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A file photo of a Bajaj Auto factory. Workers want the firm to stop operations at its Aurangabad plant. (Bloomberg)
A file photo of a Bajaj Auto factory. Workers want the firm to stop operations at its Aurangabad plant. (Bloomberg)

Opinion | Sustaining India’s Growth Momentum

  • India was the first and perhaps one of the few countries that made deep, structural reforms a part of its economic response package. These reforms are geared at unshackling the nation's productivity potential

NEW DELHI: There is growing recognition for India regaining its growth momentum as it registers an accelerated pace of economic recovery post the pandemic. With major banks, investor advisory groups, and credit rating agencies revising their GDP forecasts for the next financial year while lowering estimates of economic contraction for this fiscal, surely the bounce back is well on track.

To be fair, some of the earlier assessments were too pessimistic and assumed a gradual pace of economic normalisation even as the rest of the world witnessed a swifter recovery. Thus, a reassessment was given but nevertheless welcome.

However, despite the recent upgrades, many continue to challenge conventional belief regarding India’s economic recovery being broad-based and sustainable in nature. It is important that we look at underlying data and relate it with steps undertaken by the government with the sole objective of reviving India’s economy. It is also critical to note that typically, economic activity will see a faster revival than employment figures as labour markets tend to lag. This is because most firms face costs associated with hiring (and firing) and they prefer to adjust the working hours before adjusting employment numbers. It is therefore encouraging to see unemployment figures, including those for urban areas lower than what it was towards the end of previous financial year.

Unemployment rate
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Unemployment rate

There is of course the prospect of labour force participation rate going down but the in labour market does indicate prospects of a cyclical recovery which will lead to jobs being added at a faster pace than what was originally estimated. Critically, the new scheme subsiding part of the EPFO contribution for the unskilled workers will benefit enormously those on the lowest rung of the formal workforce which will then have spill-over effects.

One of the reasons why India's economic momentum is likely to gather steam is the fact that the bulk of the normalisation of economic activity was driven by the rural economy which eventually benefited the rest of the economy. Rural growth has gained momentum and definitely augurs well for the Indian economy as it gets one of the engines firing. It is worthwhile to note that even when the economy was in a lockdown, the agriculture sector grew 3.4% in the first quarter of the current fiscal year as against 3% in the year-ago period. Moreover, we must recognise the strong push by the government towards financing construction of assets, whether in the form of roads or other infrastructure projects or in the form of greater allocations for the urban affordable housing program.

One of the key parts of the government’s stimulus response which has not received adequate attention is the design of the aid. The design is similar in terms of its size to programmes announced by other emerging markets but the choice of instruments is along the lines those deployed by developed countries. This point was highlighted effectively by Niranjan Rajadhyaksha.

What this essentially means is that the government has refrained from excessive and inefficient use of public funds as it restricted its response to policies that would maximise the impact of the stimulus on revival of growth while restricting expenditures to temporary fiscal commitments rather than making them permanent in nature. This is important as our 2008 response had a lot of permanent fiscal expenditures which led to a systematic deterioration of our macroeconomic fundamentals thereby causing many to term us as Fragile 5 economies.

In contrast, the government has taken undertaken a sizable fiscal expansion combining automatic stabilizers, cash transfers, bank guarantees, expansion of expenditure under various programs such as MGNREGA, Food Security Act and Urban Affordable Housing Measures. The fiscal component under each of these policies can be easily reversed making it possible for India to revert to its fiscal consolidation path a lot sooner when compared to some of the other emerging market economies – or even developed economies.

More importantly, India was the first and perhaps one of the few countries that made deep, structural reforms a part of its economic response package. These reforms are geared at unshackling the productivity potential in areas such as APMCs, factor markets such as labour markets along with other reforms that allow for greater private role within the economy in critical areas such as coal, space technology etc. These moves and their productivity gains will help India improve its potential growth rate. This means that India should be better equipped at sustaining a high-growth rate of above 7 per cent due to the productivity gains that will be an outcome of the proposed reforms. This will further help a faster reduction in fiscal deficit as a percentage of GDP and our public debt to GDP figures.

Strong macroeconomic fundamentals are necessary for sustained economic growth and the government has focused on a response package which prioritises sustainability of growth rather than having a fast yet unsustainable economic recovery from the crisis. These reforms will pave way for a sustained 7.5-8% growth rate over the coming decade, paving the way for a much more robust and dynamic economy.

Vivek Singh is additional private secretary to the finance minister. Karan Bhasin is a Delhi-based independent economist.

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