Indian economy needs major spending & investment from Government
India is going through a major economic slowdown these days. Somethings looks pretty clear - Collapse of Demand. Fall in private sector investment. Stress in Banking system specially regarding NPAs & Bank frauds. Distress in various sectors of economy - Telecom, Power, Agriculture, Textiles, MSMEs, Infrastructure, Real Estate etc.
But despite economy in such a bad shape, our Govt appears to be in complete paralysis. It looks like they have no clue on what to do. Their policy is HOPE. Hopefully private sector will take Bold business decisions (as Modi keeps asking them to do so) and private investment will rise. Hopefully Private sector will create jobs and improve our job situation. Hopefully banking system problems will resolve on their own. But hope cannot be a substitution of policy. There is a lot of pessimism from side of Neoliberal experts including the IMF who are guiding Modi Govt. They are preaching TINA doctrine (there is no alternative) to Govt. IMF talks about constraints on Government like mounting National Debt & uncontrolled fiscal Deficit which makes Govt incapable to tackle economic downturn through fiscal stimulus.
But keeping aside the advice of IMF and other experts. Lets examine the basic problem with Indian economy. I mentioned about collapse of demand, fall in private sector investment, crisis of NPAs in banking system etc. But underlying all these problems, there are two main structural problems of our economy that Government and experts don't pay much attention to.
Problem with Labor force & Human resources
Looking at India's Labor force. More than half of our labor force is in Agriculture sector. Agriculture sector is the most wasteful sector of our economy. It absorbs majority of our labor force but contributes minimally to our GDP. And due to distress in Agriculture sector, the contribution of our Farm sector to our economy is continuously falling.
Another important aspect of this problem is - Why half of our workforce is engaged in Agriculture sector & other unorganized sectors of economy? This is because there isn't sufficient capacity in other organized sectors of our economy to absorb our Labor force. And also because most of our labor force is unskilled, illiterate & uneducated so they cannot be utilized adequately in organized sector and manufacturing industry. But this problem is connected to Acute Shortage of Core Assets in our economy which i will get into below.
So majority of our Labor force in employed in Farm sector and other unorganized and rural sectors like construction, private micro enterprises, small factories, small businesses (hawkers, vendors, pakoda selling, daily wage workers etc). These workers become part of informal economy which do not get any adequate wages and social security. They basically live hand to mouth.
Core Assets of economy
Economy of a nation runs of some core Assets. I would characterize these assets as follows.
Infrastructure - Roads & Highways. Transport system Railways, Metro Transit and other public transport. Electricity generation & distribution. Water distribution & sewer system. Ports and Airports. Broadband & network infrastructure.
Critical National institutions & Public services apparatus - Regulatory institutions of law enforcement, public safety, consumer protection & environment. Government departments for providing basic amenities. Judicial system & Legal bodies, Police, Military and courts. etc
A basic problem of India is that we are very low on core assets that are needed to have a sustainable economy. 65% of India is rural and has very poor Infrastructure. No proper electricity connections. No water and sewer system. No public transport. Conditions of Roads & Highway connectivity is poor. Even in top tier cities, the Infrastructure is in a bad shape. Most of India doesn't have a Broadband connectivity.
On the other hand, the public service apparatus is in worse condition. The Judicial and legal system of country is frozen with huge backlog of cases. There is acute shortage of Courts, Judges, Judicial staff, Police officers, investigating agency officials, prosecutors, legal aids etc. The Healthcare system of country is completely broken. There are very few Hospitals in Urban cities, while Hospitals are almost non existent in Rural India. There is a shortage of Lakhs of Doctors, Nurses & healthcare professionals. Education system is similarly in bad shape. No schools in many Rural areas. There is shortage of lakhs of teachers. Similarly there is shortage of universities and colleges specially Medical colleges, institutions of higher learning, R&D and Scientific advancement etc
India's shortcoming in critical Infrastructure
Even critical national institutions like Judiciary, Law enforcement & Military are in dire situation due to lack of funding.
So our structural economic problem in quite elemental. We have massive wastage of our workforce and human resources. And we have massive shortage of core assets to run a sustainable growing economy. In simple terms, we are not utilizing our workforce & we are not building national assets for our economy.
The questions that immediately follows are these - How can we best utilize our workforce? How can best utilize our human resources? Who will create the core Assets in economy? How will they be created?
How to move forward? - Role of Government & Private sector
I believe that an economy which is at such an underdeveloped & backward stages as India requires major Govt intervention. Economy like India needs to be built from scratch, by creation of strategic national assets and development of human resources. Many experts believe that private sector should lead the economic affairs in India while Government should take a back seat of merely regulating the market economy. But private sector has one fundamental flaw. Private sector runs on Debt & profit incentive. When a private company has to make a major investment, it takes a Bank loan (or borrows from markets) to raise Capital. Then the company invests that capital with a goal to generate profit for itself as well as to cover the payments of its borrowings & interests. Another shortcoming of private sector is viability of its business model in backward economy like India. Since private sector has to be profitable, it must keep cost & pricing of its services at adequate levels to generate higher revenue. So Infrastructure built by Private companies like expressways, private trains, power plants etc will have higher toll rates, higher travel charges & higher electricity costs. Similarly, services by Private sector in education, healthcare, internet etc will also cost higher. But in economy like India where per capita income is very low, a lot of people specially in Rural India can't afford the cost of services by private sector. So private sector business model becomes nonviable in most of rural India.
Govt on other hand, is not really bound by Debt & profit incentive in manner like private sector. Govt has the power to create money & credit without the constraints that are faced by private sector. So Govt spending to build strategic national assets or to provide employment to people is not constrained by profit motive. Only constraint for a Government is inflation. So the goal of Government should be well planned spending in a way which minimize inflation, maximize growth and improves economy & standards of living. Building national assets ( like Infrastructure, Schools, Colleges etc ) have a multiplier effect on economy. Every Rupee spent on these things adds double or multiple value to the economy and GDP. And it generates employment & better utilization of Labor force in economy. The Goal of Planning commission of India (now renamed to Niti Aayog) should be to formulate spending & investment policies for Govt from view of future sustainability & inflation. The artificial & irrational deficit limits are irrelevant for a monetarily sovereign country.
Looking at a private sector. Suppose a Private company wants to build an industrial hub in Uttar Pradesh region which is best from logistical point of view. But there are many problems. The Roads & Highways in the region are in bad shape. Or the Highway Toll Taxes are too high. The electricity supply is unreliable. There is a problem of water scarcity. Why will a private company then invest in building any industry in this region?
Similarly Private sector desires efficient Judicial system & law enforcement to function. A private company wants to resolve any legal disputes & arbitration as quickly as possible. A company doesn't want to wait years in court battles. Also any private enterprise wants good law & order situation for smooth operations. Its difficult for a company to operate in a region which has social unrest & breakdown of law & order.
But despite economy in such a bad shape, our Govt appears to be in complete paralysis. It looks like they have no clue on what to do. Their policy is HOPE. Hopefully private sector will take Bold business decisions (as Modi keeps asking them to do so) and private investment will rise. Hopefully Private sector will create jobs and improve our job situation. Hopefully banking system problems will resolve on their own. But hope cannot be a substitution of policy. There is a lot of pessimism from side of Neoliberal experts including the IMF who are guiding Modi Govt. They are preaching TINA doctrine (there is no alternative) to Govt. IMF talks about constraints on Government like mounting National Debt & uncontrolled fiscal Deficit which makes Govt incapable to tackle economic downturn through fiscal stimulus.
But keeping aside the advice of IMF and other experts. Lets examine the basic problem with Indian economy. I mentioned about collapse of demand, fall in private sector investment, crisis of NPAs in banking system etc. But underlying all these problems, there are two main structural problems of our economy that Government and experts don't pay much attention to.
- Massive wastage and under utilization of our Human resources and Labor force.
- Acute Shortage of Core Assets to run a sustainable economy.
Problem with Labor force & Human resources
Looking at India's Labor force. More than half of our labor force is in Agriculture sector. Agriculture sector is the most wasteful sector of our economy. It absorbs majority of our labor force but contributes minimally to our GDP. And due to distress in Agriculture sector, the contribution of our Farm sector to our economy is continuously falling.
Another important aspect of this problem is - Why half of our workforce is engaged in Agriculture sector & other unorganized sectors of economy? This is because there isn't sufficient capacity in other organized sectors of our economy to absorb our Labor force. And also because most of our labor force is unskilled, illiterate & uneducated so they cannot be utilized adequately in organized sector and manufacturing industry. But this problem is connected to Acute Shortage of Core Assets in our economy which i will get into below.
So majority of our Labor force in employed in Farm sector and other unorganized and rural sectors like construction, private micro enterprises, small factories, small businesses (hawkers, vendors, pakoda selling, daily wage workers etc). These workers become part of informal economy which do not get any adequate wages and social security. They basically live hand to mouth.
- One third of Indian Population doesn't have any education, while less than 8% of Population have a college degree. This trend is far behind all developed & most developing nations. In terms of marginal labor force, more than 20 million workers have no education at all and further 20 million barely have a minimal education.
- Govt spending on education is minimal at just 2.7% of GDP while there are recent cuts in education budget to contain fiscal deficit. Most Govt schools have vacant Teacher posts. There are 1 million vacancies in primary and secondary schools. Nearly 100,000 schools in India are operating with only SINGLE teacher. By some estimates there is shortage of as much as 500,000 teachers in India.
- As Govt is not spending sufficiently on human resources development, there is shortage of qualified, high skilled and educated Labor force & professionals in country. There is shortage of 600,000 Doctors and 2 million nurses in India's healthcare sector. Also India's govt spending on healthcare is very minimal at only 1% of GDP which lags behind most countries of the world including most of developing countries.
- Govt is not adequately investing in skill development & vocational training of Labor force. All Govt ITI vocational training institutes only have capacity to train 1 million people while 13 million people are entering workforce every year. Construction sector which provides employment to most workers after agriculture have as much as 80% of unskilled labor force.
Core Assets of economy
Economy of a nation runs of some core Assets. I would characterize these assets as follows.
Infrastructure - Roads & Highways. Transport system Railways, Metro Transit and other public transport. Electricity generation & distribution. Water distribution & sewer system. Ports and Airports. Broadband & network infrastructure.
Critical National institutions & Public services apparatus - Regulatory institutions of law enforcement, public safety, consumer protection & environment. Government departments for providing basic amenities. Judicial system & Legal bodies, Police, Military and courts. etc
A basic problem of India is that we are very low on core assets that are needed to have a sustainable economy. 65% of India is rural and has very poor Infrastructure. No proper electricity connections. No water and sewer system. No public transport. Conditions of Roads & Highway connectivity is poor. Even in top tier cities, the Infrastructure is in a bad shape. Most of India doesn't have a Broadband connectivity.
On the other hand, the public service apparatus is in worse condition. The Judicial and legal system of country is frozen with huge backlog of cases. There is acute shortage of Courts, Judges, Judicial staff, Police officers, investigating agency officials, prosecutors, legal aids etc. The Healthcare system of country is completely broken. There are very few Hospitals in Urban cities, while Hospitals are almost non existent in Rural India. There is a shortage of Lakhs of Doctors, Nurses & healthcare professionals. Education system is similarly in bad shape. No schools in many Rural areas. There is shortage of lakhs of teachers. Similarly there is shortage of universities and colleges specially Medical colleges, institutions of higher learning, R&D and Scientific advancement etc
India's shortcoming in critical Infrastructure
- 65% of Indian Population is living in Rural areas and almost 80% of these people don't have access to one or more of basic amenities like clean drinking water, sewer system, electricity, cooking gas etc. As much as 680 Million people don't have access to basic amenities. As much as 50% of population in top tier Indian cities is living in slums & illegal colonies which also lack basic amenities.
- Electricity shortages, poor condition of power plants & grids - 22% electricity loss in Transmission & distribution nationally and over 40% losses in some states. 31 million people living without any electricity. Most of rural India gets less than 12 hours of electricity a day. Instead of dealing with electricity shortage, Govt has innovatively made India into a power surplus state by excluding all those people without electricity connection. 70% of India's electricity still dependent of Coal & Gas thermal power plants most of which are old & obsolete while only 3.2% of electricity is generated by Nuclear power plants.
- Lack of Water resources infrastructure distribution, filtration & conservation - Water scarcity and water shortages across India. 600 Million people facing facing acute water scarcity. More than half of population depend on ground water for drinking. Most of top tier Indian cities will run out of ground water within next 5-10 years. In rural India, people travel 10 miles everyday just to fill up supply of drinking water. 44% of India is now facing drought situation. On other hand, whatever water resources we have are fast being depleted and polluted. 78% of India's sewage disposal is untreated and enters in rivers causing massive pollution.
- Lack of flood control Infrastructure and preparedness - Between 2010-2020, India has suffered over Rs 200,000 crore economic losses due to floods in various states. The loss is due to property damages, Crop & Agriculture damages & loss of human lives. The impact of these losses on inflation & supply chain disruption are possibly much more. Hundreds & thousands of people die in every floods & millions of people have to relocate.
- Much of India's Railways infrastructure & network is old & obsolete. India doesn't have a single High speed Rail link in the entire country. Average Train speed in India is only 70 km/hr while many routes average of less than 50 km/hr. Railway networks also have a safety crisis due to frequent derailments & other accidents. More than 40% of Indian Railways sections are used beyond 100% capacity. 30% of Trains are in delays, running behind schedules every year. All these shortcomings have a negative impact on economy.
- India is lagging far behind in terms of Internet connectivity & communication networks. Only 7% of Indian Population (out of population of 1.35 Billion) have access to wireline Broadband. Most of rural India doesn't have wireline internet connections. In regards to mobile connectivity, Much of Rural India still doesn't have access to 4G Network. Many Rural parts & villages depend of 2G & 3G mobile connectivity while thousands of villages have no mobile connectivity at all. India's Internet speeds are also among the slowest in the world. Only 42% of internet users have average speed of above 4 Mbps in India.
Even critical national institutions like Judiciary, Law enforcement & Military are in dire situation due to lack of funding.
- Judicial system of India is collapsing. There is backlog of 330 million cases in various courts of our Judicial system which is massively under staffed & under funded. Even under such workload, there is massive vacancy in Courts with as much as 6000 Judicial officers posts are lying vacant across various courts from top to bottom. Average time for disposal of case in lower courts is around 6 years while many cases drag on for more than 10 years. Even if all Judges posts are filled today, judiciary will still have a shortage of 4000 courthouses across the country.
- India's Military & Defense infrastructure is in dire condition with as 68% of military equipment is obsolete. Military doesn't have funds for modernization and buying new defense equipment. The largest segment of India's Defense budget is spent in paying Pensions while there is almost no money to make new investment in modernization of defense industry & equipment.
- India's law enforcement is in bad condition with at least one million shortage of Police personnel. Almost 30% of police personnel posts are lying vacant. India's Police to population ratio is among the worst in the world. Police departments are understaffed & underpaid from top to bottom - from beat posts, to CIDs & forensics & all the way up to prosecution.
- Overall there is vacancy of 700,000 central government jobs. Similarly there is vacancy of millions of jobs in State & local governments. All Govt departments, ministries & public bodies are massively understaffed including huge vacancies in critical institutions like military, Judiciary, law enforcement & investigating agencies & regulatory bodies. Overall there is vacancy of 2.4 Million Government jobs in Central & States Government.
So our structural economic problem in quite elemental. We have massive wastage of our workforce and human resources. And we have massive shortage of core assets to run a sustainable growing economy. In simple terms, we are not utilizing our workforce & we are not building national assets for our economy.
The questions that immediately follows are these - How can we best utilize our workforce? How can best utilize our human resources? Who will create the core Assets in economy? How will they be created?
How to move forward? - Role of Government & Private sector
I believe that an economy which is at such an underdeveloped & backward stages as India requires major Govt intervention. Economy like India needs to be built from scratch, by creation of strategic national assets and development of human resources. Many experts believe that private sector should lead the economic affairs in India while Government should take a back seat of merely regulating the market economy. But private sector has one fundamental flaw. Private sector runs on Debt & profit incentive. When a private company has to make a major investment, it takes a Bank loan (or borrows from markets) to raise Capital. Then the company invests that capital with a goal to generate profit for itself as well as to cover the payments of its borrowings & interests. Another shortcoming of private sector is viability of its business model in backward economy like India. Since private sector has to be profitable, it must keep cost & pricing of its services at adequate levels to generate higher revenue. So Infrastructure built by Private companies like expressways, private trains, power plants etc will have higher toll rates, higher travel charges & higher electricity costs. Similarly, services by Private sector in education, healthcare, internet etc will also cost higher. But in economy like India where per capita income is very low, a lot of people specially in Rural India can't afford the cost of services by private sector. So private sector business model becomes nonviable in most of rural India.
Govt on other hand, is not really bound by Debt & profit incentive in manner like private sector. Govt has the power to create money & credit without the constraints that are faced by private sector. So Govt spending to build strategic national assets or to provide employment to people is not constrained by profit motive. Only constraint for a Government is inflation. So the goal of Government should be well planned spending in a way which minimize inflation, maximize growth and improves economy & standards of living. Building national assets ( like Infrastructure, Schools, Colleges etc ) have a multiplier effect on economy. Every Rupee spent on these things adds double or multiple value to the economy and GDP. And it generates employment & better utilization of Labor force in economy. The Goal of Planning commission of India (now renamed to Niti Aayog) should be to formulate spending & investment policies for Govt from view of future sustainability & inflation. The artificial & irrational deficit limits are irrelevant for a monetarily sovereign country.
Looking at a private sector. Suppose a Private company wants to build an industrial hub in Uttar Pradesh region which is best from logistical point of view. But there are many problems. The Roads & Highways in the region are in bad shape. Or the Highway Toll Taxes are too high. The electricity supply is unreliable. There is a problem of water scarcity. Why will a private company then invest in building any industry in this region?
Similarly Private sector desires efficient Judicial system & law enforcement to function. A private company wants to resolve any legal disputes & arbitration as quickly as possible. A company doesn't want to wait years in court battles. Also any private enterprise wants good law & order situation for smooth operations. Its difficult for a company to operate in a region which has social unrest & breakdown of law & order.
Looking at modern manufacturing industry in electronics. Any company will find it very hard to consider building a factory in India not only due to Infrastructure constraints but also due to lack of skilled and trained Labor force. So a private company will much prefer to build its factory in China or some other country where it can find quality labor force for their needs or a company will import skilled workers from China or other neighboring states.
New global economic trends are in areas of Biotechnology & Biomedical industry, Semiconductors, Artificial intelligence, Space Exploration, Automation etc and exhaustive Research & development that comes in these sectors. Human Resources development should be one of the most important objective in our economy. This is an area where Govt will have to take the initiative. Private colleges, schools & educational institutions cannot satisfy the needs of economy at least in present underdeveloped state of economy.
Private sector does have an important role in economy but it requires a supporting role from government. Private sector thrives on economy with good Infrastructure, healthy legal system & regulatory institutions, proactive clean government, good regulations & most importantly a qualified & skilled labor force. The way i see Indian economy, it needs to be started from a halt. Govt spending & investment is the crank which will kick start the economy. Once the economy gains momentum, a broader role & opportunities will emerge for private sector. This will lead transformation of India from a developing to developed economy.
References
Electricity
https://money.cnn.com/2018/04/30/news/india/india-electricity-villages-modi/index.html
https://www.cnbctv18.com/market/data/around-22-of-electricity-produced-in-india-is-lost-in-distribution-188541.htm
https://scroll.in/article/937192/indias-269-thermal-power-plants-arent-just-polluting-air-theyre-also-guzzling-away-water
India's water crisis
https://edition.cnn.com/2019/06/27/india/india-water-crisis-intl-hnk/index.html
https://www.thehindu.com/sci-tech/energy-and-environment/india-faces-worst-water-crisis-niti-aayog/article24165708.ece
https://www.downtoearth.org.in/news/waste/-78-of-sewage-generated-in-india-remains-untreated--53444
http://social.niti.gov.in/uploads/sample/water_index_report2.pdf
Basic Amenities in India
https://www.business-standard.com/article/economy-policy/mckinsey-study-says-at-least-680-mn-indians-lack-access-to-basic-amenities-114021901042_1.html
http://censusindia.gov.in/Census_And_You/availability_of_eminities_and_assets.aspx
https://timesofindia.indiatimes.com/india/82-rural-India-still-lacks-basic-amenities/articleshow/6931390.cms
Broadband in India
www.communicationstoday.co.in/most-of-rural-india-yet-to-experience-4g-data-services/
https://qz.com/india/1629343/despite-jio-mobile-internet-speed-in-india-worse-than-pakistan/
https://telecom.economictimes.indiatimes.com/news/indias-fixed-line-broadband-infrastructure-a-matter-of-worry-trais-sharma/58840429
https://www.akamai.com/us/en/multimedia/documents/state-of-the-internet/q1-2017-state-of-the-internet-connectivity-report.pdf
Indian Railways
https://scroll.in/article/833585/indias-railway-tracks-are-burdened-by-too-many-trains-leading-to-frequent-derailments
https://economictimes.indiatimes.com/indias-low-train-speeds-are-a-pull-down-for-its-economic-efficiency/toshibashow_dp/50866158.cms
https://economictimes.indiatimes.com/industry/transportation/railways/cag-finds-out-why-trains-get-delayed-across-the-country/articleshow/65333672.cms?from=mdr
https://en.wikipedia.org/wiki/List_of_railway_accidents_and_incidents_in_India
India's Government Job Vacancies
https://timesofindia.indiatimes.com/india/central-and-state-governments-sit-over-24-lakh-vacancies-amid-debate-over-job-drought/articleshow/65274821.cms
India's human resources & Education system
https://www.ndtv.com/education/teachers-crisis-in-india-11-lakh-untrained-teachers-in-workforce-1783246
https://www.indiatoday.in/india/story/govt-admits-there-are-nearly-1-lakh-schools-with-only-one-teacher-1425847-2019-01-08
https://www.ndtv.com/india-news/only-4-5-population-in-india-is-graduate-or-above-census-1240996
http://www.skope.ox.ac.uk/wp-content/uploads/2013/11/WP111.pdf
India's flood control Infrastructure
https://www.indiatoday.in/india/story/loss-due-floods-india-people-killed-crop-houses-damaged-in-65-years-1591205-2019-08-27
www.india.mongabay.com/2019/10/preparedness-remains-inadequate-even-as-floods-become-an-annual-affair-in-kerala/
https://cag.gov.in/sites/default/files/audit_report_files/Report_No.10_of_2017_-_Performance_audit_Union_Government_Schemes_for_Flood_Control_and_Flood_Forecasting_Reports_of_Ministry_of_Water_Resources%2C_River_Development_%26_Ganga_Rejuven.pdf
https://www.dw.com/en/poor-preparedness-caused-flood-disaster-in-india/a-40329541
Indian Military
https://www.asiatimes.com/2018/03/article/indian-army-says-equipment-obsolete-not-ready-war/
http://164.100.47.193/lsscommittee/Defence/16_Defence_42.pdf
India's Police
https://www.livemint.com/news/india/india-s-police-force-among-the-world-s-weakest-1560925355383.html
India's Judiciary & legal system
https://economictimes.indiatimes.com/news/politics-and-nation/india-has-19-judges-per-10-lakh-people-data/articleshow/65935214.cms?from=mdr
https://timesofindia.indiatimes.com/india/shortage-of-4000-courtrooms-even-if-all-judge-posts-filled-up/articleshow/66504158.cms
https://www.indiatoday.in/magazine/cover-story/story/20160509-judicial-system-judiciary-cji-law-cases-the-long-expensive-road-to-justice-828810-2016-04-27
very excellent article problem in india is notmore govt but less govt
ReplyDelete