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Insights into Editorial: India’s Double-digit GDP growth is doable
India’s $2.2 trillion economy makes it the seventh largest in the world in terms of nominal GDP (and the third largest in PPP terms), but the country’s per capita income is less significant.
With a per capita income of $1,700, India ranks well behind some of the key emerging markets, like China, Russia, Brazil, Indonesia, the Philippines, Mexico, and Turkey.
Getting GDP to grow by 10 per cent in real terms, though not impossible, is quite challenging. As a nation we need to aim for a high target and then set the house in order to enable various elements to deliver this kind of growth. This has been the goal of the government and a lot has been done to provide the right environment through a series of reforms.
Given that in the last three years growth has come down from 8 per cent to 6.7 per cent, it looks unlikely there will be big-bang growth in the next couple of years; it is more likely to be gradual.
Looking back at times of Crisis and booming:
Interestingly, if one looks back to see whether this number has been reached, it can be observed that during 2005-08 India had recorded an average growth of around 9.5 per cent, which was just before the financial crisis.
Subsequently, the spliced series reveals that during 2009-11 growth came in at just below 9 per cent. There is a cruel disruption in the Indian growth story of almost a decade.
Soon after 2008 global financial crisis, there were expectations that there would be resurgent India growing fast at double digit or more on a sustained basis for 30 years.
So, by 2030, India becomes world’s top 3 economies. However, due to policy paralysis from 2011 to 2014 and unprecedented structural changes from 2014 till present has not allowed the economy to grow as expected.
The second is consumption. Low income is still prevalent in the country and has come in the way of spending. In the last decade or so, growth has benefited households at higher income levels where consumption tends to be satiated and hence does not provide the impetus for consuming more goods, except at the margin where the households go in for higher branded products.
Therefore, if this gap can be plugged by creating more jobs and hence incomes, there is vast potential for bringing about accelerated growth in consumption which is a prerequisite to higher GDP growth.
what needs to be done?
Broadly speaking, there are three segments that have to grow at high rates on a continuous basis.
The first is agriculture, which has to be resilient and grow continuously to keep the economy moving in an upward trajectory. Past experience shows that high GDP growth has been associated with years when agriculture grew by 4-5 per cent.
For this to materialise farm output has to be resilient and grow in an unhindered way. Every time agriculture slips, it has a ricocheting impact on other sectors as rural spending comes to a standstill. Therefore, while agriculture has a 15 per cent share in GDP, it has to be kept moving independent of monsoons on a sustained basis.
Also, a single crop failure leads to high inflation which has an impact on overall spending, interest rates and investment ultimately. Such supply-shock led inflation has always come in the way of higher growth.
Building on industry:
The second is industry, where the two building blocks would be manufacturing and construction. This segment has to register 10 per cent growth continuously for the overall growth number to clock 10 per cent. This has to change for which support has to come from investment and consumption.
Also, a greater role has to be played by the private sector. But clearly we need to resolve the NPA (non-performing asset) issue and grow the bond market as funding is a major necessity for growth.
The NPA problem, along with the requisite capital requirement, will take another two years to resolve and hence achieving the 10 per cent mark is still some distance away.
Construction, which is part of industry, would however be the easier goal to achieve as the focus of all governments has been on developing infrastructure, especially roads and urban development.
Add to this the emphasis on affordable housing, and one can see acceleration in growth which will bode well to linked industries such as steel, cement, machinery and metals.
Service sector matters a lot:
The service sector has three parts which have to necessarily grow by over 10 per cent each, which again is not impossible given that such growth rates have been witnessed in the past.
Individually, various components such as trade, transport, finance, real estate, and public administration have registered over 10 per cent growth in different years. It is, therefore, important that all of them should be clocking this kind of growth in a year to get a headline number of above 10 per cent.
Two challenges remain on this front.
- The first is that the banking sector has to be in order before growth can pick up. In fact, along with real estate this segment has been an under-performer since RERA and the NPA recognition norms kicked in.
- Second, the government sector has to play a progressive role on a continued basis, but this is becoming difficult given the fiscal path that has been chosen. In the past when this sector grew rapidly, growth was enabled by higher fiscal spending, which is not possible today.
The expectation of a double-digit growth rate in GDP is definitely well-founded. Also, while touching 10 per cent is okay the goal must be to sustain this level for at least five years to generate jobs and move the poor out of the trap.
More investments in agricultural sector, increased private investments, focus on reviving MSMEs will help to give the necessary fillip. Thus, the Indian economy will see an upturn soon thereby galloping towards one of world’s fastest growing economy in the world.
Thus, India’s macroeconomic front is reasonably sound. It is possible to take risk to economic boost. Growth has to come from private sector. If the government tries to expand and tries to spend out of its way, it will hit the macroeconomic situation. Fiscal deficit ceiling cannot be breached.
The private sector in India depends on government to give signal which is problematic. GST, IBBI enactment, fiscal ceiling are the solid measures to put the growth trajectory on sound footing.
Spare capacity can be defined as large investment opportunities, especially in infra space where the lacunae present scope for higher doses of capital formation. Even today, the US does pump prime the economy by spending on infra, which has come down in quality and requires renewal.
If a country has perfect roads, power, water supply, telecom and ports, then there would be less scope for fresh investment. But with large gaps in most of these sectors, India has opportunity for leveraging the same to grow just like China did in the 1980s and 1990s to reach the position it is in today.
The global institutions report said that India’s millennial population of 400 million is the largest in the world and is armed with around $180 billion in spending power and with high smartphone adoption and widespread availability of mobile broadband infrastructure, it will become a disruptive force faster than most businesses expect.
The population dynamics will therefore be a key force in shaping India’s overall growth trajectory and also in shaping how product markets will develop as the preferences of the population evolve.
The reports, however, noted that the demographics factor alone is not sufficient for an acceleration in GDP growth. It is important that the working age population is adequately skilled to participate in a globalised competitive environment.
The next leg of harnessing this young and better skilled population would require creation of adequate employment opportunities, which is an opportunity for India if consciously used.