Sustainable growth

Govt needs a realistic economic assessment

The projected higher gross domestic product (GDP) growth rate in the current and next fiscal years seems to have enthused ministers and government economists to predict higher sustained growth over the medium term. The International Monetary Fund (IMF) expects the Indian economy to grow at 9.5 per cent in the current year and 8.5 per cent in the next year. While the projections are in line with what most economists expect, they should not be seen as a trend for the medium term. The higher growth rate in the current fiscal year would largely be a result of the lower base of last year. In absolute terms, real GDP in 2021-22 would only be marginally better than in 2019-20. The growth rate in the next fiscal year would also be influenced by the lower base of the first quarter of the current fiscal year, when economic activity was affected by the second wave of Covid-19.

The predictions of sustained 7 per cent-plus growth or making India a $5-trillion economy by 2024-25, thus, need to be revisited. These are certainly goals India must aspire for. However, such goals can be attained only if the present situation is properly evaluated and necessary action is taken to propel growth. Private final consumption expenditure in the first quarter of the current fiscal year was around the level seen in 2017-18. To be fair, this will recover in the subsequent quarters, but is unlikely to be a major driver of growth in the medium term. Although consumption by higher-income groups seems to be gaining, it is likely to remain subdued in lower-income groups as they would need time to repair their balance sheets. Lower-income groups seem to have suffered a greater income loss because of the disproportionate impact of the pandemic on the unorganised sector.
 

A loss of income, lower consumer confidence, and their impact on consumption are affecting industrial activity. As an internal member of the Monetary Policy Committee, Mridul Saggar, noted in the last policy meeting, over 60 per cent of industries are operating below the 2018-19 level. This shows the amount of spare capacity in the system. Manufacturing sector capacity utilisation in the first quarter of this fiscal year was about 60 per cent. Revival in private investment, which could be a big driver of growth, is unlikely to happen in a hurry. With elevated levels of debt and deficit, government expenditure may also remain constrained in the medium term. Exports are doing well, but given India’s inward-looking trade policy and a possible slowdown in global growth, its sustainability remains to be seen.

According to the IMF, India’s potential growth over the medium term is expected to be around 6 per cent. In the given circumstances, this sounds reasonable. However, there is no reason why India should not work to push up medium-term potential growth. In this context, it is vital to have an institutional mechanism to make regular macroeconomic assessments and provide policy recommendations. The finance ministry does medium-term assessments, but they are largely for fiscal management purposes. In the given construct, the NITI Aayog can be asked to regularly present a medium-term assessment of the Indian economy. Besides improving the general understanding, this would enable the government to make timely and coherent interventions to improve India’s potential growth.