June , 2019
Raising GDP growth and creating more jobs
15:59 pm

Tushar K. Mahanti

Modi may have won the 2019 general election bypassing the economic issues at large but now, arresting an economic slowdown and nursing back the country’s financial sector are among the crucial challenges before the nation.Indian economy has slowed down to its lowest in five years in the last fiscal and was estimated at 6.8% after a downward revision from government’s estimates of 7% last February. The economy grew at 7.2% in 2017-18.If the World Bank’s recent projection that India would grow at 7.5% in the next three years, supported by robust investment and private consumption gives some solace to the government, the continuous deceleration in the GDP growth has to be stopped and consumption expenditure in the economy must be boosted. The World Bank, in its Global Economic Prospects released early this month, said that India is estimated to have grown by 7.2% in 2018-19 and is projected to grow 7.5% in 2019-20. “Private consumption and investment will benefit from strengthening credit growth amid more accommodative monetary policy, with inflation having fallen below the Reserve Bank of India’s target,” the report suggested.The fourth quarter GDP growth at 5.8% was the slowest since 2014-15. The previous low was 6.4% in 2013-14. GDP figures for March quarter also put India behind China's GDP growth rate for the first time in seven quarters. China’s GDP grew at 6.45% in the quarter ended last March.Agriculture contracted by 0.1% in the fourth quarter against 2.8% growth in the third quarter and 6.5% growth in the corresponding period last year. Manufacturing growth slowed to 3.1% from 6.4% in the trailing quarter.The question is: What caused this deceleration in GDP growth? According to the finance ministry’s monthly report, “the proximate factors responsible for this slowdown include declining growth of private consumption, tepid increase in fixed investment and muted exports."Clearly, a fall in growth rate in automobile sales, rail freight, petroleum product consumption, domestic air traffic and imports (non-oil, non-gold, non-silver, and non-precious and semi-precious stones) indicates a slowdown in consumption, especially private consumption despite low inflation in the economy.Savings-investment equationWhen one talks of growth, the first thing that comes to mind is investment. Higher growth requires higher savings and investment. India has not witnessed a favourable trend in either of them in recent years. To bring back the economy on high growth trajectory the government thus, would need to bring investment on track. Gross fixed capital formation, which is net investment in fixed assets as a share of the gross domestic product, was 32.3% in 2018-19, compared with 38.7% in 2012-13 – a fall of 6.4 percentage points in six years.To change this trend and to revive the investment climate, banks have to lend more. The rising non-performing assets of banks in the past had made them shaky and ever so cautious to lend. Good news is that the situation is changing and advances of banks are rising. The total outstanding non-food loans (total lending minus advances to the Food Corporation of India) by scheduled commercial banks rose by 12.3% between March 2018 and March 2019, the first year of double-digit growth in the past five years. Enabling private investment would also require a more streamlined land acquisition process and faster environmental and other clearances, which clearly show the new government has its task cut out.Second, to raise capital formation the country needs to boost its savings rate, which has gone down to 30.1% of GDP in 2017-18 from 33.8% in 2011-12. A major source of investment funding in the economy is household savings. Household savings have reduced from 68.2% of gross savings in 2011-12 to 56.3% in 2017-18. The decline in the growth rate of household savings has led to a lower growth in overall savings distorting the investment, growth and macro-economic stability.But despite economic slowdown, Indian industries have remained optimistic of good days and have continued to set up more new projects. According to the Indian Ministry of Commerce and Industry, as many as 2,880 industrial entrepreneurs memorandum (IEM) were implemented during the last five years, between 2014 and 2018, entailing an investment of `5,84,435 crore.This puts more pressure and responsibility on the new government to find out ways to boost consumption expenditure in the economy, especially since lack of private consumption expenditure is considered by economists as well as the government, as a major cause of the economic slowdown. In a bid to improve investment sentiment, the central bank has cut the policy rate, the third time in a row, early this month. A fall in interest rate is expected to improve the sales of consumer goods such as durables and automobiles which are often purchased on bank loans provided the banks pass on the benefits of rate cut to consumers.Deteriorating financial sectorIf higher growth requires higher savings and investment, a successful intermediation of them needs a strong and healthy financial sector. While there are a number of important issues that need to be addressed, one that needs immediate attention is the ailing banking sector. A healthy and well-capitalised banking sector supports capital formation and economic activity by facilitating intermediation of resources between savers and borrowers. India saves close to 30% of its annual output. Given the importance of the banking sector in the financial system, it has a crucial role to play in channelling these savings to productive investments. The mounting stock of bad loans suggests that something has gone wrong with the process of financial intermediation in the banking sector and needs to be fixed.Admittedly, the bad loans of public sector banks declined by about Rs. 31,000 crore in the first nine months of the last fiscal compared to the year-end figure of the previous year, but the cumulative non-performing assets at Rs. 8,64,433 crore remains a big challenge.Employment and unemploymentThe issue of employment generation has remained contentious over the past few years. The last Employment-Unemployment survey in 2016 revealed that only 17% of the workforce was employed in the organised sector as salary earners whereas one-third of the workforce is employed as casual labourers.In 2017-18, the country’s unemployment rate stood at a 45-year high of 6.1% according to the National Sample Survey Office’s periodic labour force survey. These data were collected by the NSSO between July 2017 and June. But then, with the fear that India is experiencing a jobless growth and scepticism abounding the country that the government’s reform measures are failing to create enough new jobs, policymakers are already facing a difficult challenge.India will need to generate 280 million jobs between now and 2050, the year when the working-age (15-60 years) population will peak, according to a United Nations Development Programme (UNDP) report ‘Changing the Future: How Changing Demographics can Power Human Development’. The report has warned that the country’s demographic divided could be at the cusp of a disaster unless enough jobs are created to these new entrants.But 2050 is still a distant future. Right now the panic of a squeezing job market has become the centre of debate. There are two schools of thought on the state of employment in India. One is the fact that more and more people are coming into formal employment which could be a trigger for growth while the other is the fact that the mass unemployment in India is a potential trigger for an economic catastrophe.Deepening agrarian crisisAgriculture, forestry, and fishing -- clubbed under the head of agriculture – accounted for 21% of GDP in 2004-05. The share has dropped by seven percentage points in the past 15 years to about 14% last year. The number of workforce in the sector has, however, has not dropped correspondingly.Indian agriculture employs nearly 55% of the workforce in the country. An estimated 26 crore people are working in the sector. This translates into dependence of about 55-57% population on agriculture, which is in distress. The immediate reason for farm distress is falling food prices. This reflected in low and often a fall in retail inflation of food items. Despite Modi government's implementation of new MSP regime, the farmers are not getting profitable remuneration from their agriculture. The government is trying to lessen the burden on the farmers with PM Kisan, a scheme to provide cash support of Rs. 6,000 a year equated over three installments. This will cost the exchequer an estimated Rs. 70,000 crore a year; that is, Rs. 3.50 lakh crore in five years.This dole will help the small and marginal farmers to meet their daily needs, but will not assist the sector’s future growth momentum as it will not create or develop the sector’s infrastructure requirements. It’s now certain that despite long promises by Modi, farmers’ income will not double by 2021. The new government will have to address bigger issue in agriculture, that is, of shifting farm workers to other employment avenues. This leads to PM Modi's another major challenge -- unemployment.Exports and trade deficitThe ongoing trade war between the US and China will help India tap export opportunities in both the countries in areas such as garments, agriculture, automobile and machinery, according to trade experts.Whether this is really happenings is uncertain but despite global slowdown, India’s merchandise exports at $331 billion reached the highest ever in 2018-19 surpassing the earlier peak of $314.4 billion achieved in 2013-14.The benefit of record exports was, however, nullified substantially due to a continuous rise in imports, which grew at double digit levels for six of the last 12 months, taking cumulative imports to a soaring high of $507.44 billion. This was nearly $42 billion more than India’s total import bill in 2017-18. India’s trade deficit as a result, reached a record high of $176 billion in 2018-19.Exports to GDP ratio in 2018-2019 stood at 12.09% -- only about 0.44 percentage point higher than ratio of 11.65% in the previous year. In fact, there has not been much change of this figure in recent years. What is probably, significant is that India seems to be moving away from low-value exports. As the RBI Monetary Policy Report of April 2019 points out, “An important feature of India’s export basket in recent years has been a shift away from primary and traditional low value-added exports to higher value-added manufacturing and technology-driven items."Exports are seen as a weak link in India’s economic growth story. The new government has to renew its focus on this sector and has to address the concerns of Indian export industry. Exports further need to focus on new products like food commodity and break free from traditional items so that growth is more resilient and sustainable. This will cushion our exports from global volatility and shocks in the long run.Economic slowdown, high unemployment rate, and agrarian crisis were not highlighted in election manifesto of the NDA. But they need to be taken seriously now. 

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