When (and how) to press the growth pedal
ALLOR MOST macro-economic indicators need not invariably look good at a given time for a national economy, which aims to embark on a high growth period. But India’s policymakers insist that it’s a key performance yardstick to present them all in bright array.
Growth examples from the past the East Asian/China models or even the American paradigm may not hold true in the current global (dis)order. Despite the universality of economic concepts,every country to an extent is unique, so is India, with its characteristic socioeconomic traits.
*The size of financial markets world-wide is now an even greater multiple of the real economy, and as much more dissociated from it. Being more connected with one another, and more artificially managed than ever before, these markets may be in for another joint, precipitous fall, which could sink all boats.
*Even what has come to be regarded as received wisdom-like the virtues of open market orthodoxy or the strong co-relation between free trade and growth-may require to be re-calibrated in time and space in national interest, and without guilt consciousness. Export led growth per se may no longer be the model to be emulated.
*The objective for India whose post Independence economic history is one of moderate success relative to potential, and a myriad of missed opportunities ought to be sustained growth, and sustainable development. While growth is essential for development (annihilation of poverty and improving life quality without jeopardising environment), it may not be a sufficient solution, if the goal is all-round prosperity that each person can enjoy.
Nikhil Gupta’s book, The Eight Per Cent Solution: A Strategy for India’s Growth, reflects a sense of empathy for thoughts like these, and corroborates at least some of them. While the official narrative of India’s medium-term growth strategy is to create an “investmentled virtuous cycle”, the economy is seen to have lost the growth capacity itself considerably. It is standing (languishing) on the crutches of leveraged consumption by a “massively weakened” household sector (all but the government and the large listed companies), and (the limited and exhaustible) fiscal firepower.
While seeking first-person intimacy with the reader and tending to be modest and explanatory, Gupta’s book is a powerful and timely reminder to India’s policy makers, and the mainstream commentators, sections of who appear to increasingly
forsake objectivity and toe the official line. The book’s prescriptions involve youthful vigour but are also sagely:
- Utilise the 2020s as a “healing decade” to strengthen the financial position of “all”economic agents and produce a policy impact that is net positive for the economy.
*Settle for an average growth of 5% in this decade, rather than exert oneself (fool hardily) to achieve high growth here and now, the consequence of which would bea further fall in the potential growth.
Gupta invokes the “Theory of Everything identity (total investments is equal to domestic savings plus current account deficit), where his formulations principally revolve around.
The author warns: “One of the major factors responsible for the weakened virtuous cycle between investments and cor- porate profits is the large economics timulus (fiscal and monetary) helping the corporate sector to thrive amid weak economic growth. The current economic environment is fragile, and the inevitable normalistion in economic policies may quickly dissipate the good times for the corporate sector(too). “The stimulus being referred to, of course, includes the slashing of corporate tax in September 2019 and the liquidity boost/solid credit growth, and also consumption boosters like assorted welfare benefits and income support for the poor.
The present policy preference begs questions about the future.
The author also observes that external trade led by exports can drive economic growth if and only if other economic policies such as the treatment of the large household sector, preference to producers and the fiscal deficit are also in line with this model. No external policy works without affecting domestic equilibrium.
“Unless the structural issues are acknowledged, it is impossible to work on policies to address them. If a step backward allows us to run faster over a longer period of time, the idea must not be rejected.” Chiefly, Gupta wants policies to resolve the weak financial positions of the households (including unlisted companies) and the government sectors, which he believes will give the country the capacity to grow at a higher rate (say, 8% plus) in 2030s and 2040s, right in time before the demographic dividend fizzles out.
Integral to the plan is a bolstering of total factor productivity and expenditure on (investment in) health and education, to achieve an investment rate of 32-33%, but it’s no substitute for the case to bolster the financial balance sheets of all principal economic agents. The formula is to shore up gross domestic savings by boosting household savings and corporate profits and reining in fiscal deficit at once.
It’s manifest that the profit shift in recent years to the large listed corporates has been at the cost of the smaller unlisted firms including MSMEs (which are collectively much bigger) and the larger house-hold sector, whereas the former should be the main driver of rising leverage. This has raised the incremental capital output ratio, necessitating an even higher (and currently unfeasible) investment rate to engender the desired growth rate.
That the so-called virtuous cycle is a pipedream is proved again by two sets of data that have lately come to the fore the RBI bulletin showing the net financial assets of households plunged to a 47-year low of 5.1% of the GDP in FY23, and the CMIE’s provisional data that revealed the value of new investment projects fell 77% on year and 82% sequentially in the September quarter. It is also likely that the economic growth is even lower than officially broadcast, at 4-5%, given the stultified unorganised sector.
While discussing the broad picture and log-term direction, the author also debunks many inaccurate/fallacious perceptions that have come to stay orare taken for granted, and points to facts/data-points that haven’t got the deserved attention in parlance. Here are a few:
*The Centre has raised the Budget capex at faster pace in recent years, but aggregate public capex was the lowest in eight years in FY23 as investments by com- panies owned by it declined, (and states turned fiscally wary, after the end to the GST compensation). With the bloated fiscal position, chances are that average growth in government spending will be lower than in the pre-pandemic period over the next few years.
*Though the marquees of news stories about public finance talk the most about the Centre’s balance sheet, as much as 60% of government receipts are appropriated by the state governments with a corresponding share in expenditure.
*Announced understanding of financial savings as different from physical investments, which helps explain certain paradoxes like why FDI may not necessarily lead to higher investments.
- Household debt in India is 35% of GDP, three times the level widely believed. There are a few engaging research findings in the book, like that the threshold for Indian household leverage is just 60-80% of the personal disposable income (which may be reached by as early as early 2030s), far lower than in most other major economies. Despite the comparatively low debt-to-income ratio, Indian households debt service ratio is much higher.
Gupta argues against higher allocation towards rural spending via direct income support to farmers (PM Kisan) and welfare schemes, saying such incentives for consumption would undermine productivity. These have, however, had mitigated the dis- tress among the vulnerable sections of peo- ple during the pandemic and thereafter, and have acceptable utility. These “con- sumption stimuli are also a far cry from the transfers to the segment of large producers, which, if the unrealised (unrecoverable) tax arrears-26 trillion at last count-are included, would even look bigger. The book makes a strong pitch for boosting gross domestic savings and physical investments. It also rightly calls for higher efficiency of investments and laments the relative neglect of the sectors with higher employment elasticity. Chances are slim for any political executive to accept a formulation that requires a slowing of growth during its incumbency. A more decentralised growth model with greater policy/fiscal autonomy for state governments, and focus on job cre- ation and improving labour productivity would not be much at odds with Gupta’s call for a wholesome policy push (structural heal).