Conclusions

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 This happened when the fiscal stimulus was being withdrawn.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.