India?s growth story: The trick is in realising our potential

By Aishwarya Bagri

The World Bank released its annual flagship report titled ‘Global Economic Prospects: Broad Based Upturn, but for how long?’ The report estimated Indian GDP growth to be 6.7 percent for the year 2017-2018. This figure is 0.2 percent higher than the Central Statistics Office advance estimate of 6.5 percent pertaining to the same year. It also forecasted 7.3 percent GDP growth for 2018-2019, with growth settling at 7.5 percent for 2019 and 2020, enabling India in becoming the world’s fastest-growing large economy in the world. However, the report reflects a revision in its previous estimates—(0.5 percent) for 2017-18 and (0.2 percent) for 2018-19 projections—caused due to GST and demonetisation related disruptions.

The authors of the report credit these figures to India’s massive potential. “In all likelihood, India is going to register higher growth rate than other major emerging market economies in the next decade. So, I would not focus on the short-term numbers. I would look at the bigger picture for India and the big picture is telling us that it has enormous potential,” Ayhan Kose, director of the Development Prospects Group at the World Bank and author of the report, said in an interview. However, realising this gargantuan potential will require policies and reforms that are proper in terms of both quality and quantity.

Labour and unemployment

India has a million new people entering the workforce every month. 65 percent of the Indian population is below the age of 35. India is touted to be the world’s youngest country by 2020, with its median age being 29. A major factor relating to India’s growth is its demographic dividend. In the GEP report, it is clearly stated that what sets India on a higher pedestal than other emerging countries is its large number of secondary education graduates. However, concerns regarding poor female participation in the workforce and high rates of unemployment are also expressed. As of 2014, employment elasticity that measures the ratio of change in employment to change in GDP remains as low as 0.15.

Nobel Laureate Paul Krugman recently said that though India has emerged as a superpower, its manufacturing growth and rise in employment is missing. Unlike its neighbour China, India did not make use of labour-intensive manufacturing sector to absorb its proliferating workforce. Yet it is never too late. With an increase in the cost of manufacturing in China, India must find ways to support manufacturing growth and promote employment at home. Other tools of raising employment can be improving education and healthcare. Failure in absorbing India’s bubbling youth using such measures will lead to greater social tensions.

Thus, India’s potential is derived from the large workforce it has produced but there is a downside risk of not making efficient utilisation of the human capital.

Structural reforms

Some major factors that led to this forecast are the on-going as well as proposed structural reforms undertaken by the government. The Insolvency and Bankruptcy Code reveals the “seriousness” of the authorities in solving the bad loan problem and promoting lending and investment. Yet the implementation of the IBC will decide the fate of Indian banking; mere formal existence isn’t enough.

The goods and services tax was introduced on July 1, 2017, replacing an overly complicated tax regime. Though a report by the World Bank titled ‘India Development Update-India’s Growth Story’ tags India’s current tax system as the most complicated in the world, it also appreciates it for reducing the cost of compliance, widening the tax base and including informal activities under its ambit. According to the Global Economic Prospects Report, the GST is expected to benefit economic activity in the medium term. This, however, depends on how swiftly and efficiently administrative issues like problems in the online filing are solved.

Various efforts at improving health and education infrastructure will facilitate growth. Demonetisation may have promoted digital payments and formalisation of the cash economy but it has led to a slowdown in economic growth.

Domestic consumption and investment

India is not an export-driven economy. Thus, domestic demand plays a very important role in its growth story. According to the report, strong private consumption is expected to continue to support economic activity. Private investment is expected to revive as the corporate sector adjusts to the new tax regime. The various efforts of the RBI and government to heal the banks’ balance sheets are expected to lift credit to the private sector. These efforts include the bank recapitalisation package, cash infusion into banks by the RBI and the Insolvency and Bankruptcy Code.

One must realise that these are just projections and experience tells us that India was the only emerging economy that performed below expectations last time. For the year 2016, private consumption expenditure was 7.9 percent. This statistic stagnated at 6.5 percent for the first two quarters of 2017-18.

At a time when bank credit saw a 10 percent increase in December 2017 (as per the fortnightly data released by the RBI), the banking sector took another hit due to the PNB-Nirav Modi scam, the Rotomac controversy and the Gupta Brothers scam.

Also, the manufacturing sector growth measured by the Index of Industrial Production (IIP) was as low as 2.2 percent for October 2017, in comparison to the previous year. But it surged to 8.4 percent for November 2017 (with respect to the last year). A thorough analysis reveals that this increase is due to a low base year. That definitely doesn’t imply a necessary growth in manufacturing.

Global economic scenario

Much of India’s growth from 2014 till 2016 can be attributed to the global oil-price collapse and two consecutive heavy monsoons. However, it would be interesting to see how the increase in oil prices play out for India considering the production cuts by oil-producing countries. There has been a revival in the global economy especially with the Euro region performing better than expected. Yet, rise in import tariffs by the American government and similar trade wars as well as geopolitical tensions may be a cause for concern.

Conclusion

The World Bank report clearly indicates that India is a powerhouse of resources and potential. However, for this potential to be realised and resources to be efficiently used, structural reforms should not remain only on paper; stringent implementation is what is needed for realising the shared national dream of becoming a superpower.