Reviving India’s Growth – A Complexity Approach

India's growth

The past few months have been pretty dramatic. The slowdown in India’s Growth has been making headlines on every channel and every news outlet. This sudden shift in stance has caught many people off guard. The sense of urgency with which the government is acting has raised suspicion among those who anticipated a slowdown caused by the two shocks – GST and Demonetization apart from other deflationary tendencies.

Ajit Ranade, early last month and subsequently earlier this week, wrote about the need for stimulus. Rajeev Dubey in an article published recently outlined the possible policy responses and their viability – monetary may not be useful, fiscal is key. On the other hand, Kaushik Basu also presented his view – using bother monetary and fiscal policy to spur growth. They have covered both monetary and fiscal policy – issues such as interest rates, exchange rates, government expenditure, taxation etc. One thing they all agree on is the need for targeted government expenditure. There perhaps may be consensus among all economists on this issue. Keynesian policies are the need of the hour. But this is where the debate ends.

The author of this article has a suggestion to make in terms of approaching a way to think about targeted policy. In an article published on Indian Folk, titled ‘GST – Policy Implication’, there is an outline as to how GST will be key in helping the government and policy makers rethink how the economy functions. A case is presented where complexity and systems thinking can be used to think about how the economy functions and the flows in the economy. Some in the government, such as Sanjeev Sanyal, principal economic advisor to the government believe in such an approach to the economy.

GST plays a critical role as it shows the functioning and precise magnitude of flows. GST returns would give the government real time data on prices trends, flow of goods and services, sales trends, etc. The possibilities with this data are unlimited as the economy could be modeled as a map with an accurate understanding of flows within the economy as well as their magnitude. This data can then be used to frame policies to ensure maximum benefit.

The data generated would also give firm level as well as sector level view on the economy. The government could monitor the performance of a sector and then come up with appropriate policies. The government would have accurate data on the magnitude of the impact of the current slow down on the industries as well as the distribution across the country. It could then formulate policies or injections (subsidies, tax waiver, soft loan, etc?) to revive specific sectors with an understanding of the flows this would have in the economy (One man’s expenditure is another man’s income) – backward linkages in the sector as well as forward linkages. This exercise would also provide an insight into the cause of the slowdown in growth.

All this is easier said than done. There are many operational challenges that lie ahead. The first is the GST data itself. Since the number of returns that have been filed are limited, the view it creates will also be limited. Issues such as seasonality and seasonal variation would not be accounted for. A few more returns would be required to gather a better picture.

While thinking about targeting, it must be done in a sector specific way. Certain areas which could quickly respond to this stimulus must be picked while also keeping in mind India’s comparative advantage. There is a need for a nudge to come from outside the economy. When one looks at targeting specific sectors, it is important to see the sector’s ability to absorb this growth and pass it on. The usual suspect that come to mind during such periods is infrastructure. It is important to think of how this would be delivered. As infrastructure firms are ridden with debt, there is a possibility of leakage also. Each sector has its own set of issues. It is important to review them carefully.

Additional tools and frameworks would be required to ensure transmissions happens quickly.

Another major constraint is the financial position of the states. With a push for farm loan waiver, the financial ability of the state governments is also constrained. Deferring farm loan waivers isn’t a possibility as it is desperately required by the sector and is subject to intense political pressure. Perhaps some leeway would be required with regard to the Fiscal Responsibility and Budget Management Acts.

As there has literally been an overnight change in the view of the economy, there may be an alarmist tendency in the economy. It will take some time till we get an accurate picture of what the exact health of the economy is. A little patience will be required. A slowdown in growth was expected as the economy just experienced two major shocks (demonetization and GST) in a limited period of time. The deflationary pressures in the economy were captured in the second volume of the Economic Survey 2016-17.

The important point here is that the government must rely on interdisciplinary tools to derive insights on the economy and think of policy responses. There are challenges that lie ahead, but some of them can be overcome. We must be a little more patient before swinging into panic mode. The economy is a very fragile construct dependent on the sentiments of various agents.

**Complexity science is the study of the complex behaviour of a whole system that arises from its interacting parts and its emergent system behaviour thereof. Complex behaviour generally cannot be reduced to the sum of the behaviour of the system’s individual components. It is more than the sum of the individual components. When one looks at the economy as a complex adaptive system, one factors in the interactive, reactive and adaptive aspects of agents. Unlike the Newtonian equilibrium way of looking at the world, it looks at the economy as something that is subject to constant shocks that affect its short run functioning.

-Contributed by Bhargav Dhakappa

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