From an economic perspective, do you view the Indian government’s current response to COVID-19, specifically in terms of renewed shutdowns of most non-essential business and night curfews, to be the right course for India during the pandemic? 

Though the government made some bad decisions in the run-up to the current Covid surge and left the country tragically unprepared for the gravity of its impact, at least its response to India's deteriorating circumstances has been better calibrated than its precipitous national lockdown in the spring of 2020. In most states, setting aside Maharashtra, the shutdowns are evening or weekend curfews. The effort is to strike a balance between limiting the spread of the virus in hard-hit localities while avoiding restrictions that might limit India’s economic recovery.  

There is still great reason for concern. India is in a difficult place. If you look at the pandemic, the number of cases continues to increase geometrically in recent weeks. India was fortunate during the first year of the pandemic. Most people felt that the incidence of the virus was at a remarkably low level. Part of the explanation is probably that the population is very young. There are also many instances of underreporting. 

Now, we are looking at more than 360,000 new cases per day.  The medical system is under extraordinary stress.  It is not able to meet the needs of Indians suffering from the virus.  It has been said that it is the “pharmacy of the world” meaning that the capacity of India’s pharmaceutical sector to manufacture vaccines is high.  But the government overestimated India’s production capacity while underestimating the impact of the second wave.  India exported millions of doses of vaccines in the name of vaccine diplomacy. Now, it has substantial shortages and it has curtailed exporting vaccines to service its population. The challenge now is to collect and distribute enough resources to mitigate the widespread suffering and then to vaccinate enough people at a sufficiently rapid rate to protect the public and minimize the chances of more harmful mutations.  

In November 2020, India’s Finance Minister Nirmala Sitharaman announced a $35.14 billion package to stimulate the economy by boosting jobs, consumer demand, manufacturing, agriculture, and exports hit by the coronavirus pandemic. Her stated objective was to attract foreign direct investment (FDI) and to enable India to become a bigger part of global supply chains. How critical are external sources, like FDI and exports, to India’s long-term economic growth compared to domestic sources of growth? 

India has been fortunate to attract a significant amount of foreign direct investment (FDI). FDI is also likely to continue to play an important role in the Indian economy. Even at its peak, however, FDI has only comprised about 1 percent of India’s gross domestic product (GDP). 

A more important source of long-term growth for India will be reviving its domestic investment. Domestic investment has decreased from its peak in the early years of this millennium because of problems in its banking sector. The banking crisis was particularly harmful to domestic investment since a large share of domestic investment goes through India’s banking institutions. India’s banks have a problem with non-performing assets. Underpinning this, banking is done on a political basis, where policymakers have regarded banks as instruments of policy rather than commercial ventures. Related to that, lending goes out to those who are politically well-connected rather than to those who meet commercially viable criteria. Banking regulation has been lacking and there needs to be a re-evaluation of how banks function to avoid banking scams that shake public trust in financial institutions.

Street vendors are a large segment of India’s urban economy.  What role do informal actors, like uncontracted laborers and street vendors, play in the Indian economy? What should the government do, if anything, to bring these actors into the formal economy?

India has a huge informal economy, with roughly 90 percent of all economic activity in the informal economy. The informal economy is much broader than the street vendors. However, street vendors are in an interesting, unusual position. Are they workers or are they entrepreneurs in their own right? 

More broadly, there needs to be a larger push to bring informal workers into the formal sector, by giving them greater rights and protecting their working conditions. Unfortunately, the trend has been in the opposite direction, as firms in the organized sector have found ways to transfer work to the informal sector rather than increase formal sector employment.  

India’s retail inflation is accelerating amid the rise of COVID-19 cases. What long-term implications can this rise have on domestic consumption and the Indian economy more broadly?

This phenomenon is surprising; you would expect the decline in demand that accompanied the pandemic to bring down prices, but that has not been the case. The rise in inflation is not a large concern, however, because the larger priority in India should be to invest and revive the economy in the short and medium-term. Due to the pandemic, India’s total debt has risen to 90 percent of GDP in April 2020.  Nonetheless, India is not in such a bad position. One of the biggest problems with foreign debt is the threat that foreign investors may panic and withdraw funds. In India, only around 2 percent of its deficit is held by foreigners. Throughout the pandemic, India has been able to attract foreign investment. At this point, the deficit is less of a priority than increasing investment and reviving the economy. 

This priority is reflected in the Reserve Bank of India's (RBI) policies. The RBI has maintained interest rates amidst the pandemic at a relatively high to moderate level. Inflation is a concern and causes some hardship. The solution to many of these hardships is to increase investment and stimulate the economy and generate more employment.  Given the reluctance of the private sector to increase investment, public sector investment will have to lead the way.  The government recognized this in its most recent budget.  As long as the government is not reckless in its spending – and it does not appear to be so -- Inflation will likely not get out of hand. 

The Indian economy is valued at USD 5 trillion, with a per capita GNP is around $3,000. Nonetheless, many Indians must scrape by to survive from day to day. What policies or reforms are needed to reduce income inequality? 

Poverty has increased because of the pandemic after a long period of decline. It will eventually diminish as India recovers from the pandemic. Inequality is a growing problem in India where the benefits of economic development are increasingly captured by a small share of the economy and millions of Indian citizens are excluded from participating in the benefits of India’s economic growth.

It is critical for the Indian government to increase investment in primary and secondary education. The Indian public is eager for greater education. Currently, the private sector of education at all levels has been growing significantly, but public schools remain in a bad state. Educating the larger population will give them the skills, tools, and capacity to participate in India's economic growth.

A fundamental challenge facing India that so many people are stuck in the agricultural sector. With a growing population, we see a decline in the average size of land-holding. People need to get out of the agriculture and the informal sector and transition into more productive work in other sectors.  Increasing exports in employment-intensive manufacturing offers an important remedy to this problem.

Many analysts think that India’s economic expansion has been service-led, but a recent paper by Shoumitro Chatterjee and Arvind Subramanian (former Chief Economic Adviser to the Government of India) has shown that from 1995 to 2018, Indian’s manufacturing exports grew by an annual average of 12.1% -- third fastest in the world behind only China and Vietnam.  Nonetheless, there remains wide scope for further growth, especially in employment-intensive industries.  India needs more investment in key infrastructure and better linkages to global value chains. Since 2016, there has been an increase in tariffs. This increase does not seem like the best way to attract foreign investment or link up with global commodity chains. 

Banking reform is also important.  An efficient banking sector will allocate investment to spur growth in employment-intensive areas. There is currently a small, privileged group of established, large businesses that get disproportionate access to investment funds. The banking system must reform to change its bias against small and medium enterprises.

One of the most noteworthy reforms under the Modi government was the 2016 Insolvency and Bankruptcy Code (IBC) because facilitates the efforts of banks to withdraw capital from unproductive investments and “zombie firms” and reallocate it to more productive ones.  Unfortunately, the code has been diluted in the past couple of years. 

In the United States, the Biden Administration’s infrastructure plan expands the definition of infrastructure to include the “care economy” including how health care and long-term care are provided. India may have a comparative advantage in the care economy. The care economy could provide a large number of jobs and be employment-intensive. An added benefit of growing the care economy is that a large number of jobs would be for women. This would reduce gender disparities and get more women into the economy and increase women’s labor participation rate. 

Currently, India is the sixth-largest economy in the world in terms of nominal GDP and purchasing power parity (PPP). Bank of America predicts that India will be the world’s third-largest economy by 2031. What do you think of this prediction? Is India currently on track to reach this new height? 

Thinking about India’s relative rank in terms of GDP and growth compared to other countries makes for an attractive story for journalists, but to my way of thinking, I am less concerned about India’s growth rate and more concerned about how the economy affects people’s quality of life, levels of poverty, and inequality in society. There should be less attention paid to measures like GDP growth and more attention paid to the quality of economic growth.

What is the biggest threat to the Indian economy in the medium term and what can be done to mitigate the impact of the threat?

The largest threat at the moment is related to India’s financial sector. The lagging financial sector increases the potential for more crises to take place. There is the issue of non-productive assets within the banking sector. Additionally, investment levels have come down from their peaks. These issues have been further exacerbated by relatively ineffective regulation and scandals in the banking and non-bank financial company (NBFC) sectors. 

Recent reforms announced in the February 2021 budget statement reflect some progress. One measure will be to privatize two of the banks in the public sector. Another important reform in the financial sector is the creation of a “bad bank” to take all “bad assets” away from the banks in the public sector. I have my doubts about this as an effective solution to the problems in India’s banking sector.  Banking regulation is problematic, whether we are talking about private sector or public sector banks. In the last years, there have been scandals in prestigious private sector banks like the ICICI and Yes Bank as well as scandals in public sector banks.  It is hard to see how these problems can be resolved without improved regulation.  Without improved regulation, creating a “bad bank” may simply allow banks to transfer their bad assets remove distressed assets from their books without doing away with the incentives for making bad loans in the first place.  The measure could add to the problem of moral hazard that has enmeshed banks.  This arises because there are political motives to make loans to well-connected firms.  Bank managers are not inclined to declare distressed assets because of the negative impact on their bank's balance sheet; because it reflects badly on their records; and because the government recapitalizes the banks even if they continue to accumulate more distressed assets.  The “bad bank” proposal doesn’t get to the root of this problem; it simply transfers bad assets to the bad bank.  In the last three years, the Indian government has spent USD 35 billion recapitalizing banks. While the bad bank may reduce the mounting costs to the government of recapitalizing India’s banks, the moral hazard problem remains.  Unless the incentives of public sector bankers are changed, bank lending will continue to be allocated inefficiently and the government will continue to have to spend billions to recapitalize Indian banks. 

Another large threat to the Indian economy is the authoritarian temperament of the government. The Modi government enacted the 2016 demonetization policy which defied the advice of experts. The Indian government had tried a demonetization policy in 1978 and failed miserably. Demonetization suddenly froze 86 percent of all Indian currency, imposing tremendous hardship on the informal sector and those who depend on cash for their livelihood.

The precipitous approach of the Modi government was again manifested in spring 2020 with its sudden, indiscriminate, and harsh lockdown to fight the Covid pandemic.  In both of these cases, most analysts agree that there was a need for substantial reform.  Problems caused by the Modi government’s authoritarian temperament, are also manifest in its farm and labor reforms over the past year.  The drawbacks are less with the nature of the reforms introduced – though they most certainly could be improved -- and more with the way the reforms were formulated. For instance, in the case of the farm reforms, there was no parliamentary debate and no consultation with farmer groups during the policy formulation phase. The absence of consultation has meant that the government has missed the opportunity to incorporate input from groups with valuable knowledge and experience.  It has rendered the reforms less acceptable to strategic political groups,  Consequently, the reforms generated mass opposition.  Implementation of the reforms would revolutionize the lives of farmers who have become dependent on selling their produce to the government.  Imposing the reforms without consultation inevitably provoked political resistance.  Deliberation and consultation would have reassured farmers and helped to work out some of the kinks in the policy. In particular, a troublesome feature of the policy is that it strengthens the bargaining position of Indian corporations at the expense of farmers.  Implementing economic reforms without public consultation does not bode well for the future of Indian economic policy.