April , 2023
What is holding back India’s GDP growth
14:42 pm

Rajiv Khosla

Data released by the National Statistical Office on February 28, 2022 highlighted that GDP growth in the Indian economy in Q3 of FY23 remained 4.4% which was less than Q2 (6.3%) and Q1 (13.5%) growth. For the full financial year 2022-23, the growth in GDP is estimated to be 7% which is significantly less than the 9.1% growth in GDP experienced in 2021-22. Further, for the FY24 RBI has pegged GDP growth at 6.4% which indicates that for two years, GDP growth in India will remain stumpy. In order to understand this slowdown, it becomes imperative to understand how engines of growth or different components of GDP are operating in India. Table 1 shows the share of different components of GDP since 2011-12. The table illustrates that the most important factor that has got a towering share in GDP is Private Final Consumption Expenditure (PFCE), followed by Gross Fixed Capital Forma-tion (GFCF) and Government Final Consumption Expenditure (GFCE). More than half the share of GDP comes by way of PFCE which is nothing else but the consumer demand in India. Similarly, the second vital component viz. GFCF is a measure of money spent by businesses through investments. Of course, GFCF contains both the investment from the government as well as the private sector, but the majority (nearly 90%) of the share in it comes from the private sector. Pertinently, these two biggest drivers of economic growth are highly correlated as well.

A fall in consumer demand discourages businesses from making any fresh investment in the economy and vice-versa. The third component of GDP i.e. GFCE reflects government spending. This component is more or less associated with the adjustment mechanism. When the economy is in a boom phase, consumption demand is picking up and businesses are investing, the government tries to limit its spending in a way that the momentum of the economy in general and business investment is not disturbed. However, when the consumer sentiment is weak, businesses are restraining from making fresh investments, at that time, the government jumps in to kick-start growth by making public investment so that it may be catalytic in attracting the private investment in future by way of “crowd in” effect. The net impact of the fourth component i.e. net exports (export of goods minus import of goods) is minuscule in India. It is evident from the table that the share of GFCF that used to be 34% in 2011-12 has continuously fallen and remained 30% in 2020-21. In other words, private investment in India has been going subdued for a long time and its impact can also be felt in the context of falling share of exports from India. Of course, with a fall in GDP, the actual impact of a fall in share of different components of GDP cannot be analysed properly, hence to envisage the effect clearly, year wise and compound growth rates have been computed and presented in Table 2. This table categorically states that GFCF has turned out to be the major factor that is inhibiting GDP growth in India. It is not that government of India is unaware of this fact, rather government has repeatedly tried to revive private investment by way of fiscal as well as monetary stimulus.

In September 2019, a colossal (Rs.1.45 lakh crore) stimulus package was extended to the corporate sector for reviving the sagging investment by way of decreasing corporate taxes. On the monetary side, to persuade additional borrowings by the corporate sector, the repo rate was reduced by 135 basis points from 6.50% to 5.15% in the year 2019. Even in the post-covid era, the government tried to boost investment by providing moratorium, production linked incentives, ELCGS etc. However, these measures too seem to have remained unsuccessful to lift the private investment sentiment.When we explicitly try to find out the reasons for tepid investment by the private sector, the explanation can be extended on both the demand side as well as the supply side. On the demand front, it is evident that back to back blows of demonetization (2016), hasty GST implementation (2017) and sudden lockdown (2020) compounded the problem of small, micro and informal economy in India. Crackdown on this economy, particularly in urban and sub-urban India led to the exodus of workers towards agricultural and allied activities in rural areas. Not only the remittances from urban to rural areas decreased with reverse migration, the cost of living being less in rural areas eventually culminated  into a decrease in aggregate demand. Accordingly, the business sentiment reversed thereby leading to missing animal spirits. On the supply side, decrease in consumer demand created excess capacity in the system. Estimates suggest that even now most of the units in India are running at less than 70% of their capacity which cuts down the necessity of additional investment or GFCF. Also, with the eruption of the Russia-Ukraine war, mass inflation has blown-out worldwide, to prevent the central banks globally increasing the interest rates. This increase in interest rate has also discouraged the private investors to invest in new projects. Lending by commercial banks to industry (Table 3) stand testimony to the fact how investment has fallen in India. In the existing framework, where government’s efforts to revive private investment have not fructified in the recent past and macro-economic fundamentals (GDP growth, unemployment, inflation, CAD, Exports, currency interest rates, etc.) are in a delicate position, there is an emergent need to restructure the attempts to revive investment.

A combination of both intellectual capital as well as physical capital should be roped in for this purpose. To the extent intellectual capital goes, an infrastructural commission needs to be set up with an inclusion of experts from different areas. This commission should investigate and set priorities of investment in the urban as well as rural areas for atleast next five years. Loans for development to different sectors/areas should also be extended on the recommendations of this infrastructural commission. It would be appropriate if long term finance is made available to the private sector at competitive rates. For this, we need to revive the tradition of development banking that we lost almost two decades ago. We used to have development financial institutions like IDBI, IFCI, ICICI, etc. which in the post-independence period played a catalytic role in the development of infrastructure. Of course, as per the contemporary requirements New Generation Development Bank(s) should be erected. These development bank(s) should provide long term loans to the government as well as to the private sector as per the recommendations of the Infrastructural Commission.

Last but not the least, the government should try to bring back that amount which has been illegally stashed in tax havens. Undeniably, with the help of Voluntary Disclosure Income Scheme and other such amnesty schemes, attempts had been made to bring back this illegal money, but these have not been very successful. The government should notify that if such illicit currency is brought back by its owner, he/they will not be subjected to any sufferings and will remain immune from all laws. However, he will have to donate atleast 50% in proposed Development Financial Bank, 15% should go to the government as TDS and rest 35% can be preserved by him.Only out of box thinking and acts can help to revive the much needed investment climate in the economy.

The author is a Associate Professor at DAV Institute of Management, Chandigarh


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