About 6.5% in 5 years seems reasonable now
India will have 177 million poor people in FY19 if economic growth picks up to 9%, but around 256 million if growth continues at the current 5% levels. Real estate developers will sell 1.1 million new homes in the top 10 cities if growth picks up to 9%, but just 9.6 lakh if growth remains at 5%; the number reduces from 18.5 million passenger cars to 14.5 million, and from 108 million to 92 million in the case of two-wheeler sales … Crisil’s latest report—Of growth & missed opportunity—has several such chilling examples, the most frightening of which are the ones on the labour market. The question then is really of how you get to 9% which works out to roughly doubling the present rate of growth. Like most others, Crisil points out that this just isn’t possible; if all goes well, the credit rating agency posits, India can look at getting to 6.5%. The reasons for this are simple, and that is the reason why the new prime minister needs to hit the ground running, and if that man is Narendra Modi, he needs to jettison some of the ideological baggage of the past—with respect to subsidies, government shareholding in banks, privatisation, using Aadhaar, the list is a long one.
To understand why Crisil believes growth is constrained with an upper-bound of 6.5%, it is important to understand why growth fell from the FY04-11 levels to today’s sub-5%. At its crux, there was less capital being invested, and what was invested was getting a lot less productive. The trick, then, is to get both to rise, and with a decisive government, the argument is, this will happen automatically. This is Crisil’s point, it won’t. Clearing policy logjams, getting the courts to allow mining once again, getting coal linkages worked out—this, by the way, involves sweeping reforms like opening up the coal sector—will help make existing investment more productive. This is what economists call Incremental Capital Output Ratio and, from 7.4 right now, Crisil reckons it can fall to 5.5 in the next 5 years—that’s huge, but much higher than the 4.4 in FY04-11. Getting investment back on track will be even more difficult for a variety of reasons. For one, with capacity utilisation down—to 45% in the case of cars and UVs—firms have no need to invest for a few years. Two, with India Inc’s balance sheets hugely over-leveraged, it does not have the capacity to invest; with huge NPAs, banks simply can’t lend fast enough.
So, among the first things the new government needs to do is to tackle NPAs by being tough on India Inc, it needs to reduce its stake in banks to allow them to raise the fresh capital needed to lend. And since no investments can take place without savings, government savings need to be brought back on track. With subsidies rising from 1.5% of GDP in the NDA years to around 2.5% now, and 3.5% if the Food Security Act is to be implemented, tackling this has to be a top priority—in which case, the BJP will need to relook the much-reviled Aadhaar. There is lots more to be done—the land acquisition Act, the industry secretary is on record saying is stopping all investment—but this is a good enough list to begin with.