India's vulnerability towards the “Japanization” of the economy

Weak economic activities are vicious and contagious, long exposure of it to the subject drains the overall immunity (savings in terms of economics) of the subject (that we call “capita” in Latin and “person” in English). A lot of speculation and predictions are being made since subprime fall and repercussive things happened thereafter. A very unique word that has been used by economist to describe the situation is 'Japanization', although I don’t find it appropriate to tag the name of a nation or entire culture for such a negative connotation, however, this what the academics are using so far.

Takatoshi Ito defined the term “Japanization”  as a combination of the following economic conditions: (1) the actual growth rate is lower than the potential growth rate for an extended period; (2) the natural real interest rate is below zero and also below the actual real interest rate; (3) the nominal (policy) interest rate is zero; (4) deflation, i.e., negative inflation rate.

With due effects of “Abenomics”, in the latter half of this passing decade ironically Japan has emerged as least Japanized economy and the position of it in the east Asia has been more or less taken by south Korean economy. In the wake of GFC, the counties of western Europe faced twin crisis of banking and sovereign debt, Greek sovereign debt crisis in 2010 was one of those which affected many countries of Eurozone like Italy, Spain, Portugal, and Ireland. Many banks were closed after Lehman brothers, these economies have shown signs of fitting into the definition.  in fact, at a time after GFC,  USA was almost entering into the league, but the Federal Reserve took some decisive action and saved US economy from a financial meltdown, from the severity of deflation and stagnation but still, the interest rates and policy rates were below than targets for almost half a decade.

As for as Indian economy and its present situation are concerned, let’s test it at parameters of  “Japanization”.

The first is stagnated growth that is, the actual growth rate, g, being below the potential growth rate, g*. Currently, India’s structural growth potential lies between 5% and 6% but it grew by on average 7% a year from 2009 to 2013 and then 2014 to 2018.  A lot of policy efforts that are needed to come into place specifically in R&D, education & human Capital.  Why focus on these areas only? Because India’s share in total USPTO knowledge stock increases to 8% (same is expected to continue till 2030 at least ), faster than the world, so investing in strength is kind of classic wisdom to get higher ROI.

Aggregate demand In India has been at negative growth side and the pandemic has worsened the situation, low demand means low production and that means low employment, the unemployment rate is around 10% now by June 2020. Interestingly unemployment is also a major cause of low demand, so anyhow employment has to be accelerated and that too in the formal sector, because private durable consumptions and capital investment are increases at a better rate when employment generates not just wages but the security of future income as well.

The second fancy parameter is “secular stagnation”, that is a prolonged period of stagnant growth. The situation arises when aggregate demand is always below aggregate supply, due to too high real interest rate. Primarily the real rate of interest should be negative to qualify the definition. The real rate of interest in India is moving in between 4 to 6 so we do not qualify the “secular stagnation” criteria, we are still at the growth side.

The third characteristic is that the policy rate( repo rate particularly),  is lowered to and stuck at (near) zero. In India, the same has been always above 5 %, went 8% and above in 2011 and now is lowest in the decade that is 4%. the central bank has consistently been dovish quarter by quarter in the last few FY’s to leverage some additional liquidity but nowhere at an alarming rate of zero.

The last piece of Japanization is deflation. Fortunately, we have in a frame where countering inflation is a challenge, the targeted range is 4-6 %, with 3% volatility 5% can be taken as mean around that we are moving up and down. So again we are not in that phase.

On conclusion, it is convenient to say we are for away from the Japanization or any long term stagnation worthy regime, but if we analyse what lead to japan in netting into that situation we are pretty much simulating same behaviour. NPA’s of our commercial banks are piling and piling for new records, the bubble and burst of economic advantage can impact severely if technological changes are not taken into execution, in a pragmatic manner, for example despite having a huge IT potential we are technologically dependent upon other countries, look at mobile apps of your cell phone. Structural reform in corporate governance and public governance were pathetic and still are, without overcoming these drawback it is fairly not possible to maximize the surpluses and overall wellbeing. Manufacturing has to pick the race that we are losing in the hands of lower economies. In short, if we keep losing IPR potential in hands of advanced nations and production potential in hands of lower and simpler economic nations then we would stagnate tomorrow or day after. Fortunately, we have a demographic advantage that gives us room for a longer duration to improve.