Our Broken Growth Model Is In Acute Need Of Some Repair Work

Livemint     9th August 2021     Save    
QEP Pocket Notes

Context: Solving India’s chicken-and-egg problem of income and investment will need unprecedented government action.

Analysing the past growth and decline in the Indian economy

  • Factors that drove economic growth during 2000s.
    • Rise in investment to gross domestic product (GDP) ratio: From 26% in 2000-01 to 34.3% in 2011-12.
    • Rise in exports: Exports jumped from 13% to 24.5% of GDP during the period. They rose further to 25.4% in 2013-14.
  • Declining growth prospects since 2010
  • Inflation had hit double digits.
  • Banking crisis: Projects did not take off on time as per the optimism of Corporates, leading to huge loan defaults.
    • Some business promoters simply siphoned off money borrowed from banks.
    • This led to huge bad loans for banks that peaked at Rs.10.36 trillion, as of 31 March 2018.
  • Investment-to-GDP ratio fell: In 2020-21, it was at an almost two-decade low of 27.1%.
  • Exports fell: To 18.7% of GDP in 2020-21. Even between 2015-16 and 2019-20, these were in the 18-20% range.
  • GDP growth: The growth was led by strong private consumption.
    • Consumption’s share increased from 56.2% in 2011-12 to 60.5% in 2019-20
    • Increased borrowings: Bank lending to the retail sector increased from 9% of GDP in 2011-12 to 14.3% in 2020-21, and rise in retail lending by non-banking finance companies.

          Issues India’s recent growth model

          • The model is unsustainable: This cannot continue indefinitely, given that the ability of people to repay loans and of banks to give out fresh retail loans depends on income growth. 
            • Income growth is restricted: Per capita, gross national disposable income grew in single digits between 2014-15 and 2019-20. Income growth in 2019-20 was just 6.8%. In comparison, this growth had stood at 16.9% in 2010-11.
            • Considering the rise in inequality during the period, the income growth of an average Indian must have been even slower.
          • Increased liabilities: The liabilities of the central and state governments have already touched around 91.7% of GDP as of March 2021.
          • India’s economic paradox: 
            • Income growth needs investment: If income growth has to pick up, investment needs to go up in order to create jobs and spur economic activity.
            • No incentive for raising investment unless the demand grows: Many businesses are not in a position to borrow. Even if they are, the capacity utilisation in many sectors continues to be low.
            • Consumer demand is a function of income growth: Income growth, in turn, depends on investment. This has become like a chicken-and-egg story, which has proven difficult to break.

          Way forward

          • Focus on exports: India’s goods exports between April and July stood at $130.5 billion, almost 22% higher than between April and July 2019. This is a positive sign, but India needs to build on this.
          • State needs to spend more: Both central and state governments.
            • This could involve putting more money directly in the hands of citizens in the form of tax cuts to spending more money on capital-intensive infrastructure projects. 
            • Cutting excise duty on petrol and diesel could be a small start.
          QEP Pocket Notes