Sustainable growth

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 absolu.....
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.


Dear Reader,


Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.

We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel
Key stories on business-standard.com are available to premium subscribers only.

Already a premium subscriber?

Subscribe to get an across device (Website, Mobile Web, Iphone, Ipad, and Android Phone applications) access to Premium content, Breaking News alerts, Industry Newsletters, Stock and Corporate news alerts, access to Archives and a lot more.

Read More on

INDIAN ECONOMY

BUSINESS STANDARD EDITORIAL COMMENT

OPINION

EDITORIALS


Most Read

Markets

Companies

Opinion

Latest News

Todays Paper

News you can use