What can keep India growing in 2018

When is India’s excellent growth potential going to be realised? For India to become a $10-trillion economy in 2030 from its 2016 level of $2.26 trillion, and possibly the third-largest economy in the world, its real rate of growth must be at least 7 per cent per annum. If the real growth rate is 9 per cent, however, GDP will be $14 trillion, making a large difference to welfare.

There are promising growth impulses over the next year, however.

First, while average growth has risen after the reforms so has its volatility. Across a threshold, growth should become steady and self-sustaining. Counter-cyclical macroeconomic policy can also smooth growth, provided there is space. This space has been painfully created ever since 2011 with stabilisation and recent structural reforms. Monetary-fiscal coordination is essential in an economy like India’s where government polices affect inflation more, and interest rates have a greater effect on demand than on inflation. Macroeconomic policy can use space, consistent with the current rule-bound framework, to stimulate demand even as supply-side measures reduce inflation.

Second, ongoing structural reforms will begin to deliver efficiency and scale economies. For example, GST will remove cost-increasing distortions such as multiple company warehouses across States. Intractable governance reforms due to multiple government agencies can be achieved using India’s success in climbing up the World Bank’s ease of doing business ladder as a trigger. To help India reach 50 from 100 can motivate better coordination. For example, a special logistics cell has been set up to reduce India’s costs of exporting. This is much higher than its peers, partly because of the multiple authorities involved. Clear allocation of responsibilities and accountability among government departments will help.

Competition among States, and good publicity for best practices, as through the smart cities website, is an example of reform by stealth. This can overcome political constraints that block land and labour market reforms. Better data enables further opportunistic reform — digital land-title records can be built and shared. Procedures under the bankruptcy code should revive assets, and together with the recap bonds strengthen bank balance sheets and reduce NPAs.

Third, poor public services most hurt the less well-off since they cannot compensate with paid private services. This absence of true economic inclusion, despite full political inclusion, is the biggest failure of our democracy. It was perhaps the heterogeneous electorate that lent itself to the creation of vote-banks on non-economic grounds. Greater awareness and less illiteracy means voter focus is now on governance and public service delivery. Political parties are increasingly motivated to perform.

Technology is also improving public services. For example e-metering and pre-paid mobile cards can considerably reduce electricity pilferage and the human interface that delivers free electricity at the cost of a reduction in its quality and viability. Even the poor are willing to pay for uninterrupted electricity supply.

Fourth, full inclusion in a country of more than a billion people increases the market size for mass consumer goods and induces innovation. New technologies can leverage our youthful skills and reduce the prices of mass goods in a virtuous cycle. An example is the cellphone. Another is how NBFCs are able to lend to MSMEs based on cash flow data rather than collateral as banks demand. This is part of the ongoing formalisation in the economy. Our diversity and demography, together with migration to new and hopefully better planned cities, all support innovation.

One of the puzzles worldwide is the slowdown in productivity growth after the global financial crisis. But this has been avoided in India, supporting the argument so far, especially since unorganised sector compound annual productivity growth (7.2 per cent) over 2011-2016 exceeded that in the organised sector (3.2 per cent) (CSO 2017).

There is a long way to catch up, however, from our current levels of about 45 compared to the US frontier at 100. But the story of ICT in India from the body-shopping associated with Y2K at the turn of the century to the creation of value-added products at Koramangala demonstrates this possibility.

Fifth, ongoing investments in infrastructure, given India’s massive needs, will boost growth. Government support for low income housing (whose share in housing loans has doubled in the last 3 years) can help revive labour-intensive construction activity. Some fine-tuning is required, however, to better estimate demand from different income levels. Innovative finance can help leverage public expenditure. When world trade is slow, investing in non-tradables is good policy.

Sixth, India’s informal employment structure is well-suited to align with worldwide changes towards the so-called ‘gig-economy’, where skills are made available to multiple employers through the internet, in lieu of formal ‘9 to 5’ jobs. For example, internet agencies can standardise and better match a range of domestic services, thus improving their quality and salaries.

Three-month training can equip school-leavers for retail malls. Automation threatens standard jobs but aids the new economy. India must, however, position itself for this by creating skill ladders for different levels.

For example, nano degrees that give relevant training and re-training linked to clear standards set in industry, with government help where industry bodies are unable to do so, are essential. Primary schooling must train students for lifelong learning, with a thorough grounding in code languages. Government school principals must be freed from central control but subject to community discipline.

Seventh is the global and domestic consumption recovery. Indian exports are most responsive to a growth in world demand and that is likely to sustain.

Eighth is the rise in financial savings through mutual funds by Indian households so that equity markets are not so vulnerable to the vagaries of foreign investors, and savings can be better intermediated. But there is also a risk in households entering narrow markets at high price earnings ratios. Policymakers have to take steps to deepen markets.

These include persuading more good companies to list by making the process less onerous; encourage market making in small stocks; use the opportunity to sell public sector equity; and increase the attractiveness of other assets. There are risks, but the normalisation of Fed rates seems to be going smoothly, and some rise in oil prices is actually good for Indian exports.

The writer is a part-time member EAC-PM. The views are personal

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