive. Anyone who can’t basically afford to send their kids abroad or to an expensive private university is fated to receive a bad education. Wages and income stagnate. Prosperity a very important term does not go up generation by generation. That is a middle income trap. What role has policy played in not really pushing up our you know per capita income from the lower middle income to at least the middle income level. Policy in India unfortunately over the last five to six years especially postco it’s been a do nothing policy. It’s been a do nothing policy in the sense that they’re already doing some things. they’ve been doing for a long time which is what prevents Indian poverty from going up which is subsidizing heavily the bottom 15% of the population the top 1 2 3% of the population is independent of the government policies and the bottom 15% are getting very effective targeted cash transfers but the rest are also getting transfers but for them those transfers don’t make the difference between survival and not survival those transfers are basically compensation payments that are being made to them for not being prosperous. The focus therefore of the of the of the national compensation is not about the economy at all. So in a sense what I’m saying is it’s not just the government that does not have a stake in increased Indian prospering. And this is very common in in middle- inome countries. The population too has given up. We are now consigned and resigned to economic mediocrity with some sloganering and a reflexive appeal to some glorious past and babbling about the future. Not about 2030 but about 2040 2047 because it’s a counter either for the people or for the government. Hello and welcome to this uh special discussion on uh the state of uh the Indian economy after Iran and US have signed a a durable peace agreement. uh there is a hope that this agreement would be durable and and the markets have responded uh u positively. Global markets have uh gone up. Indian markets have also recovered although Indian stock markets performed much worse than most other stock markets in the world during this period and as also last year and Indian currency had also performed uh worse worse than most other major economic currencies u um as it was the case last year. Indian currency was the worst performing last year too which of course has led to many economists uh talking about India probably Indian economy go going through a more serious uh structural problem uh which is uh yet to be very clearly diagnosed uh by by policy makers uh economic survey brought out in u before the budget last uh union budget also admitted that that there was some problem with Indian economy uh which is causing foreign investors to to to shy away from India which is also causing domestic investors to shy away from investing uh which is also causing uh the Indian currency the rupee punching way below its weight. uh now all these problems got accentuated in the during the US Iran uh war uh uh as the as the external sector as all countries suffered an external sector shock but India was seen as the most vulnerable. So now that the the US Iran war has uh has kind of come to uh some resolution and the and the oil prices have are settling downward. uh do we assume that the Indian economy will also recover smartly or do we do we assume that or do we think that the structural problems that that plague the Indian economy even before the war uh those problems will remain and will be a headache going forward. So to discuss this we we’ve got an eminent economist Dr. Ratin Roy uh who has been talking about this problem for many years now. I I have got Ratin Roy to talk to us because he had given an early warning about the structural issues uh that the Indian economy had been facing uh which have got accentuated by the external shock that has come on account of the US uh Iran war. So uh uh and Ratino Roy is a distinguished uh professor at the Killilia Institute of Public Policy and he uh he had been uh a member of the Prime Minister’s Economic Advisory Council uh uh in in in NDA1 uh uh that is uh the first term uh for some years of the Modi government. uh and he has written an article in the economic times which is very instructive and I’ll I’ll recommend that article to uh people uh who want to know what’s going on uh where he argues that that the Indian economy uh uh is indeed uh going through this uh structural problem which he described as a middle- inome stagnation, middle income trap combined with low productivity and for some reason and low consumption demand. right through uh the last maybe seven eight years uh from which India is unable to emerge. So so so to understand what’s going on uh I invited Dr. Ratin Roy to to talk to us. Welcome uh to the wire ratin. Um and you as as I mentioned your your article in the economic times says uh that that we are in a in a low productivity low consumption demand rut. uh and you and you say that you had been warning about this uh uh from 7 8 years ago uh even when you were in the you part of the prime minister economic advisory council but uh I guess policy makers were not paying heed uh to this uh to this issue and uh they were basically I guess Indian policy makers were carried away by their own narrative of India being the fastest growing economy in the world etc etc. So please tell us uh uh what made you write this piece uh now that the US Iran war seems to be seems to have come to some resolution and uh there is there’s positive uh some positive signals in the market oil price etc. But you you claim that that we are still we are we are still in the middle income uh trap or the middle income stagnation rut. Please tell us uh why. Well, the let me first uh clarify a couple of things. Yeah, bill income is a category and that category is a big one. Moves from approximately sort of $2,500 no sorry $1,200 per capita. Yeah. To almost $14,000 $15,000. Okay. So middle income means you’re not a poor country anymore in terms of your per capita income. India attained middle- income status that is our per capita income exceeded $1,000 about 20 years ago. Yeah. So we are a lower middle- inome country. If you compare us for example to the top eight middle- inome country which is almost a high income country, China. China closed on $30,000. They’re also a middle- income country but just about to exit into prosperity. On the other hand, you take a country like Brazil which has a per capita income of around$9 or $10,000 and they’ve been stuck in that place for 30 years. So middle income is not an adjective, it’s a noun. What is a middle income trap? It has been observed across the world that most countries that move from low income to middle income status, which is actually pretty easy if you’re not colonized or you’re not in a conflict, tend to be stuck there forever. Very few countries move from middle income to high income. I can count them for you. Other than the countries, yeah, about 10% of the historically much less other than the countries in Western Europe u other than Australia, you know, these sort of rich South Korea, South Korea or some all you can count are South Korea, Taiwan, Singapore and Chile. Oh, and Mexico. There are five countries that have moved. But if you take the vast majority of countries in the world that the ending the movie ending is very depressing. Yeah. You start with Argentina, think of Brazil, think of Jamaica, come to the Middle East, think of Morocco, think of Egypt, think of Kenya, think of South Africa. Go further east to Asia. One talks about the Asian miracle. All the countries in Asia par Taiwan, China and South Korea and Japan are in the middle income trap. What does that mean? The middle income trap very simply means you are a middle- inome country. you will have probably eliminated extreme poverty and therefore the very bottom of the pyramid in your country are better off than they were before and the top of the pyramid are very rich almost having lifestyles like a high income country in terms of private goods but the majority of the country let’s say 80% of the population is not significantly better off than when the country was poor by which I They are still afflicted by extremely poor public services. They live in shitty urban environments. They may have urbanized but live in shitty environments. Their healthcare indicators are poor. Healthcare is expensive. Education indicators are poor. Education is expensive. Anyone who can’t basically afford to send their kids abroad or to an expensive private university is fated to receive a bad education. Wages and income stagnate. Prosperity, a very important term, does not go up generation by generation. That is a middle income trap. Number one, how does one get into it? One gets into it for two reasons. If you compare the Philippines or India or Thailand to successful countries like South Korea or Taib, there are two things they then lack. They lack an acrosstheboard increase in productivity. They lack enough demand in the economy to to to produce goods at affordable prices that that 80% of the population that’s not either very rich or very poor can consume without subsidy from their own incomes. Without subsidy from their own incomes, that’s a middle- income trap. And the final point, once you get into a middle- income trap, it’s very difficult to get out of it. The only country which is showing some signs perhaps of getting out of it, but it keeps getting interrupted by politics is Brazil. The other country that showed promise but again interrupted by politics was Turkey. Turkey other than and and so zero countries having entered the middle trap get out of it. Your progress through the middle category has to be like South Korea or Taiwan or China. smooth where you consistently see an increase in prosperity and an increase in productivity, an increase in domestic demand and that means not just to the very poor news and the very rich gain but inclusive prosperity happens for the vast majority of the population. Okay, I I I I I got your point. Uh and Ratin, you have been I noticed right from the beginning uh right from the time you were a member of the prime minister economic advisory council, you have been warning the government about about this middle income stagnation. Of course, even within the middle income as you yourself said the even within the middle income range, India is kind of at the lower middle income. India is much worse than let’s say uh Malaysia, Thailand or or Brazil in terms of per capita income also isn’t it? and and in during this crisis nothing I I noticed um in the last uh 3 months uh during the post uh Iran US conflict period and also before that like last year we found that that even those the countries that you say are still in the middle income stagnation uh range trap uh like Brazil is definitely also part of the middle income uh stagnation e but they did much better than India in the last two years in terms of the way the currencies performed in terms of the the markets perform in terms of possibly in terms of foreign investment u happening in the economy in terms of domestic investment etc. So what I’m saying is even within the middle inome countries, India still is at the lower end but not showing signs of say moving up its per capita income to let’s say to 78,000 uh dollars per capita. Uh India is still at roughly about 2,800. So uh but but Brazil and some of these countries uh which you site as struggling to move to higher income uh they they have their per capita closer to 89 $10,000 etc. So how do you see India’s relative position and how do you see India’s whole policy framework uh over the last six seven years having uh having sort of what role has policy played in not really pushing up our you know per capita income from the lower middle income to at least the middle income level. policy in India unfortunately over the last five or six years especially postco has been largely redundant in terms of it’s been a do nothing policy. It’s been a do nothing policy in the sense that they’re already doing some things they’ve been doing for a long time which is what prevents Indian poverty from going up which is subsidizing heavily the bottom 15% of the population. The top 1 2 3% of the population is independent of the government policies. You know they are way too rich and way too plural now in terms of the global citizenship to really care unless they fall far of the government and government moves into this you know very common primitive sort of gunda home ministry mode and they start beating you up or preventing you from going to the country but that is that is that is that is a dark side I mean that is nothing to do with the economics that’s the politics of it you know that I I I I I hurt rich person X because I favor rich person Y that sort of pettiness is quite common with weak authoritarian regimes who are incompetent in handling the economy. So I’m not talking about that. See by and large rich people economically are independent to the government. Top 2 3% and the bottom 15% are getting very effective targeted cash transfers but the rest are also getting transfers. But for them those transfers don’t make the difference between survival and not survival. those transfers are basically compensation payments that are being made to them for not being prosperous. So you know you expect prosperity to increase as the country’s per capita income increases as you say that the country’s um you know GDP rank is going up you say we are the fastest growing economy in the world when that prosperity does not grow for the majority of the country then basically government has no project to change that and no desire to change that because it does not matter electorally It matters zil electorally. I’m not just talking here about the central government. I’m talking also about the state governments. It does not matter to them because electorally it makes no difference to their fortune. So politicians therefore quite logically realize that one scheme here, one here, one there is that is enough at the margin for people to electorally make choices that proceed. The focus therefore of the of the of the national conversation is not about the economy at all. So in a sense what I’m saying is it’s not just the government that does not have a stake in increased Indian prosperity and this is very common in in middle inome countries. The population too has given up. We are now consigned and resigned to economic mediocrity with some sloganering and a reflexive appeal to some glorious past and babbling about the future. Not about 2030 but about 2040 2047 because there’s no accountability in that. either for the people or for the government. So that’s the service that’s going on. So I wouldn’t blame the government because don’t forget it doesn’t make an ounce of a difference electorally whether you want to offer an agenda of prosperity or not. Yeah. So in a way what you’re saying is what Sud Bala recently said wrote uh he wrote an article which headlined uh winning elections but losing the economy. Uh now I want to ra talk about you’ve also referred to this often in some of your articles. Uh I call it the Hindutwa political economy. Now the Hindu fora political economy uh it seems to me u it fits in with your description that that it it lives on sloganering it lives on Vix Bharat 20 whatever 47 uh etc etc uh it lives on the glorious past and the glorious future but in the present uh there is a whole middle class uh as it were which you you said the top 3% independent of uh the government doing well uh the business uh class capitalist class the bottom whatever the bottom 15 20 bottom 15 20% uh being fed on uh whatever freebies uh free food grains etc etc. Now the the the the the middle income uh stagnation uh that we uh we started our discussion with now this section seems to be uh do you think they’re happy with the uh the hindutwa narrative of some greater glory will arrive in the future? Uh but for the time for the present uh some suffering is uh is is okay. It’s kosher. I mean it’s uh it’s not such a bad thing. Is that the case uh that you’re making? I think so. I think it is very obvious that your average person just forget the bottom 80 just talk about people like you and me who complain bitterly about these things. And if you take people who are middle-aged and older than middle-aged who don’t have a future left like you and me who you know they don’t really care about 2047 they have attained whatever prosperity they could attain already you know say if you’re 45 plus by now they know that nothing great is going to happen to their prosperity between 45 and 60. Their children are a different matter and we shall have to see what happens to them. But as long as these people mentally have made up their minds, I’ll give you an example in a minute that mediocrity is acceptable. They might couch that in very other ways, very sad in many other ways, but they are resigned, consigned to a mediocre existence. then they will justify it and all the other things that Hindutwa offers them then become an opiate which helps them live their extremely disempowered low self-respect lives you know with some modicum of borrowed dignity which is based on othering which is based on saying that you know the major threat here is call it Pakistan call it Abdul you know call it anyone you like that a particular group is bad and therefore what we need to do and Donald Trump is also doing this in America. It’s not something unique to India or to you know Egypt does it, Turkey does it that there are some people inside who are bad and my primary task is to make sure their badness does not affect my life. That kind of compromise which is a very bitter and I’m very fortunate to escaped it in my personal life and bleak and depressing compromise worth you know is I think what older people are doing the younger people I don’t know their situation is very very bad I’ll give you a very simple example when I began my working life I earned 3,500 rupees a month and I paid income tax as a temporary lecturer in a college the same job today goes for about 65,000 rupees a month which is not a level at which you pay income tax. Most people passing out of even our premier universities today are not getting jobs when they start paying income tax which means you get a great wow you at the salary I earned then as a young person I could hope in fact in in Delhi if you know Delhi Vasamur was an upcoming locality five six years salary they had EMI that I’d have enough principle to buy a home in Vas right today there’s no hope in hell our children cannot buy assets Unless you have legacy assets or you join a corrupt profession like the government, you have no hope in hand of asset accumulation the honest and hardwork. The pathway that you do well in studies and then you get a white collar job that pathway is getting closed off. Blue collar jobs that used to pay well once upon a time largely in the public sector there’s no public sector jobs left and the private sector jobs pay horribly. Let me give you an example. I think you’d agree with me that the best the dream blue collar job today is in Apple or Samsung in Tamil. Yeah. Well, the mean salary of a worker there in Apple or Samsung. Okay. These aristocrats the manufacturing labor post is 22,000 rupees a month. That’s not enough to pay income tax. Yeah. Yeah. Absolutely. So the entry levelvel young people who are entering the workforce are leading lives where their prosperity is significantly less than that of their previous generation. And that’s a frightening thing to say in a developing country. True. The government is switched off from this. I don’t know what’s going to happen politically but the government is switched off from this not because it doesn’t know because it doesn’t know but it it it does not And and the worst part to come back to the hard economics is on the productivity side. Why is China our biggest import partner? Not that we can’t export. Forget exports. That’s too big for our pay grade. Okay. Other than shrimp or something. Yeah. Or or low-end computer services. Why can’t we make our own dishes? Why can’t we make things? Yeah. Yeah. Why can’t we make you know hammers that affordably in India that people can work on to sell things? Why is it that 300 rupee shirts are imported from Bangladesh and Vietnam while we can make 5,000 rupee shirts like this one for rich people? Yeah. because India’s productivity is abysmally low and that is reflected in the fact that our manufacturing share in GDP is at the lowest level this century and the informal sector is the major contributor now to services growth. So if you have very informal sector being the engine of your growth your manufacturing has collapsed your agriculture is heavily subsidized and barely able to keep up prosp and and you can’t do anything about these things and you won’t do anything about these things then prosperity falls the relatively older people are protected because their life is over it’s the younger people who are bearing the brunt and that is the great tragedy of this particular mediocre economy called India so I want to uh I want to come to this particular sentence that you’ve written in your piece in regard to I mean I I take your the broader point that low productivity low consumption demand uh low equilibrium economy has not created any uh inclusive prosperity as in has not expanded the consuming middle class last whatever 7 8 10 years but you have said that foreign investors talk of the talk of the economy as the next big thing only to dump it when crisis exposes a structural demand problem and persistently low productivity. Now what is this a serious crisis because India has suddenly India is experiencing uh virtually zero net FDI inflows over the last 2 three years and we are also experiencing negative balance of payments last two three years we are we are not even able to cover you know 1% of of current account deficit with with foreign capital flows uh How do you see this problem now? Is this peculiar to India or is it uh uh is this happening with other uh countries in who are also in a kind of uh uh middle income trap and who are also experiencing some external shocks uh like like India is uh most countries that are not commodity exporters experience this countries that are heavy commodity exporters don’t have capital controls therefore what happens is that they run into private sector balance of crisis such as South Africa. South Africa cannot have commodity controls. They have a different problem because their industries is controlled by people like Anglo-American whose loyalties lie in London, not not in not in Johannesburg. Uh they are exporters of gold, right? They’re exporters of basic commodities. Brazil is in a similar situation except it has a progressive government that is somewhat careful about uh what happens to it currency. there uh governments uh essentially let the currency take the brunt and when government borrowing uh when government and private sector borrowing uh becomes excessive they have a crisis they have these repeated crisis. India has been quite fortunate so far in the sense that our FDI plus FII largely fin you know comfortably finance only our current account deficit and little and because our investment rates are so low in the formal sector compared to others. It’s not as if the entire economy is hugely dependent on FDI and FI except to cover the current account deficit. Yeah. So if FD and FI this way if FDI and FI exit this country say by 20 30%. What would happen to the growth? The answer there would be far more comforting then the answer to what would happen to the balance of payments. So we have a payments crisis. We are unproductive. So we import more than we export. Yeah. Uh we have to import even things that there’s no call for a poor country like India to be importing such as Ganesh idols. As I keep repeating I’m not talking Ganesh idols. I’m talking pins. So in these circumstances uh foreign direct investment and foreign institution investment does not play a catalytic role in promoting growth. However I’m equalizing if it did then many more engineers would have jobs. If it did then many more chemists would have jobs in farmer companies. I’m talking only about FDI here. So what it is doing is it’s helping us balance our balance of payments. Now here we have got a major macroeconomic problem. One way to deal with the balance of payments problem is to make imports more expensive and exports cheaper. You do that by devaluing your currency. Forget all this talk about real exchange and overv valued undervalued. This is all rubbish that economists use because you know uh there’s no such thing. I mean it’s like talkload potential out. Uh so you don’t need to pay attention to that if you’re a smart guy. Just understand this that the more the Indian rupee depreciates against the dollar the more expensive it is to import stuff. Right. Because you have to pay more in rupees than for every dollar worth of thing you import. Yeah. Right. and the cheaper it is to export. Yeah. So because you earn more rupees for every dollar. So let’s say a London Bombay air ticket costs $100, right? And you want to travel to London, that’s an import, right? Unless you travel by Air India, that’s an export. That’s a good way to say it. So when $100 is uh 100 rupees to the dollar, then you know you pay 100 rupees for that ticket. When it becomes 200 rupees to dollar, you pay 200 rupees for that ticket. Right. Yeah. Got it. So British Airways is earning more less but Air India is earning more because Air India earns in rupees, British Airways earns in dollars. Yeah. Yeah. So ideally you would start devaluing your currency freely to the extent possible. Now there are two constraints that one is importing so much that that would mean that things will become very expensive in India and so inflation will go up and since most of the consuming is done by rich people uh their inflation will go up. Second, which is more important is when FDI or FII comes into this country, let’s say I’m an FDI guy from London. I bring a $100 here to put it to the stock market. How do I do that? Stock market operates in rupees. So, I go to the RBI, I change my $100, let’s say for 100 rupees, right? Or in today’s exchange, we had about 10,000 rupees. I put the 10,000 to the stock market. What has happened? RBI has got $100 more that it uses to pay our current account deficit. Now when I want to return the profits on that let’s say I invested 10,000 pay% so I made 2,000 rupees now 2,000 rupees at uh you know at a exchange rate of 1 is to 100 is about 20 rupees worth of dollars okay $20 if I devalue the currency and that uh 2,000 rupees is only worth $10 then my profits go down by half so I’m watching the devaluation saying boss I invested in your country But and but but when I the exchange risk is very very high and therefore I’m not going to invest. So I can’t even devalue too much. Yeah. True. Therefore the government has started all this polycottling of foreign investment. Yeah. I’ll bear my exchange risk. But you know what? In the end the money has to come from your reserves. Yeah. When you when you when you hedge on behalf of a foreign investor, the money has to come from your reserves. Yeah. So India is in a very bad macroeconomic quantity. I had warned about this in 2022 at the Cthillia Economic Conclave. All the economists in that room laughed but now I hope they can eat there after because we are precisely in that situation. This is what you describe as a as a schizophrenic economy in your right. So essentially you you’re saying that that there are two sets of indicators. One points in one direction the other most others are pointing in downward uh direction. Right. That’s what you saying. Yeah, I’m saying that you know growth and inflation normally signal increased prosperity. Yeah. But when you have structural problems in the economy then growth high growth and low inflation do not signal prosperity. Inflation signals extreme caution in discretionary expenditure. We have evidence now that a lot of consumption India is increasingly loan financed as people try and keep up standards. Now if you’re going to spend on loans, you’re going to be very careful what you buy and you sell. Right now obviously there’s a slight increase in price and gone. You won’t go to the market as indigo and are discovering and FFCG companies are discovering small increases in prices are resulting in empty trains and therefore prices they keep prices down and demand is low and that’s one trend. So inflation is low is reflecting that. Yeah. Right. Not not low prices in the face of strong demand and the supply response. And you’re essentially uh I mean what you’re saying is that this arrangement it suits uh the this regime which uh which has a political economy uh as as we discussed uh the objectives are to to keep winning elections to keep consolidate the the the Hindu uh uh uh whatever Hindu base and and and and within this economic economic framework. Yeah, I don’t blame this regime at all. They’ve won three elections at the center. Uh if you look at state governments also there elections in no election in this country is anything other than compensation an electoral issue right the electorate does not respond to demands for even you take Mr. Rahul Gandhi’s 2019 NIH proposal which I oppose. What was it? It was about compensation. Okay. What is the cost census about? It’s about compensation. So it’s not as if the now all that happens is that the current government in power has something other than compensation to offer. Okay? And they do it. But most important people buy it. Forget the central government. Take come and learn. What was Vic’s offer to the people? I don’t know. But whatever he was offering, it was not it was not prosperity. But they elected him in large numbers, right? uh so the the the political uh I think the entire political spectrum in this country has lost its way in terms of a prosperity offer. Mr. Nu had a prosperity offer. Mrs. Gandhi had a prosperity offer. Rajiv Gandhi had a prosperity offer. Narima had a prosperity offer. Baja had a prosperity offer. Maybe what people have learned is that Indian society does not reward you for improving inclusive growth. I don’t know and that’s quite possible. I mean Thailand progressive country parties were not rewarded for increasing prosperity. They ended up in this mediocre place with a quasi dictatorial dysfunctional government and are well known now for what for tourism and being the largest producer of chickens in the world. Yeah. Dtoid when Lula and increased inclusive prosperity was made to suffer for 10 years and a right-wing you know incompetent was brought in you know who who sent the economy back 15 20 years. So I would say it’s a larger issue that it’s becoming very very difficult now in the present day and age to sort of put forth an ideology of prosperity. Certainly in Indian context no party is doing it. So why train the poor rooting party at the center? There are so many things they can do to win elections and I don’t blame them because if you don’t have a a national vision if you I mean on the economy if you don’t have a national project for the economy now if you want to make India you know a Hindu I don’t know I’m not qualified to speak on that but if you don’t have an economic vision unless you’re forced to develop that by the electorate why would you bother you just want to get keep getting dected and that’s what they’re doing and they want to keep winning in every state where they’ve not won and that’s what they’re doing so why why train They you get the government that you vote for and that’s what you’re getting. True. True. Yeah. You get the you get the government you vote for. Thank you. Thank you Ratin for uh talking to us and uh giving us your insights um on um on on a whole range of issues. Uh thank you very much. Thank you.