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.