Why India should aspire for 10% GDP growth, not 8% | Mint

Why India should aspire for 10% GDP growth, not 8%

Away from the world’s attention, rich democracies face a profound, slow-burning problem: weak economic growth. In the year before covid-19, advanced economies’ gdp grew by less than 2%. (Getty Images/iStockphoto)
Away from the world’s attention, rich democracies face a profound, slow-burning problem: weak economic growth. In the year before covid-19, advanced economies’ gdp grew by less than 2%. (Getty Images/iStockphoto)

Summary

  • Settling for 8%, down from 10%, as India's aspirational GDP growth rate is unnecessary

A lowering of India’s growth ambition is underway right now. A decade earlier, the ambition was to achieve a growth rate of 10%; now, increasingly, an 8% growth rate is being talked about as the aspirational rate. This is unnecessary. 

India needs to aspire to grow at 10% a year while its demographic transition remains favourable, and take concerted steps to marshal policy and spending priorities to achieve that growth.

A slowing world economy is cited as the major constraint to India growing faster. It is a factor, no doubt, which would depress demand for imports from the rest of the world for any country experiencing slowdown. 

However, neither the experience of other large economies that have experienced fast growth nor the internal dynamics of India’s growth suggests that slow global growth is a binding constraint on domestic growth.

China grew at a compound annual growth rate of 10% plus between 2004 and 2014. World growth was between 2.9% and 3.5%, depending on the currency units used to measure output. The country grew at a compound annual growth rate of over 9% over the 19 years prior to the pandemic year of 2020 (calculated from World Bank data for GDP in constant local currency units). 

Between 2000 and 2022, China’s GDP per capita grew from $2,093.9 (constant 2015 dollars) to $11,563, a five-fold increase. 

In contrast, India’s per capita income grew from $755 to $2,085 over the same period, using the same measure.

India has demonstrated sporadic stints of fast growth. But during the period of relatively fast growth between 2003-04 and 2013-14, the compound annual growth rate was a shade less than 6.8%. The global financial crisis of 2007-09 impacted India’s growth as well.

How did China manage to register such spectacular growth, even when world growth meandered at one-third of China’s growth rate? 

The secret was high levels of investment. China registered an investment rate, total investment as a share of GDP of 33.7% in 2000, the ratio climbed to a peak of 47% in 2011, and hovers above 40% in the post-pandemic period. 

Of course, foreign direct investment helped, but in China’s case, the primary role of FDI was not so much to augment domestic savings as to improve the quality of the investment. China’s domestic savings have typically exceeded domestic investment, reflecting in national income accounts as a current account surplus.

India, in contrast, managed to pull up the share of gross fixed capital formation above 30% for the first time in 2004-05. It kept climbing to a peak of 35.8% in 2007-08, and stayed above 33% of GDP till 2012-13. 

In 2013-14, the year of the taper tantrum, in which the prospect of monetary policy tightening by the US Fed markets and currencies tumbling around the world, including in India, causing some to include India in a club of so-called Fragile Five, the share of fixed capital formation in GDP stood at 31.3%. 

Thereafter, this crucial figure of investment fell steadily, slipping below 30% and staying there, reaching 26.6% in the pandemic year of 2020-21 (figures from the Economic Survey).

Foreign direct investment (FDI) is a part of the capital formation counted in these figures. The FDI that pours in, but does not get absorbed in real investment, merely adds to the foreign exchange reserves. 

Unabsorbed capital inflows from abroad account for the climb in India’s foreign exchange reserves — India has had a negative current account surplus, so does not add to its forex reserves via export surpluses, unlike in China’s case.

So, what can be done to boost growth, even in a slowing world? 

To begin with, let us be clear that even if exports do not offer an automatic route to higher GDP growth in a world that collectively decelerates the pace of imports, an economy can, through higher productivity and competitiveness, hope to substitute exports from other countries to gain market share and boost its overall exports. 

This is not easy, but not impossible, as China demonstrated in the first decade of this century.

But the real boost to growth comes, for a large economy like India, not so much from external demand as from domestic demand driven by investment. 

The real constraint on growth is investment. Investment will generate the savings needed to finance it, if necessary by augmenting domestic resources via imports, and by shrinking the consumption of fixed income earners by means of higher prices.

How can investment go up? Direct government action is a primary source. State-funded investment in roads, railways, and power infrastructure has been sustaining the growth India has had. 

Private sector fixed capital formation, after hitting a high of 27.5% of GDP in 2007-08, has been slowing thereafter, slumping below 24% in 2016-15, and touching a low of 21.3% in the demonetization year of 2016-17, before recovering to over 22% in 2018-19 and 2019-20, before slipping below 20% of GDP in the pandemic year.

The twin balance-sheet problem — over-leveraged companies that are unable to service their debts, causing banks to be burdened with bad loans — hit private investment badly. 

This problem is being tackled, with the help of the Insolvency and Bankruptcy Code, recapitalization of banks, after writing off unpaid loans, and tighter lending norms. 

However, the private sector has not yet started investing, as is evident from any and every minister using every possible forum of industrialists to urge the private sector to invest.

Sound macroeconomic policy and optimism about overall growth is one factor that would largescale private investment. For that, India needs fiscal consolidation via curbing expenditure and augmenting tax revenues.

Another is specific policy, such as the public-private-partnership policy for infrastructure that built assets like the Delhi and Mumbai airports, highways and ports, but has now fallen defunct. 

Creating policy such as designing ultra-mega power projects and bidding them out to private players also materialized tens of thousands of crore rupees worth of private investment to generate thousands of MW of power generation capacity.

It is not enough for the private sector to invest in capacity for meeting consumption demand, at a time when spare capacity has been a feature of the Indian economy in the recent past. 

We need policy to incentivize private investment in infrastructure, in particular new urbanization that India needs to accommodate the tens of crore people who would move from village to town as growth creates more jobs in industry and organized services, rather than in agriculture.

It is not enough for bloated government expenditure to boost private consumption to prop up growth, as in the recent past. India needs coherent policy to draw in largescale private investment in infrastructure. Tame global growth is an opportunity to boost domestic infrastructure, as commodity prices fall for India to import what it needs.

India should aim for sustained growth in excess of 10% a year.

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