Watch: Rakesh Mohan on the State of the Indian Economy

In an interview to Karan Thapar for The Wire, Rakesh Mohan discussed the state of the economy six weeks before the end of the year, focusing specifically on growth, investment, unemployment, poverty, inflation and the state of the rupee. A Member of the Prime Minister’s Economic Advisory Council, Dr Mohan said that India faces “a very difficult situation” which he adds is “a matter of great concern”.

Dr. Rakesh Mohan, who is also a former Deputy Governor of the Reserve Bank of India, said it’s hard to say with precision or conviction what would be the GDP growth rate this year because of the impact on India of the enormous international uncertainty which, he added, is more than it has been for the last 4-5 decades. However, Dr. Mohan believes that if Quarter 2 growth, which will be released in the next few days, is between 6.1% and 6.3% then growth this year should be somewhere between 6.5% and 7%. However, if Q2 growth is lower than 6.1% overall growth for the year could fall below 6.5%.

Dr. Mohan identified India’s declining investment rate as one of the important concerns behind the Indian economy’s growth performance. He said we don’t know why the investment rate has declined from 39.1% in 2007-2008 to 32.2% in 2019-2020 nor do we have a clear idea of what needs to be done to boost it back. However, he is hopeful that the sharp lowering of bank non-performing assets, the improvement of company balance sheets as well as the recent increase in capacity utilisation will see the investment rate rising over the next 4-5 years which, in turn, should lift the economy’s growth.

Dr. Mohan said that the MSME sector, which represents 30% of the economy and perhaps 45% of employment, is a sizeable section of the economy about which we do not know much. We don’t have data and our only knowledge is anecdotal or based upon what we see. He believes the MSME sector has suffered seriously during the COVID pandemic and it’s hard to say what its condition is today. He believes it has suffered far more than the formal sector.

In the interview, Dr. Mohan identified unemployment or poor levels of employment including under-employment, as the most serious problem India faces. He says the private sector is simply not doing enough to generate jobs and government capex on infrastructure is unlikely to create sufficient jobs.

Dr. Mohan said it does look as if India’s recovery from COVID and its present day growth is K-shaped.

Speaking about inflation, Dr. Mohan said that he believes the RBI should continue to raise interest rates to tackle inflation, particularly because the real rate of interest is still negative. 

Speaking about the rupee, Dr. Mohan said the rupee should be allowed to decline because that would encourage exports and help accelerate growth whilst the corresponding increase in the cost of imports would provide an incentive to industrialists to produce equivalent goods in the country. He believes that the RBI has spent far too much of India’s reserves shoring up the rupee. Over the last ten months approximately, the reserves have shrunk by over a 100 billion and of this it’s believed that perhaps 60-65 billion has been used to shore up the rupee. 

He also spoke about the almost deliberate neglect of education, health and nutrition by all governments and prime ministers from 1947 till today. He believes this is one of the important reasons why India’s economic development – not just GDP growth but of its people and workforce – has been held back or has not been as fast it could have been.

Dr. Mohan also expressed great concern about India’s female labour participation and he also spoke about the need for large companies and manufacturing units to fuel exports. He said he felt let down by the private sector which has not emphasised employment-led manufacturing, which creates jobs, but instead focused on production that is increasingly reliant on high-tech machines.