Unlocking India's decadal growth

Sustained high growth will need hard reforms

The political outcomes of the 2024 general election are unlikely to affect the near-term macroeconomic outlook. However, the hard policy choices embedded in alternative policy visions and reform agendas might lead to very different economic profiles over the medium to long term.

While the external environment still seems unsettled and volatile, the large G7 economies appear to be moving towards a “soft landing” to varying degrees. Hence, the policy response will become more conducive to growth, gradually lowering interest rates. This bodes well for emerging markets, with a “risk-on” investor sentiment attracting more capital inflows.

In this context, the domestic macroeconomic environment remains robust, with nowcasting metrics indicating continuing strong demand. Financial year 2023-23 (FY24) growth is expected to print close to 8 per cent, and the Reserve Bank of India’s FY25 growth forecast of 7 per cent remains eminently feasible. A large part of investor confidence in India is due to the demonstrated fiscal discipline by the Centre, in coordination with the calibrated monetary policy response, which is perhaps the best executed and most agile in the world.

On domestic consumption, Q4FY24 results of consumer companies point to improving rural demand, further reinforced by the predicted normal rains. While consumption import demand is likely to remain robust, India’s current account is unlikely to be adversely impacted, with the deficit increasing to maybe 1.2 per cent of FY25 gross domestic product (GDP) from last year’s expected 1 per cent. Inflation, particularly non-food and fuel (i.e core inflation), is falling and the headline rate might be expected to move towards the 4 per cent target towards the end of FY25, thereby allowing a relaxation of monetary policy. Bank credit flow to micro, small and medium enterprises (MSMEs) has remained strong, growing 20.1 per cent year-on-year (YoY) as of March 24, 2024. Loan disbursals by non-banking financial companies (NBFCs) for the relevant MSME borrowing requirements had slowed marginally over the first nine months of FY24, but still remained healthy.

However, despite the economic success of the past few years, sustaining a 7 per cent-plus growth for 10 years will not be easy and will require multiple enablers operating synchronously. Sequencing and coordination of reforms will be key to designing feedback loops into other processes, mutually reinforcing the overall agenda. A major constraint is resources availability, which will force choices among competing objectives, necessitating difficult economic trade-offs.

An expected private corporate capex upcycle, given falling borrowing costs, deleveraged balance sheets, and expected consumption demand will augment the public sector. Enormous investments will be needed for the ambitious transition to the net-zero carbon goal by 2070, with a need to access global capital pools.

Yet, economic weaknesses remain. Policy and regulatory enablers will need to address structural deficiencies.  Unemployment, especially amongst the youth, is the most pressing problem and will only get exacerbated by ongoing technological advances. The quality of jobs is as important as their availability. The Periodic Labour Force Survey (PLFS) data for Q4FY24 shows that even in urban areas, only 47.4 per cent of jobs were salaried or regular wage positions, while 40.2 per cent were self-employed, and 12.5 per cent were casual labour. The share of salaried workers is likely much lower in rural areas.

One channel for mitigating this problem and boosting jobs is to refocus policy attention on the micro and small segments of the MSME sector. The data, especially regarding the size and other metrics of this segment, are woefully outdated. The last economic census was in 2013; and the Survey of Unincorporated Enterprises was in 2016. Other surveys provide a fragmented look at establishments, employment and economic activity. A combination of increased access to credit, government procurement support, skilling and apprenticeships, comprehensive insurance coverage, marketing support (e.g., via Open Network for Digital Commerce), export opportunities, among other steps, is crucial for a vibrant MSME ecosystem.

Intertwined with MSME growth is the need to boost exports, both merchandise and services. India’s ambitious goal of achieving $1 trillion in merchandise exports by 2030 implies an annual growth rate of 15 per cent (FY24 exports were about $435 billion) and will need a multi-pronged approach to enhance markets access, including tapping into new, less penetrated markets, boosted by new free-trade and investment agreements. India will also need to integrate even more substantially into the global supply and value chains. Facilitating the scale-up of labour-intensive job-creating enterprises needs equal priority. Services exports, especially attracting more global capability centres (GCCs), provide an opportunity not just to increase integration with the global economy, but also to go up the value chain, e.g., leading edge research and design capabilities.

This ambitious $1 trillion merchandise export target suggests that imports will exceed $1.5 trillion. Efficiently transporting goods of this magnitude will require world-class logistics infrastructure designed for multimodality. Port terminal capacities with connectivity to hinterlands will need to be upgraded. While the government has made significant strides in improving transport and logistics systems, key initiatives like Gati Shakti and Bharatmala will need to be scaled up. Of particular importance will be the operations of the two dedicated rail freight corridors currently approaching completion and the implementation of others in high-density freight routes.

In the longer term, the government has to lead multiple structural transformations, which are crucial for the growth in productivity for sustained growth. Globally, productivity growth has largely emanated from urban agglomerations. Urbanisation in India has been one of the weaker stories, with the share of urban population rising from around 31.6 per cent in 2012 to 35.9 per cent in 2022. China’s urban population, over this period, had moved up from 53.1 per cent to 64.7 per cent (up from 19.4 per cent in 1980, roughly the same level as India’s then). Land availability is a significant constraint on urbanisation in India, but better road, rail and metro connectivity is pushing out the boundaries of peri-urban habitations. An earlier initiative, Providing Urban Amenities in Rural Areas (PURA), merits revisiting. 

Finally, the “last mile” is critical for efficiently implementing the reforms needed to sustain the high growth necessary for transitioning to an upper middle-income economy. This will require intense coordination among the Centre, states and local bodies in the true spirit of federalism.

The writer is an economist