Macroeconomic Policy in India Since the Global Financial Crisis - Trends, Policies and Challenges in Economic Revival Post-COVID

By Sebastian Morris

Springer, 2022, Singapore

Cite the book as

Morris, S. (2022). Introduction. In: Macroeconomic Policy in India Since the Global Financial Crisis. India Studies in Business and Economics. Springer, Singapore.

(Preface and chapter wise abstracts)


(From the front matter of the book)

The belief that India is the fastest growing economy is widely held, and the government in recent years has made this claim repeatedly. After 2015 China slowed down, and India’s growth was in the same range as China’s. The comparison, if truly driven by a keen desire to make the economic transition, as it should be, would have to be with the East Asian Tigers and China, during their transformation phases. Korea and Taiwan grew at around 8% over more than three decades, with brief interruptions caused by global shocks (most notably the Oil shock, during the late 70s). They were able to lift themselves well above the “middle-income levels” to reach nearly advanced country status. Singapore went on to become one of the richest countries in the world on its own steam with no natural endowments. While the case of Singapore could perhaps be kept aside due to its small size and city status, the cases of Korea and Taiwan are most relevant. From 1979 till almost 2014, China has grown at rates above 9% to take the economy to within striking range of being an advanced country.

Yet, these economies hardly find mention among the policymakers and academics in India. The facts of their growth experience are readily pooh-poohed by the Indian intelligentsia, even by the few among them, who are concerned about growth and the economic transition. Others, who worry about the human agency, are predisposed to ignore growth. They create a false hiatus between growth and (human) development. The evidence is overwhelming that no country of any substantial size has made sustainable human development without economic development. Though the two are not exactly parallel, their trajectories tend to be in step. Deviations are almost entirely explainable in terms of the distribution of income, which in turn may have been caused by social and economic factors.

For many others, the economic transition does not seem to matter. It is some archaic notions of identity and culture that they seem to be concerned about. Modernization (with the inclusion that goes with it) appears alien and intrusive to them. Unfortunately, this segment of the intelligentsia has grown in recent years. Limited growth, in not being able to include all, but having benefitted the middle classes substantially, may have contributed to the rise of this segment. The political discourse today reveals that Indian society is at an inflection point where the middle classes as a whole are beginning to show their impatience with the inclusive democracy that is India, and take more than potshots at it. The failure to provide public services is at the root of this impatience, slowness of growth has limited inclusion. Elites who believe in modernization and democracy underestimate the dangers of not having high enough growth, and in leaving the problem of public services delivery unaddressed.

The so-called “middle-income” barrier has entrapped many nations, and the few instances of escape are almost exclusively the export-led (high) growth economies. Additionally, our poor land endowments per person, similar to Korea, Taiwan, and Japan, make these cases relevant. Would India be able to follow these economies? If it does not, risks to its unity would arise, belying the great political program of an inclusive society that was initiated with independence. When the cake grows slowly, the concern about where the cuts are made takes precedence over growth. The slowness of economic growth in India casts doubt on whether it is on its way to its economic transition. We know that the later a country has successfully transited, the quicker its transition has been.

Social media is rife with the country’s achievements both real and fictional. The reality that India houses some 30–40% of the world’s misery be it disease, poverty, unemployment, hurt due to pollution, child undernourishment, or illiteracy stares starkly at anyone who chooses to make even a casual glance at the reality. Countries with vastly superior endowment of natural resources—many of them African, Central Asian, and Latin American—can at least reach the middle-income level riding on the dynamism of the advanced countries and China. India has no option but to create its own high-speed engine of growth. The Philippines’ approach of depending largely on remittances is out for India. It is just too big. That approach cannot, even for the Philippines, ensure the economic transition. The thin original middle class of India that exported much of the younger generation out to escape to a better life cannot be the model for the billion that waits.

We overcame hunger through the high growth that raised the poor’s incomes, aided by the MGNREGS. But over the last 9 years or so growth had been slow. The COVID crisis has been particularly harsh on the poor and many millions have lost their jobs. Now, with almost 2 years into the crisis and recovery, the GDP has just crossed the pre-COVID level, and the effective employment is much below the pre-COVID levels. The years before the COVID were also nearly stagnant on employment. It is no longer possible to explain (away) the slowdown by pointing to the external conditions and shocks. While these are important, the small size of the economy, yet relative to the world economy means that it is action and policy within that would determine the course of the economy.

It is on this matter of growth that we focus. The framework of analysis is essentially macroeconomic with the demand determined level of output being central. The structure of the economy, with the impact of policy and action on the structure, in influencing the capacity to produce, is also important. But we do not cover all aspects of the same. We know that demand and the capacity to produce (the emerging economy equivalent of the full employment level of output in the mature economies) have to rise keeping in step. Reform for the better can be held back if demand is not in sync. Excessive demand, without the reforms to extend and improve capacity, can only be ephemeral and inflationary.

The fact that India has vast surplus labor would mean, at an abstract level, that over the longer term, there is only one real constraint that policymakers need to accept— land. Capital and hence the capacity to produce is only a current “constraint” that can be overcome with investment—an objective of macroeconomic policy. And much (though not all) of technology can conceivably be “imported”. And even technological development is actionable by policies that attempt to counteract the market failure in its generation. Skill development is part of the process of reform and structural change. In other words, growth is the best recipe to overcome constraints, even as policies—industrial, trade, and tax—besides governance and administrative reform that address constraints make room for growth.

Hence, the fact that India is not growing at high rates is a matter of much concern. There is little comfort in it growing at anything less than 7%. We believe that with the potentially great dynamism of the private sector, policymakers would have to work hard to give it less than 5%! Yet, there seems to be an acceptance of low growth by many in positions of power and influence. The RBI in giving itself “inflation targeting” may have veered away from a concern for growth. Understandably, growth cannot be achieved by monetary policy alone. But in an emerging economy context (with the existence of idle labor), the mantle of growth cannot be shirked away by appealing to doctrinaire notions that may have been functional in the developed country context of labor tightness. The current fashion should not be acceptable on its currency alone. Left leaners also cannot neglect high growth. In a market economy, when the technology itself (as capital intensity expands) can give an aggregate labor productivity of nearly 5%, growth at any less rate cannot lead to labor absorption. This does not mean that the march of innovations and capital investments be restrained, or that work norms be lowered. That would amount to backpedalling. At 9% growth, there would be labor absorption at about 4%. And that when sustained over a couple of decades would undoubtedly ensure the economic transition. The demographic dividend is not automatic, unlike what many populists believe it to be. It can only be achieved with high growth, and the “asking” rate for its achievement only increases with the backlog of idle labor that slow growth engenders.

Today, it is a little less difficult to argue against orthodoxy that “governments and the central banks have a role merely in inflation control”. The Global Financial Crisis (GFC) has shaken the foundations of the sterile and unreal world of rational expectations equilibrium schools. Their tenets of policy irrelevance and equilibrium of markets and the economy as a whole, which vice-like held their reign over the academic macroeconomics, are fading away. Similarly, the aspect of coordination between central banks and the government on macroeconomic matters cannot be easily dismissed. In the case of emerging economies much more is required from the visible hand. The aspect of strategic macroeconomic policy that recognizes as its objective, the use of idle labor to export to the rich countries and more generally, needs recognition. The macroeconomic dimensions of export-led growth constructed from the stories of China (until today), Taiwan and Korea (till about 1997), and Japan much earlier need to be brought to the forefront in policymaking in India.

No country of any substantial size has made the economic transition without a prior or simultaneous agricultural transformation. Today India may well be at that point when the terms of trade need to rise in favor of agriculture. Only then can agriculturists’ incomes rise to slow the divergence between rural and urban incomes. Otherwise, inclusion would be hurt, and the home market would constrain. China, with its somewhat higher level of income (and far more egalitarian distribution), reached this stage almost immediately after its open-door policy. Despite the growth of agriculture at 6% or so since then for 8 years or so, inflation largely on account of food prices was high given the small but sustained gap between demand and supply. Chinese policymakers’ understood the structural context and the supply-side aspect, and did not respond to this inflation to curtail demand through macroeconomic particularly monetary measures. The inflation over a decade and a half passed over as the food demand growth slowed down. Today we see the RBI targeting inflation—not just the core—and being ever ready to tighten as if that could bring down food demand— the most basic of all demand which for most (other than the very poor bottom 40%) would be income inelastic. Not only does it arrest inclusion but also retards growth with no gain in terms of reduced inflation. The fact that high growth has made nearly all—even the urban poor—calorie “sufficient” c. 2015 should have given the RBI greater confidence to pursue growth, recognizing the structural necessity of including the agriculturists in the home market demand. Of course, supply-side initiatives, including measures that improve the farmers’ take from the consumers’ expenditure on food, are important, but that gets into strategies for agricultural transformation and falls outside the scope of this book.

Analyses of the macroeconomy cannot anymore relegate the financial sector to the background. The quantum of financial assets in portfolios has gone up much faster than either assets or GDP. This has been a global phenomenon, and while the advanced countries have taken the lead, the emerging economies too show large rises in financial asset holding. Low costs of financial transactions, heightened information availability (though not of valuation), and participation through algorithms have meant the development of leverage and more frequent determination of market prices. The concomitant demand for liquidity arising out of portfolio demand relative to the transactions demand has been rising sharply. Similarly, exchange rates over the short run are almost entirely determined by capital flows, even though the current account would have a role in driving expectations. Hence, the gamut of monetary policy has expanded to include besides liquidity (and/or low-end rates) to actions along the yield curve, to direct support of private entities (quantitative easing), besides of course the foreign exchange markets.

Executives and administrators rightly think in terms of action, and the sharp distinction between policy and other actions is not clear in their minds. However, for governments and central banks, it is important to think in terms of policy and underplay action/intervention of a direct kind, or indulge in advice. Notably, the government in India goads the industry to process more food, while the tax policy is completely orthogonal to that objective. RBI desires a high level of transmission by banks, but its own policies and stances could drive banks to poor transmission. As the economy matures it is important to move away from action and discretion, to working through policies. It has become fashionable among the many in the intelligentsia to blame all our failures on the politician. Some go to the extent of creating the “political class” on whom if the problem can be ascribed, so no more analysis is required. We would think this is self-defeating. Most of the problems of the country are correctible through a change in policy, law, framework, organization, design, etc., and the academic has the role to discover the specific leverage points for change in society. Crisis present opportunities for change, but more often than not the constructive answers for change are not ready with policymakers. The few instances when they were—as during the balance of payments crisis of 1991–1992, the Great Liberalization followed, to deliver the economy out of the mess of the previous decade.

This book takes a detailed look at the growth experience of India since the GFC. It has to take a detour into the measurement issues given the significant divergence in growth as computed from the older 2004–2005 GDP series and the new 2011– 2012 series. Many more series than what is used in conventional analysis had to be considered to build a consistent picture.

The period covered includes the terms of the UPA-II, Modi-I, and Modi-II which is on today. The regime changes have been sharp. Not only the executive, but the judiciary through its actions had amplified uncertainties on the economy. While I don’t cover the high growth period that preceded the GFC nor the GFC itself, references to the same, are inevitable in any discussion. The presentation and the approach of the analysis majorly work on the determinants of demand and of inflation whether these arise from external shocks or internal actions including policy with a focus on the fiscal and the monetary. The discussion is on “high growth”. Why did it elude India after having had two rounds of high growth? References to the East Asian Tigers cannot be avoided, though this is hardly a comparative study.

It is almost a truism that India has to find ways of engaging its vast “idle” population. And to do that demand for manufactured goods and tradable services—through exports and home market demand—has to grow rapidly. Investment ratio, employment growth, and export growth, therefore, become the true indicators of performance. A brief consideration of manufacturing performance, although not strictly within the domain of macroeconomic analysis, is also included.

So also, the GST being destination-based would create fiscal disincentives for production-oriented regions in their support of investments, a role that regional governments ought to keenly play at the current phase of development of the economy. The Goods and Services Tax (reform) because it integrates the home market and removes distortions is vital. Should there not be compensatory mechanisms for the production states?

Over time, I hope very much that the perspectives developed here would help in framing the issues in macroeconomic management after the more detailed analyses are contested and debated.


In this book, we bring out the performance of the Indian economy, and review the approach of macroeconomic policy especially demand management in the Indian economy, since the Global Financial Crisis. We also consider the COVID crisis and its impact, and the measures adopted to mitigate its effects by both the government and the central bank focusing on the macroeconomic dimensions of the various initiatives. We also cover the issues related to manufacturing performance in India. At end of November 2021, the economy showed a mixed response with the stock market rising sharply though the recovery was modest, and as on date is yet to go decisively over the levels reached in 2019 a year before the crisis.

There is much hope though that the capital investments cycle which had been depressed almost since 2012–13 would revive based on the government’s initiatives in manufacturing, and due to the positive effects (for India) from the vastly changed global economic environment, especially those related to China, and its relationship with Europe and US, especially the latter. The institution of GST has created disincentives against investment support on the part of regional governments, and the institutional mechanism also makes it difficult to quickly use tax cuts as countercyclical policy and puts an upward political bias to keep rates high.

We also lay out an enhanced macroeconomic framework that recognizes shocks that heighten uncertainty increasing the portfolio demand for money, as the role of “structural” policies on the capacity (full employment) output in macroeconomic management. We bring out the limitations in the CPI that is used by policymakers including in the core CPI. We also take into account the correction required in the new GDP11-12 series which had in the early years overestimated the growth in the Indian economy.

This chapter covers the conceptual enhancements to the standard macroeconomic framework and also provides a synopsis of the coverage and results brought in other chapters of the book.


In this chapter, we being out the estimates of growth from the period since the Global Financial Crisis (GFC) using a variety of data—GDP using both the series with 2004–05 as base year and the new series with 2011–12 as base year, besides the Index of Industrial Production (IIP) as well again with both base year. What should have been a simple matter is made difficult by the divergence in the estimates of growth between the two national income series, by as much as 1.5% per annum over the years that they overlap. The problem of overestimation is recognized, the trends in growth are drawn by considering the physical IIP. Growth had been high at around 9% for the 2 years following the GFC when the fiscal stimulus was in place. Thereafter it fell and rose again briefly in 2016–17 to fall again. From late 2018 growth slowed down to reach a low level of just a wee bit above 4%. The manufacturing, and the trade, transport, storage, and communication sectors too show trends which are broadly similar, and the low growth from 2011 to 2012 onwards is supported by the lower rate of gross capital formation in India.


In this chapter, we bring out the trends in credit until the eve of the COVID crisis. Credit growth has been muted from around 2016, being close to zero or negative for industry reflecting not only the slow down but the problem of non-performing assets (NPA) and high risks both perceived and real in lending to the industrial sectors. Credit growth to the services sector was higher but still below 10% generally and much lower than in the earlier period. In all sectors, credit growth declined sharply from 2019. Since there are significant changes in the labor participation rates, the growth rate in employment when considered presents a dismal picture right from 2016 of little or no growth in urban employment and marginal growth in rural. Goods exports remained nearly stagnant over the period, and services exports grew from 2017 but both fell off from 2019. The current account deficit was low implying a low growth of the economy. The “Tiger Period” from 2003 to 2004 to the Global Financial Crisis (GFC) saw very rapid growth in net portfolio investment and in FDI.


In this chapter, we bring out the trends in gross capital formation, and in foreign investment both FDI and FII. Gross capital formation has been muted its share falling from the high levels achieved in the “Tiger Period” to levels around 32%. And the share of the private sector had fallen from the high levels reached. The story of reforms since 1991–92 has been one of the shares of private corporate sector rising. Both portfolio and direct investments have been modest or nearly stagnant though showing much volatility. FDI has generally followed growth. In the period since 2011–12, they mirror the overall slowdown and the fall in the rate of gross capital formation.


In this chapter, the trends in inflation are brought out and corrections made to the same since the CPI has major issues. We discuss the problems with the CPI, that even the core measure is erroneous, because of the treatment of rent expenditure by recourse to the government and public sector employees’ House Rent Allowance (HRA) as part of the rent payments. The weight for food being overly high in the Consumer Expenditure Surveys of the National Sample Survey. With the corrections, the inflation in recent times have been modest at around 5% of lower, and had steadily declined from 2011 to 2012 onwards. The mistaken reading of “high inflation” in 2010–11 may have been the basis for the rather steep monetary tightening that the RBI had put in place 2011–12. Furthermore, the rates of interest may have been higher than that indicated by the policy rates—repo and reverse repo—since the low-end bond yields were often well above the repo implying an unstated credit rationing indulged by the RBI. Rates had been coming down from the very high rates reached during the “taper tantrum” but rose again from 2017 and began to decline from 2018. Uncertainty in the financial market rose sharply from 2019 onwards.


Here, we bring out the key influences, both shocks and policy changes, that account for the performance of the economy brought out in the earlier chapters. Being an analysis of the dynamics of the short run, the focus is on demand and its determinants. Structural policies and changes are covered to the extent that they have a bearing on the demand. We cover both the financial market side (including the global market) and the goods and services market. The emphasis is on the policy though since the Indian economy being small in relation to the rest of the world, there is always a policy response that is possible to keep growth at high rates, given also its emerging character—the availability of idle and underutilized labor. The fiscal stimulus provided to counteract the GFC was what kept growth rates at a high level of 9% in 2008–09 and 2009–10 and part of 2010–11. The near simultaneous withdrawal of the fiscal stimulus and the monetary contraction (to fight largely a supply-side inflation that was also overestimated), c.2011–12 was the immediate reason for the sharp decline in investment and in output. The problems were compounded by the so-called “policy paralysis” brought about by a spate of bans and governance issues in the telecom and mining sectors. However, the suddenness of the monetary squeeze when the rest of the world was still in a situation of ample liquidity braked investments generally and brought many of the investment projects in infrastructure including PPPs to their knees. Many had built in debilities but not all. The feedback effect from problematic design to a high interest rate regime put pressure on the banking system to which the risks had been shifted. The uncompensated demand reduction due to the success of the GST was an issue. Most initiatives of the Modi Government, despite their potentially very large public and social value, did not have the necessary basis in design, organization, policy and law, and as such had little impact. The fiscal side too was conservative with the large reduction in the MGNREGS allocations, and the underspending vis-à-vis budgets in a period when “animal spirits” were down.


In this chapter, we re-examine the approach of monetary policy in India, including the stated objective of “fighting” inflation. We bring out the dysfunctionalities in targeting the CPI both in terms of the ability to fight inflation, and the impact on the capital market. We also discuss the issue of supply side and demand side inflation in the context of an economy that has yet to make its economic transition.


In this chapter, we write about the COVID Crisis as it unfolded, without the benefit of hindsight. The data and the analysis are therefore of meaning when considered with reference to what was known by early May 2020. The situation prior to the COVID as brought out in the Chaps. 27 was problematic with major slowdown and heightened uncertainty in the financial sector in the last year before the crisis. The crisis changed everything. The now steep fall “due to the crisis” could now confound the earlier slowdown. If every country was expected to decline by around 20–30% over the immediate quarter then a decline of the nearly the same order but from a prior slow growth should not have attracted attention on the ground that there had been a slowdown. The response of the RBI, free from its conservative shackles, now followed the US into expanding liquidity and supporting the financial sector, in ways that were quite radical for the RBI. In contrast during the GFC the RBI had to be persuaded to act. There were no arguments against the need to adopt supportive and expansionary monetary measures, and the governor with no doctrinaire blinkers could address the reality. However, the government in its fiscal response was barely adequate. The “20 lakh crore” stimulus was misleading. Only about Rs. 1.72 lakh crore involved expenditures directly or indirectly by raising consumer incomes. The rest were liquidity, credit, and guarantee measures, and included a borrowing limit enhancement for the state governments. The response was in sharp contrast to the response to the GFC when the central government took the leadership role to put together a fiscal package and persuade the RBI to expand liquidity, to restore the growth to almost its original level. The administrative measures of territorial lockdowns did little to contain the spread, but imposed great hardship on the people, especially the migrant workers, besides curtailing production wantonly. We estimate the unconditional impact of the crisis (i.e., without the fiscal response) should have taken the economy down from its 2019 to 20 value to between 8.86 and 12.23%, and conditional on the stimulus to a value of −6.21 to −9.68%, most likely closer to the latter. The very early estimates were somewhat worse, but the RBI in responding swiftly and in kind ensured that there would not be a monetary constraint, and hence a simpler expenditure model could be used.


In this chapter we bring out the performance of the economy over the crisis period and its subsequent recovery. Since the decline over the initial quarter of the COVID crisis was steep being in the range of 20–30%, growth over subsequent quarters or months in relation to the very low levels appear high. To overcome this “base effect” which would affect normal YoY estimates of the growth, we have variously used rolling moving averages and current month or quarter over previous pre-COVID month or quarter. In this chapter we bring out the performance of the economy over the crisis period and its subsequent recovery. We consider first the performance of the stock market which is seemingly out of line with the performance of the economy. We explain that there is no anomaly here, since h the discount rates (both foreign and domestic) had fallen considerably owing to the fall in the interest rates over various maturities. Additionally, costs such as interest, and tax (corporate) besides labor had fallen. The effect of the crisis was quite severe on the manufacturing sector, and not all segments have recovered. Capital goods and durables have yet to reach their pre-COVID levels. Employment recovery has been most problematic. We bring out the trends in employment, credit, portfolio, and direct investments, and also review the monetary developments. Employment recovery has been particularly problematic and there are large employment losses in the manufacturing sector, and recovery in employment is well below the pre-COVID levels. It is unlikely that without the revival of the investment cycle there would be job creation. A significant part of the job losses in the manufacturing sector seems to be “structural”. We consider in detail the effects of the initiatives of the RBI on the financial sector and show that the RBI was able to bring down the low end rates quite sharply and marginally the 10-year bond yields, so that the uncertainties with regard to the future rates continue. This is a doubt due to the continuing belief of the capital market that the RBI would respond to CPI inflation given its stated target of inflation (CPI rather than Core CPI) targeting. We conclude that the recovery has barely taken the economy back to the pre-COVID levels. And employment recovery in industry and manufacturing has yet to take place. There have been massive job losses which are in part being hidden by the return to agriculture (with its disguised employment) and fall in the labor force participation rates.

  1. THE CHALLENGE OF MANUFACTURING (by Sebastian Morris and Kapil Shukla)


In this chapter we analyze the reasons for the modest performance of Indian manufacturing despite its potential. In the analyses the contrast is with the East Asian “Tigers” and China, which all adopted Export Led Growth (ELG)”. In the process we characterize ELG as the simultaneous pursuit of both import substitution and export promotion and not the movement to laissez-faire as many assume it to be. ELG has its own macroeconomic aspect—undervalued currencies, low interest rates, and a growth rather than inflation orientation. The fact of idle labor in transforming economies makes it imperative to reconsider some of the tenets of both conventional trade theories and macroeconomics. We also bring out industrial and trade policy-related debilities on much of manufacturing—tariff inversions, excessive taxation. These had kept scales low and costs high. The prices of non-tradables especially infrastructure services and goods have been very high as well. For long years the export trade profitability was lower than the domestic trade profitability. More functional tariffs allowed the automobile sector to perform better. We also bring out how the vast demand potential in electronics, solar panels, computers, mobiles have been missed by crucial errors of policy. Similarly, we also bring out the perverse consequences of large positive deviation from the uncovered parity condition which not only increases the cost of capital for Indian businesses but puts them at a disadvantage vis-à-vis MNCs, which situation had been avoided by the East Asian “Tigers”. We list out the recent initiatives of the government, especially the Production Linked Incentive (PLI) scheme. The scheme we believe (though too early to analyze) could affect positively certain sectors. The changing global environment brought about by China being seen as an adversary by many countries including the US, China going “green” and China consciously moving into high-tech industries could act in conjunction with the PLI. The very success of ITES and the large remittances inflow act to create a “Dutch Disease” on manufacturing.


  1. GST AND THE DISCRIMINATION AGAINST PRODUCTION STATES (by (Sebastian Morris, Astha Agarwalla, Ajay Pandey and Sobhesh Agarwalla)

Goods and Services Tax as introduced in India, being a destination oriented tax, does not encourage regions to promote manufacturing and tradable services industries. The country is at an early stage of its economic transition, and the states have a subnational character. It is important that the states engage in locational tournaments to attract investments by providing infrastructure services, governance, and other public services. We develop a new consumption-based approach that adjusts the detailed consumer expenditure figures of the National Sample Surveys at the state level to estimate the Revenue Neutral Rates at the state level. There are stark differences between the rates for the producing states and the consumption-oriented states amounting to as much as 20% of GDP. The divergence is higher than those arrived at by the Government before the introduction of GST. The proposed compensation scheme that protects revenue at 14% growth for 5 years would be unfair to the producing states once the 5 years are over. As GST impacts the locational choices of new investments, the lack of fiscal incentives for states to attract and nurture investments, unless corrected, would have deleterious effects. A significant share of the Centre’s collection of GST may have to be distributed based on manufacturing and tradable services production, if the country is not to lose the steam of high and growing investments to take it through its economic transformation. The institutional mechanism for GST, viz., the GST Council in its present form would make it difficult to quickly cut or raise tax rates including across the board changes that are necessary for macroeconomic management.


The Global Financial Crisis (GFC) did not lead to a reduction in growth in India. Growth, which had reached a level of 9.75% in certain quarters, before the crisis, had marginally slowed down over the last three quarters before the GFC, due to the restrictive monetary policies pursued by the RBI, to quell a supply side inflation a part of which was imported through higher oil prices. Growth nevertheless was at around 8.5% on the eve of the crisis. The RBI during the early part of the crisis delayed its response.

However the government had its fiscal counter action ready and as a result growth did not really fall for the next two years being supported at nearly 9%. However, the RBI seeing high inflation (largely because the CPI was being erroneously computed), acted to dramatically raise interest rates, which brought investments down by nearly 4% points as a share of GDP. This happened when the fiscal stimulus was being withdrawn. Almost until 2018, the RBI kept a hawkish stance. Other actions such as underspending in relation to budgets (which happened during the first two budgets of Modi-I), the early bans by the courts of important activities, the nearly unconditional pursuit of the fiscal deficit targets, significant pull back in MGNREGS spending, demonetization, unwarranted uncertainties imposed on an important industry -automobiles- further contributed to what was to become the longest period of slow growth since the Great Liberalization of the early 90s. Over a significant part of this period the policy rates underestimate the interest rates since the repo window was not open wide. The financial sector too was under stress due inter alia to the slowdown itself, the delayed response of the government to shore up the net worth of PSU BFSIs (and hence of the pressure on NBFCs), the poor lending practices especially to the infrastructure sector, and to the tightness in credit.

GST in improving the tax compliance raised the effective tax rate to put further pressure on demand. In the run up to the 2019 elections, which was also when global economies showed a spurt up, there seemed to revival, which however proved to be ephemeral since the growth on the eve of the crisis was most certainly no more than 4.5%.

The COVID Crisis brought about a decline which was much larger than it need have been, due largely to the dysfunctional lockdowns over the first six months of the crisis. The response of the government in expenditure terms was modest with an additional thrust of just about 1.6% of GDP. The RBI however responded very well, and its response overcame the problems with the financial sector seen before the COVID crisis.

Recovery has been modest, and even as late as 2021(Q4) output had barely crossed the level before the Crisis. Gross Capital Formation rates which had fallen to 30% or lower in 2012-13 from the high 36% in the "Tiger" period from 2003-04 to 2007-08, continues at that level or lower. Private investment has been the casualty. The recovery as expected varied much across the sectors. Employment in manufacturing is nowhere near the pre-COVID level. The experience of macroeconomic management reveals that the key to high growth is the positive combination of macroeconomic measures with "structural reform" measures, which was missing during much of this period.

The movement to Direct Benefit Transfers, though the design could have been much better was positive, but little else of the many announced initiatives during both Modi-I and II were systematically pursued. Poor design and organizational limitations of the government ensured little more than launches.

The relatively poor performance of manufacturing in India is constrained by macroeconomic and trade policies, that are not conducive. The contrast with the East Asian Strategy of export led growth is large. Recent initiative in the form of the Production Linked Incentive (PLI) scheme has potential, especially now that there are three China related factors (going Green, emergence as an adversary to the western world, and its own leadership not refraining from bans to achieve green goals) that could help some of the manufacturing sectors. We also argue that macroeconomic management for emerging economies with vast unutilized (but ready to be used) labor has to be very different from the standard approach that works for the advanced countries and others where such is not the case. In this chapter only the main conclusions are stated. The current high inflation is argued to be supply side inflation of a new kind that is best termed as a 'logistic' inflation.


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