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Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint

The long road to a high-growth future

One of the reasons for softer growth in recent years is the decline in savings rate

NITI Aayog is preparing a 15-year vision and a seven-year strategy document, and has circulated a three-year action agenda. The goal of transforming India and attaining the desired level of economic and social outcomes will require higher and sustainable growth in coming years. Higher economic growth will not only create employment, but will also generate higher revenue which will help increase government spending without disturbing the budgetary balance.

The vice-chairman of NITI Aayog, Arvind Panagariya, in his presentation on Sunday, showed that the size of the Indian economy will increase from a level of Rs137 trillion in 2015-16 to Rs469 trillion by 2031-32 (2015-16 prices)—a compound annual growth of about 8%. Higher growth is the best way of lifting standards of living, as has been demonstrated by China in recent decades. Attaining and sustaining this level of growth is feasible, but will need policy action on various fronts—as has also been highlighted in NITI Aayog’s action agenda. A 2016 working paper published by the Reserve Bank of India (RBI) noted that India’s potential growth slipped to about 7% during 2009-15 compared with 8% during 2003-08. The Indian economy is estimated to have expanded by 7.1% in the last fiscal.

As things stand today, in order to push both potential and actual output growth, policymakers would do well to focus on at least four broad areas.

Firstly, focus on strengthening macroeconomic fundamentals. A sound macroeconomic environment is a prerequisite for sustained higher growth. India has made significant progress over the last few years on this front, and all efforts should be made to attain the medium-term fiscal and monetary policy targets. The N.K. Singh committee has proposed a new fiscal architecture that will reduce the level of total debt stock with steady reduction in fiscal deficit. On the monetary policy side, the RBI’s rate-setting committee is targeting 4% inflation on a durable basis. Continued progress in both these areas will help strengthen economic stability.

One of the reasons for softer growth in recent years is a decline in savings rate. Higher growth in the last decade was backed by higher savings. India’s savings rate is estimated to have declined from the level of about 37% of the gross domestic product in 2007-08 to under 30% in 2016-17. India will need higher savings to sustain higher growth. A stable macro environment should augment savings and investment.

Secondly, fix the banking sector. It is now well accepted that high levels of non-performing assets—particularly in public sector banks—are a drag on investments and growth. The sector needs a fresh road map in the short to medium term that not only addresses the current problem, but also provides the necessary checks and balances so that a similar situation is avoided in the future. NITI Aayog’s action agenda has suggested auctioning assets to private asset reconstruction companies. For a durable solution, the government should reconsider its role in the sector. A significant reduction in government holding in banks will augur well for the economy.

Further, India also needs a lively corporate bond market as it will provide an alternative source of financing and reduce the pressure on the banking sector. A vibrant, competitive and stable financial sector will help push investment and growth in the medium to long run.

Thirdly, improve conditions in land and labour markets. In order to sustain higher growth, the government will need to make it easier for businesses to acquire land and hire labour. India is a country of small enterprises. The latest economic census shows that on an average, enterprises in India employ only 2.24 workers. The small and informal nature of business enterprises in India affects productivity and is an impediment to growth. One of the reasons for having too many small enterprises is rigid labour laws. The government should work on creating a flexible labour market, which will allow businesses to take advantage of economies of scale. Similarly, the government also needs to make it easier for businesses to acquire land. A number of projects are stuck because of land acquisition problems. Reforms in these markets would require greater coordination between the Centre and states.

Finally, the government needs to review its own functioning and change in a way that allows the market to attain its full potential. For instance, it will need to withdraw from commercial activities through privatization and focus on strengthening regulatory capabilities. Further, it should always be careful about the unintended consequences of intervention. The recent decision of the Narendra Modi government to impose price caps on coronary stents is an example of exactly what the government should not be doing. Price caps inevitably result in shortages with adverse consequences. The government should always avoid such decisions.

It can be said with near certainty that like the last decade and a half, the next 15 years will also bring tremendous change, especially in the area of technology, and throw up new opportunities and challenges. Therefore, policymakers will need to constantly work on multiple levels in order to create enabling conditions that will allow the Indian economy to develop at a rapid pace and achieve long-term goals.

Can India grow at a higher rate on a sustained basis? Tell us at views@livemint.com

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