Das Kapital

RBI Governor Shaktikanta Das listed "five factors" that can lead to "dynamic shifts" that can help revive the Indian economy from its pandemic-induced slumber. We analyse most of them.

We are in the midst of an unprecedented global economic situation. Even the Great Depression of 1929, or the Global Economic Crisis of 2008 didn’t cause disruptions like this one. Back then, people lost money, lost their jobs and defaulted on mortgage payments, but most of the world carried on as usual.

This time it is different. For the first time in 167 years, the Indian Railways has stopped running. For the first time in 116 years, the famed New York Subway has started halting operations during the nights, so trains can be cleaned. International borders between most pairs of countries are closed. People are reconsidering practices that were second nature to them, such as going to work or schools or shops.

Since we are in the middle of a very unique global economic situation, it is but natural that most of us have our own ideas on how we need to get through this, both at an individual and a policy level. The most that some of us can do is to voice these opinions in one of the zillion Zoom calls we take each day. Maybe we can tweet. Most likely, people nod their heads in quiet agreement (or disagreement) and move on. Or they just ignore what you said. Most people’s opinion simply doesn’t matter in these times.

However, if you are in certain positions of responsibility, every word you utter gets recorded and reported. When you head your country’s central bank, more people are trying to read between the lines of your speech than understand what you actually say. So when Shaktikanta Das, Governor of the Reserve Bank of India (RBI, India’s central bank) gave a speech (over videoconference) to the Confederation of Indian Industries on Monday, the speech got widely reported.

We will thus defer to our colleagues elsewhere in Indian media and provide “footage” to this speech. Maybe he watched Kill Bill recently. Or perhaps he read Chetan Bhagat’s first novel. Or he was dreaming about the Pentagon. In any case, his speech to the Confederation of Indian Industries contained five points to reshape the economy, in light of the pandemic.

Reserve Bank of India (RBI) governor Shaktikanta Das on Monday said five dynamic shifts -- fortunes shifting in favour of the farm sector, changing the energy mix in favour of renewable, leveraging information and communication technology (ICT) and startups, strengthening supply and value chains, and focusing on infrastructure as a growth multiplier -- have the potential to shape the future of the Indian economy.

“They (the five factors) may escape our attention in this all-consuming engrossment with the [Covid-19] pandemic, but they could be nursing the potential to repair, to rebuild and to renew our tryst with developmental aspirations. These dynamic shifts have been taking place incipiently for some time,” Das told the Confederation of Indian Industry (CII) via video conference.

We are not sure if each of them are “dynamic shifts”, or just subtle changes. We are also not sure if these points will be able to pick up the slack of the damage that the pandemic has had on the economy.

Let’s look at them one by one.

Renewable Energy

This predates the RBI Governor’s speech by a long way, but India wants to have at least one city in each state that runs entirely on solar power. There is a “master list” of 60 cities that the union government has created, out of which each state needs to pick one to make a “solar city” (India has 28 states and 9 union territories, so if each of them has one representative in the list, at least some state governments don’t have a choice to make).

The thing with renewable energy (such as solar) is that while it might be environmentally sound, historically, a lot of the production of the equipment has been in China. Now, as India looks to reduce its dependence on China (thanks to border clashes), renewable energy is going to be a challenge.

The fast-growing domestic market for solar components is dominated by Chinese companies due to their competitive pricing. India imported $2.16 billion worth of solar photovoltaic (PV) cells, panels, and modules in 2018-19.

Prime Minister Narendra Modi is aware of this, and announced that the government will look to promote local solar equipment manufacturing. For starters, government departments will buy solar cells and modules only from Indian manufacturers. Then, the above mentioned “solar city scheme” also has spurring local manufacturing as one of the objectives.

This will not only add heft to India’ green energy credentials but will also help create demand for a solar equipment manufacturing ecosystem for ingots, wafers, cells and modules; that the country desperately needs.

This solar power demand creation also ties in with India’ efforts to become an integral part of the global supply chains, as firms look to move production lines out of China, due to the disruptions caused by the coronavirus pandemic.

India already levies hefty customs duties on solar cells, modules and inverters imported from China and Malaysia.

We must mention that prior to this “solar city” campaign, and the move to buy Indian when it comes to some solar equipment, the Indian solar energy sector wasn’t doing well at all. So we’re not sure if this will truly result in a paradigm shift, as Governor Das mentioned.

Infrastructure “as a growth multiplier”

Even as Das spoke about the focus on infrastructure as one of the “five shifts”, he mentioned in the same lecture that Indian industry needs to find alternative sources of funding for infrastructure projects, and that it is not ideal to rely on banks for financing.

We need to remember that the RBI is the lender of last resort to, and also the regulator of, the Indian banking sector. With the last round of banking sector trouble in India having been caused by reckless lending to risky infrastructure projects that turned sour, it is natural that the RBI doesn’t want banks to take on this risk once again.

“On financing options for infrastructure, we are just recovering from the consequences of excessive exposure of banks to infrastructure projects,” Das said. “Non-performing assets relating to infrastructure lending by banks has remained at elevated levels. There is clearly a need for diversifying financing options.” 

Maybe this change in funding structure for infrastructure projects is the paradigm shift he was talking about? Nevertheless, he plumped for an increase in government-led mega projects.

“As in the case of the golden quadrilateral, a big push to certain targeted mega infrastructure projects can reignite the economy,” the governor said. “This could begin in the form of a north-south and east-west expressway together with high speed rail corridors, both of which would generate large forward and backward linkages for several other sectors of the economy and regions around the rail/road networks.” 

So what alternative sources of funding does Das want? Mint reports.

Promotion of the corporate bond market, securitisation to enhance market-based solutions to the problem of stressed assets, and appropriate pricing and collection of user charges should continue to receive priority in policy attention, he said.

Meanwhile, even in infrastructure, the Chinese aren’t far away (and we aren’t talking literally here). While India has tried to end Chinese involvement in this sector due the ongoing border tensions, exemptions to projects funded by multinational institutions means that the Chinese might be still able to participate.

The great rural hope

Recently we spoke about the economy seeing (literally) green shoots, with a largely good monsoon likely to increase agricultural output for the year. This June was the wettest since 2013, and the rainfall was well distributed. Tractor sales in May and June were robust.

Beyond this, there are three other reasons, ET reported, as to why companies were getting excited by the rural demand.

First, farming continued even during the lockdown that started March 25, while manufacturing languished. Second, more land has been under cultivation this year, according to preliminary assessments by government agencies. Third, many factory workers who returned to their rural hometowns as jobs evaporated in the cities are now involved in farming activity. These factors, and the lack of any other positive sentiment in the near-term, have convinced corporate India, particularly those with a wider rural portfolio, to focus on consumers in Bharat. 

On the other hand, in June, as people returned to their villages fleeing cities, supply of labour in rural places shot up, leading to greater unemployment.

The rural unemployment rate climbed to 7.66% in the week ended 26 July against the 7.1% reported in the week to 19 July, according to fresh data from the Centre for Monitoring Indian Economy (CMIE).

Unlike June, July will not see a good recovery in replacement jobs, and fresh job creation will take time, said economists and experts. They argue that along with the summer crop sowing season, which is drawing to a close, the spreading coronavirus in rural India has impacted the employment scenario.

Unemployed people don’t spend too much, even though with more of India living in rural areas compared compared to normal times, demand might still hold up.

As we come to the end of July, heads of consumer goods companies are yet to agree on whether the rural sector can make up for the shortfall in urban demand when it comes to their goods.

In a July 20 report by brokerage Credit Suisse, analysts Neelkanth Mishra, Arnab Mitra, Abhay Khaitan, and Pratik Rangnekar say the net monthly gain from government spending in rural areas is only 0.9 per cent of gross domestic product (GDP). India’s rural economy is 47 per cent of the country’s GDP. The analysts also say that weak domestic remittances (due to reverse migration) and weak perishables output (in the past few months) do not leave rural households to spend much on FMCG and other products. This comes even as market research agency Nielsen has said that June FMCG sales had rebounded to pre-covid levels on the back of beauty, food, hygiene, and rural areas.

So we have more people in rural areas, so there will be more demand. However, a lot of them are not employed there, and some are beginning to return to their jobs in cities, so it is unclear if rural India can sustain the economy this year.

Information and Communications Technologies and Startups

“Information and Communications Technologies” or ICT is one of those terms that is used exclusively by “outsiders” - people who work outside of the sector. This particular term is a favourite of policymakers and not-for-profits and think tanks and academics, but you would be hard pressed to find anyone who works either in information technology or communications to say “ICT”. Hence, any mention of “ICT” needs to be taken with considerable salt.

That said, Das also mentioned startups in the same breath, so we will talk about that.

Prior to the pandemic, startups (taken as a unit, which is not mathematically accurate, but we will go with that) were not doing too badly. Mint had written that there were “52 startups who are potential unicorns”.

The pandemic, of course, hasn’t been kind to the startups (except perhaps for the EdTech sector). We have this running theme that people will continue to do what they were doing earlier, but will do them differently. Most startups start off by helping people do things in a particular way (though, some, like WeWork, can talk about a “higher consciousness”). So, when people start doing things differently, these companies suffer.

By one account, Indian startups have together accounted for at least 20,000 layoffs since the pandemic hit us (we did not independently verify that number).

So will startups cause a paradigm shift? One way to think about it is that most of the startups that have downsized are those that help customers do their things in a particular way. Now that people are doing these things in different ways, these startups are downsizing.

However, the pandemic has provided an amazing opportunity for startups (and potential startups) that help people do what they were doing earlier in new ways. It is possible that there are companies that have started doing this, but they are still so small that we haven’t heard of them. Maybe Das has privy to this information?

In any case, the government doesn’t seem to be doing much. This is what the StartupIndia website describes as part of “drivers of the startup ecosystem”:

Government of India is understanding the value of working with disruptive innovators across the value chain and using their innovations to improve public service delivery.

  • Department of Animal Husbandary and Dairying has conducted a grand challenge in association with Startup India to award top startups in 5 categories 10 lakhs INR. 

  • Small Industries Development Bank of India has launched a scheme to provide assistance to existing Small and Medium Businesses in need of capital for growth

  • Over 26 states in the country have Startup policies 

These policies surely won’t help create a paradigm shift.

In any case, in all of 2019, which was a good year for the Indian startup ecosystem, the “sector” created all of 60,000 jobs. Since this number comes from an industry body, it can only be an overestimate. India needs to create millions of jobs each year.

“It does not indicate a job crisis. But consider this: more than a million young people enter the working age population in India every month. The World Bank’s South Asia Economic Focus Spring 2018 report states that between 2015 and 2025, India’s working age population, or those above the age of 15, is seen to be expanding by 1.3 million a month.

“India, therefore, needs to create millions of jobs a year – exactly how many millions depends on the estimates of the employment rate,” he suggests. Manufacturing, according to the book, is getting more technology intensive and so is the services industry.

So it is not clear why Das is pinning hope on startups being one of the five shifts. The only hope we can offer is that when returns are governed by a power law (as startup returns are), the maximum we have seen so far is likely to be far less than the maximum we will see in the future.

Perhaps there exists an Indian startup, or will exist, that will become orders of magnitude bigger than any of our existing unicorns. If that happens, it will surely be a paradigm shift. We can only hope.


As for the “value and supply chains” bit, we were unable to find much material about how they will cause a paradigm shift. If you think about it, it sounds like typical Indian business school student speak. Maybe Das wanted five points and not four (else what will happen to Kill Bill and Chetan Bhagat?), and so he included this.

We continue to live in hope.