Watch | We Face 'Very Difficult' Economic Situation, Matter of 'Great Concern': PMEAC Member

Rakesh Mohan tells Karan Thapar that unemployment – or poor levels of employment including under-employment – is the most serious problem India faces.

In an interview to discuss the state of the economy – focusing specifically on growth, investment, unemployment, poverty, inflation and the state of the rupee, a member of the Prime Minister’s Economic Advisory Council (PMEAC) says that India faces “a very difficult situation” which he adds is “a matter of great concern”.

Rakesh Mohan, who is also a former deputy governor of the Reserve Bank of India (RBI), says it’s hard to say with precision or conviction what would be the GDP growth rate this year because of the impact that the enormous international uncertainty may have on India. The uncertainty, he added, is more than it has been for the last four-five decades. However, 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%.

Mohan identifies India’s declining investment rate as one of the important concerns behind the Indian economy’s growth performance. He says 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.

In a tour d’horizon interview with Karan Thapar for The Wire, 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 on what we see. He believes the MSME sector has suffered seriously during the COVID-19 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, Mohan identified unemployment or, as he put it, 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.

Mohan said it does look as if India’s recovery from the economic impact of COVID-19 and its present-day growth is K-shaped.

Speaking about inflation, 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, which is presently trading between 81 and 82 to the dollar, 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 100 billion and of this, it is believed that perhaps 60-65 billion has been used to shore up the rupee.

The PMEAC member raised 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 not as fast as it could have been.

Mohan also expressed great concern about India’s female labour participation and 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 but has instead focused on production that is increasingly reliant on high-tech machines.