Insights into Editorial: Government’s key agenda must be to accelerate growth
Introduction:
As in the revised new base estimates, the growth rate in 2016-17 was 8.2%. In 2018-19 it was 7%.
The national income numbers continue to be controversial. No serious policy decision can be taken with ambiguous numbers. Nevertheless, even with the new official numbers it is clear that growth is slowing down.
Accelerating economic growth must be on top of the agenda of the new government.
It is only a fast-growing economy that will generate the surpluses which are necessary to address many of our socio-economic problems and to provide social safety nets.
Declined of investment rates in recent years:
For faster growth, what is critically needed is a higher investment rate.
In current prices, the ratio of Gross Fixed Capital Formation to Gross Domestic Product has stayed low at 28.5% between 2015-16 and 2017-18. In 2018-19 it is estimated at 28.9%. In 2007-08, it was as high as 35.8%.
In constant prices, the ratio, has, however, shown a smaller decline from the peak. It is true that for a time growth can come out of better utilisation of existing capacity. But for sustained growth, the ratio has to go up, and that too substantially.
Reasons for decline in Investments Rates:
Reduction of Corporate Investments:
- There are several studies which indicate a fall in corporate investment. Every year the Reserve Bank of India (RBI) publishes a forecast of corporate investment.
- It uses the data made available by banks and other financial institutions on the phasing of capital expenditures of projects sanctioned by them.
- Recently, RBI Bulletin says that in 2017-18, the capital expenditures of the corporate sector were estimated at ₹1,487 billion. There has been a steady decline from Rs.2,050 billion in 2014-15.
- The industry-wise distribution of projects sanctioned by banks and other institutions in 2017-18 shows that the power sector accounted for 38.2% of the total expenditure. Pure manufacturing had only a small share.
Employability and Employment rates gradually reduced:
There has been great concern about the inability of the economy to generate adequate employment.
Employment numbers have always been somewhat worrisome because of the presence of heavy underemployment in the country.
Perhaps there has been some shift of employment from the unorganised to the organised segment.
Sectors such as IT and the financial system, which provided attractive employment to young educated entrants to the labour market in the past, have their own problems.
But this does not alter the overall situation. The answer to the problem of jobs is only growth.
Agrarian Distress implies slowdown in Rural Consumption:
The main concern is the slowdown in rural demand, which can affect the off-take of consumer goods.
Agrarian distress, which is the cause of slowdown in demand, needs to be tackled on a priority.
Where distress is due to a fall in prices, the best course of action is to resort to limited procurement so that the excess over normal is procured by the government.
Solutions to increase the Investment and Employment rates:
- It is faster growth and faster investment which will generate employment.
- Of course, the pattern of growth also counts. Some sectors such as construction are more labour intensive.
- But an improvement in the financial system may trigger some new jobs. Ultimately, it is overall growth which is key to more employment.
- To deal with Agrarian distress, making available inputs such as seeds and fertilizers at an affordable cost must be the major task particularly of State governments.
- Over the medium term, more attention must be paid to increasing agricultural productivity through consolidation of land holdings and spreading better techniques of cultivation. Improving marketing arrangements has been a neglected area.
Increase Public Investment:
What is needed is for the government to interact with all public sector units and prepare a programme of public investment for 2019-20.
Public sector units can take a longer-term view than the private sector. A strong public investment programme can be a catalyst of private investment.
In a situation such as the present one, it can crowd in private investment.
Second, there have to be sector- or industry-wise discussions between the government and industrialists to understand the bottlenecks that each industry faces in making investment and take actions to remove them.
In 2019-20, capital expenditures of the Central government to GDP are expected to be 1.6%.
Reforms that need proper implementation in Letter and Spirit:
- The introduction of the Goods and Services Tax is a major step. But glitches still remain in its implementation.
- The government should get tax authorities, industrialists, traders and, particularly, exporters to sort out the issues together.
- The Insolvency and Bankruptcy Code was another significant step taken in the last few years. Even here there are some bottlenecks and the government must address them.
- Land reforms which enable entrepreneurs to buy land speedily have been suggested.
- Labour reforms should wait until the economy has picked up steam and moved to a higher growth path.
Minimum income support:
In the wake of electioneering, there was a lot of talk on social safety nets, more so on providing a minimum income to the poor.
Any caring society should do this. But it also depends on the ability of the government to sustain it.
The government should move in the direction of removing some of the subsidies and schemes which are similar in nature to minimum income, consolidate them, add to them what is fiscally feasible and provide the funds directly to the poor.
The bigger problem is to define the ‘poor’ and, more particularly, identify them. But a move in this direction must be part of the agenda.
Conclusion:
To conclude, besides economic factors, non-economic factors are also critically important to revive what are often described as ‘animal spirits’. All these point to the urgent need to accelerate investment.
To resolve NPA issue, the government must infuse adequate capital into banks at one go.
There are mechanisms such as resolution councils or committees which can help to resolve the NPA problem without the bank management coming under scrutiny of investigative agencies.
Over the medium term we should consider reviving the setting up of separate long-term financial institutions, partly funded by government.
While there is a case for some easing of liquidity, monetary policy should keep a watch on prices as there is no easy way to forecast the behaviour of crude oil prices or the monsoon.
Investment today is based on expectations of future earnings. Thus, it is an act of faith in the future. For this to happen, there must be social and political tranquillity.
