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India’s big growth challenge: Aligning what is needed with what may be possible

It is may be fashionable and certainly not flawed to see India as a bright spot on the global economic growth firmament. After all, at a time when worries of a possible recession plague several developed economies, India, with hopes hinged onto a 6.3 per cent GDP growth in 2023-24, emerges in the lead for any large economy, with global agencies forecasts even for China hovering at around 5 per cent.

The Reserve Bank of India (RBI) has now gone a step ahead and in its monetary policy statement released on Thursday, April 6, 2023, forecast, 6.5 per cent real GDP growth for India in 2023-24. It quotes several factors, including the prospect of Rabi foodgrains production increasing by 6.2 per cent in 2022-23 though it does not say much about the talk of adverse impact from bursts of heavy rains in some pockets. The index of industrial production (IIP), it says, expanded by 5.2 per cent in January while the output of eight core industries rose even faster by 8.9 per cent in January and 6.0 per cent in February. In the services sector, it points to growth in domestic air passenger traffic, port freight traffic, e-way bills and toll collections even as railway freight traffic registered a modest growth in the last quarter. Apart from the pick-up in auto sales, steel and cement output, which also get a mention by the RBI.

Also Read: RBI marginally raises FY24 GDP growth projection to 6.5 per cent

But then, if it all adds up to a growth forecast of 6 per cent or what some call a more optimistic 6.5 per cent, the number is still not high and considering that in the past, India could manage even a 8 to 9 per cent GDP growth. In fact, Dr C Rangarajan, economist and former governor of the Reserve Bank of India, once told this writer that if India needs to be on par with the developed countries on a per capita income level then it will need 8 per cent growth per annum for 22 years in a row. This is assuming an inflation rate of 4 per cent (higher the inflation number, lower the real growth number).

The question therefore today boils down to what is needed and what may be possible. Ask Dr Rangarajan on what is the one crucial need for India at this point and he says, a 2 per cent increase in the investment rate – be it at constant or current prices.

But then, what is finding India having to cope with, what he calls, “a lower aspirational goal.” There are several factors at work and how they play out will show how India gets to deal with the key challenge of aligning what is needed with what may be possible. These include factors both external and Internal. Externally, Dr Rangarajan says, “the developed countries are still talking of a possible recession and if there is a slackening in the rate of growth in the Western countries then it will also have an impact on the developing countries.” Plus, “there is still a conflict between growth and inflation with inflation hitting the developed countries at a level unheard of for the last several decades and to contain this they seem willing to let growth rate suffer a little.”

Added to it all, is that air of de-globalisation wafting across nations. He calls it an “environment for global trade that has weakened with tendencies more towards protected economies and this has a direct hit on our exports.”

In fact, even the statement by RBI governor Shaktikanta Das issued along with the monetary policy statement cautions: “the drag from net external demand may continue due to increased global headwinds. The protracted geopolitical tensions and global financial market volatility pose downside risks to the outlook.”

Also Read: The ball (Rupee) is in the Reserve Bank of India’s court

Reminding that “we are living in very volatile times,” governor Das refers to “the sudden announcement of an output cut by OPEC+ a few days ago and the resultant jump in crude oil prices is yet another evidence of this volatility. The overall outlook thus remains dynamic and fast evolving.” 

But then, “assuming an annual average crude oil price (Indian basket) of US$ 85 per barrel and a normal monsoon,” the RBI projects the consumer price index (CPI) inflation to moderate “to 5.2 per cent for 2023-24.”

On the domestic front, Dr Rangarajan sees both non-economic and economic factors at play: With India headed for general elections next year, the political situation will only heat up and this typically tends to put investors in a “wait and watch” mode with direct implications on the investment climate and the “animal spirits,” an iconic descriptor coined by the celebrated economist John Maynard Keynes to signify the emotional mindset or the sentiment of the investing community.

How this gets addressed will impact the economic factors domestically if the 2 per cent increase in the investment rate overall with a granular, sector-specific push is to happen. While anecdotally, many within the industry talk of investments happening and especially brownfield investments being made they are not sure why it is not getting reflected in the aggregate numbers and taking the investment rate and savings rate well past the 30 per cent mark.

Longer-term View

Seeing the need for taking a longer-term view of the economic prospects, Naushad Forbes, author, co-chairman at Forbes Marshall and the former president of the Confederation of Indian Industry (CII), says that while he agrees with the argument about global headwinds causing concern at the moment, the fact remains that India’s medium-term prospects are still very positive. It has the potential to post high growth but to deliver on that potential the approaches to investments and capacity expansions need to be with a longer-time horizon. “At the very worst, you will have the capacity two years before you need it but then you will be needing it anyway and will not remain unused,” he says. Giving the example of his own company, he says, “we are going ahead with substantial expansion this year.” Also, in terms of policy, he prefers looking at the longer term employment policy. “Putting millions of people to good quality jobs should be a single- minded focus of policy.” And this, he says, will include addressing the education system and the industry orientation towards labour intensive sectors for ensuring good quality jobs. He does see this being recognised by the government but feels it may help with a lot more emphasis or a singular focus. For the moment however, Dr Rangarajan says, “we must be satisfied with a 6 per cent growth rate in 2023-24” and to remember that global agencies like the IMF or the World Bank, have not revised the GDP growth prospect downwards from 6.6 per cent earlier but have become more realistic and in line with what our own estimates have been in India.

But then, the challenge lies in how these estimates are approached and what is done to align what is possible with what is needed to get to that high aspirational goal of becoming the factory for the world and a $13,000 per capita income country.

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