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Tuesday, 19 June 2018 09:39
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If India can grow at 8% on a sustained basis, that is good enough

 

It is not clear why India’s political class keeps talking of what is required for the country to grow its GDP in double digits. UPA politicians would talk of how, since India’s GDP was growing at 8-9% per annum, it was just a matter of time before it grew at 10%, and now prime minister Narendra Modi has done the same thing at the weekend meeting of NITI Aayog’s governing council. He said that while the economy grew at 7.7% in the fourth quarter, the challenge was to take this growth to double digits. Though India’s growth has averaged 7.3% in the four years of the Modi government, the prime minister’s statement seems to assume that such a progression in growth is natural, while the fact is that even 7-8% is not assured—indeed, while Q4 growth was 7.7%, the fact is that the full year’s growth in FY18 was down to 6.7% as compared to 7.1% the year before and 8.2% in FY16.

The prime minister has not spelled out what he meant when he said that “many more important steps have to be taken” for India’s growth, but surely it would be obvious that the collapse in GDP growth is related to the sharp fall in investment levels, from 32.9% of GDP in FY08 to 28.5% in FY18? While it is to the government’s credit that it has managed to raise its own capex—railway capex rose from Rs 67,432 crore in FY14 to Rs 131,000 in FY18, for instance—overall capex cannot rise till that of the private sector rises. And, apart from the usual issues of doing business in India, government policy continues to be unfriendly in sectors like oil and telecom which are traditionally big investment areas. The fact that both banks and firms are cash-strapped, similarly, is a big constraint to investment and the fact that large discounts are being offered at the NCLT means that financially sound firms will be buying existing projects rather than investing in new ones.

 

Similarly, India’s FY18 exports are 5% lower than those in FY14 ($303 billion versus $318.6 billion) while the 9%+ growth years of 2006-08 were years when exports grew by around 25%, annually—once again, it is inconceivable that India can sustain even an 8% growth without such exports growth and that, in turn, is not possible unless India is able to increase its competitiveness in a big way; that means significant labour reforms, and lowering infrastructure and other bottlenecks. And, while there are years when GDP has grown fast despite poor agriculture growth, by and large, years of poor agriculture growth have been years where GDP has also slowed—Modi’s first four years saw agriculture grow at just 2.5% with the government unable to make much progress in freeing agriculture markets and other reforms. In short, instead of getting fixated on double-digit growth, the government would do well to just concentrate on economic reforms. Growth will take care of itself—if India can sustain even an 8% growth for a few decades, that is significant progress, considering India has grown at just 6.6% since reforms began in 1991.

 

 

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