Home/ Companies / News/  ‘Economic growth potential hinges on states’ efficiency’

New Delhi: The Indian economy could achieve its potential of growing at 8-8.5% if states improve their efficiency in areas such as labour and land, said Bibek Debroy, chairperson of the Economic Advisory Council to the Prime Minister (EAC-PM).

Addressing the Mint India Investment Summit 2023 in Mumbai, Debroy said while the aspirational growth rate for India would be 8-8.5%, the economy is expected to expand in the range of about 6.5% over the next two to three years, which could accelerate further to 7% as the impact of supply-side reforms already undertaken kick in. The growth could inch up to 7.5% if one were to be optimistic, Debroy said.

In response to a question on monetary policy’s linkages to fiscal policy, Debroy said as things stand currently, monetary policy is not completely delinked from fiscal policy and therefore, the Reserve Bank of India has to work in close collaboration with the North Block. The linkage between monetary and fiscal policies is an issue linked to the stability of the Union budget, he said. “As reforms take hold, hopefully, taxes will not change from year to year and hopefully, expenditure will also not change from year to year and the Union budget will be known in advance," Debroy said. “Once that happens, fiscal policy becomes more stable and one can think of the monetary policy being delinked from fiscal policy. That is the terminal goal for which various committees have suggested ways. Somewhere down the line, that is what we should hope to move towards," he added.

Addressing business leaders, Debroy said in the past when India had seen a 9% economic growth rate adjusted for inflation, exports had done well. Although India’s services exports are doing well, it would be unreasonable to expect net exports to be an important driver of growth at this juncture in view of the prevailing global uncertainties.

He explained that there is scope for the growth rate to accelerate if states do their bit to improve efficiency in the economy. Debroy said that despite the global uncertainties, there is enough scope to achieve 8% growth because India’s aggregate growth is largely a summation of what happens at the state level with the exception of railways, national highways and defence.

“There is a lot of slack in terms of what can be done to improve efficiency of land and labour markets. If many of the states jack up their growth rates, something like 8% is possible. Do not get me wrong; I am not saying that 8% growth this fiscal year. I am just talking about the potential," Debroy said.

He said both private investment and consumption tend to get postponed when there is uncertainty and where expectations about inflation are high.

“In the medium term, my guess is, depending on the definition of what medium term is, we are on a trajectory of something like 6.5% real rate of growth," he said. Debroy said reforms undertaken by the government on the supply side will lead to gains in the medium term. He also acknowledged that it is becoming clear in hindsight that India’s fiscal response to the pandemic has been good. “As the supply-side reforms kick in, the 6.5% (growth rate) can increase to a real growth rate of 7%, and if you are very, very optimistic, even 7.5%. But that is somewhere down the line. For the next two or three years -- not this year -- I am inclined to think something like 6.5% real growth is something like the right kind of growth to bank on despite what I said on aspirational growth rate of 8-8.5%," Debroy said.India’s economy is expected to grow at 7% in FY23 as per the government’s second advance estimates. RBI has projected a 6.4% growth in FY24.

Debroy also spoke about the transition India is undergoing in terms of urbanization, formalization of the economy, formalization of the labour force and digitalization of the economy. He said these changes represent work is in progress and that formalization of enterprise and of the labour force are desirable as both bring efficiencies and make it easier to target government programmes. “In addition to formalization of enterprises, there has been a formalization of the labour force.... When I mention these transitions, do not imagine that I am talking about binaries. It is not as if all of these transitions have been achieved. They represent work in progress,"Debroy said.

“The last bit of transition that I want to mention is a transition that has to do with the focus of the Narendra Modi government since 2014. The second term is a continuation of what happened in the first term which is to provide what Economic Survey a few years ago called ‘the basic necessities’," Debroy said.

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Updated: 22 Mar 2023, 12:52 AM IST
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