2020 was a terrible year. In the first quarter of the financial year growth was minus 24%. Even in the middle of the great depression, this did not happen. Even in the middle of the world war, it did not happen. We got minus 24%, not because of the recession. The government had a lockdown that prohibited economic activity. Now having gone down all the way to minus 24, the next quarter we have bounced back and it is minus 7.5%, much better than the expectation of most people.
So, from having a huge crash, we have shown resilience and we are rising again. Unless there is some huge resurgence of a new kind of coronavirus, a new variant, I would expect that in 2021 this upsurge will continue and because of that, I would not be surprised if we record GDP growth of 11-12%. This would be a good thing. A nice bounce back from a really low thing. To add to the economic trend, because the vaccines have now come, vaccinations will begin and I hope they will expand very fast from January onwards because, in the service economy, people are still afraid to go out for shopping, for travel, and tourism, and entertainment.
If people are still afraid, I am afraid the economy will not revive on the services side and services are 50% of GDP! So vaccination is a very important part of what happens next year. We need to get that program started fast. We need to expand it fast. We need the confidence to come back that it is now safe to go shopping. It is safe to travel. It is safe to do tourism, pilgrimages. Once that confidence comes back, then you will really see a nice good upsurge in 2021, especially in the second half.
The key factors you see evolving on the macro front for 2021?
India was in reasonable shape as far as macroeconomics was concerned before Covid. There was some fuzzing of the fiscal deficit and yet it was not too bad. The government had 3.5%, maybe it was 4.5%, maybe it was 4.5-5%. A very large number of countries in the world went for a massive fiscal deficit. Japan did 21% straight away. The USA did 10% straight away and with the latest thing, we will also go to 20%. India has kept its fiscal stimulus at no more than 2% of GDP. I have been a critic of this. I have been a critic saying we are not doing enough for the poor. We are not doing enough to push out purchasing power. If you do not have a large enough fiscal stimulus, you will not revive the economy fast enough either. I will only say that I have turned out to be wrong to the extent that I did not believe the economy could revive to this extent without a stronger fiscal stimulus.
The good thing about this is the fiscal prudence that Nirmala Sitharaman has followed. It means that the long-term scars of Covid will be much less. With a big fiscal deficit, our debt to GDP ratio would have gone to 90-95% because the fiscal stimulus was kept only at 2%, the debt to GDP will be something like 80% which is much lower plus the interest rates are lower. So this is going to leave more fiscal space for the economy to expand in 2021.
In fact, our foreign exchange reserves have been rising to a record high since the RBI does not want to allow an excess of dollars to appreciate the rupee. So, on the macroeconomic front, it is mostly okay. The one source of worry has been inflation. Inflation has exceeded the RBI range of 2-6%. It has gone above 6%. However, this is mainly on account of two things; one was vegetable inflation because excess rains had hit the Kharif vegetable crop. Second, global oil prices had crashed.
This is a country where land acquisition continues to be a problem. We started on building what we called dedicated rail freight corridors, one was the western region from Delhi to Mumbai, the other one from Punjab going on to Calcutta. After 15 years, these are not complete because of land acquisition problems. What kind of development are you going to get when you have created land acquisition laws and a political funk to get tough on these laws so that projects are just not going forward.IOC and others are planning the biggest refinery in India and maybe one of the biggest refineries in the whole world at Ratnagiri. There was an agitation by the farmers we would not give the land. The whole idea has been given up because the government does not have the guts to acquire the land for a refinery. You have to overcome the land issue. It is not an easy thing to overcome.
One of the big things one needs to do is to make it much easier to acquire land for projects even if necessary to give more money but for heaven’s sake get it done quickly. As far as labor is concerned, this is significantly a state subject and Mr. Modi by and large is decentralizing powers of liberalization to state governments. So far I have not seen it achieve any miracles. You would still not have anybody who wants to put up a factory with 25,000 workers or 40,000 workers the kind of giant textile factories that we have in Bangladesh for instance where you can hire and fire. Given the political opposition, I do not think it is feasible in India.
One of the main positives for India has been our demographic dividend. However, there has been a huge fall in labor participation especially that of females and we are seeing high levels of unemployment. Instead of reaping the benefits of the demographic dividend, can it become a challenge and backfire? The demographic dividend which was expected has not come. A demographic dividend means there is a larger proportion of your population working because they are in the working-age of 15 to 45 and to that extent. there is a smaller number of dependents. If in the population, you have more workers and relatively few dependents, then that is the demographic dividend. But for that, the total labor participation in the economy should be going up.
There is a consensus among economists that we should be spending very large sums on infrastructure especially at this stage. Infrastructure takes a long time and a lot of money. It is very capital intensive. Currently, we have the lowest interest rates that the world has seen for ages. So you can borrow from abroad. Even within India, the rates for gilts are now down to 6% or whatever and in the crisis of 1991, the rate on gilts was 13-14%. So as interest rates have come down, this is an excellent time to be doing long-term investment in infrastructure.
My real problem is that we already have such big infrastructure projects which never seem to get completed. We have been independent for 75 years, you still cannot build a railway line to Srinagar. I mean how pathetic can you get. In China, they can go all the way over Tibet and all the way to Lhasa and can build a railway line. We cannot even get to the valley of Srinagar. Why has the east-west corridor taken more than 15 years and we still cannot do it? Mr. Modi said I am going to have this bullet train between Ahmedabad and Mumbai but just cannot acquire the land for that. We need to invest in infrastructure in a big way but before we can invest in infrastructure, we need to improve our capacity to invest.
Do you think that my second half of 2021, RBI will begin the process of monetary policy normalization?RBI has very clearly admitted that between inflation and growth, the focus of the RBI today is on growth and not on inflation. So while everybody is used to the idea that RBI is only worried about inflation and what it will do interest rates, the RBI wants growth to resume and because of this, it gave the loan moratoria, the special dispensation for MSMEs and is doing its level best to ensure that various problems of insolvency are resolved quickly.
The focus of RBI is going to be on promoting growth. It is not going to be in a hurry to raise interest rates. It will tolerate higher rates of inflation than it might have done in the past because, after a bad 2020, 2021 must be the year of growth. Let nobody say that 2021 was about to boom and the RBI killed it by raising interest rates. That is the last thing the RBI wants to be said and therefore I would expect the RBI to be more supportive of growth and more willing to tolerate inflation than some other gentlemen seem to think.