By Surjith Karthikeyan
India has been witnessing arguably the best growth globally over several years. At times there was turbulence, especially during the Covid pandemic coupled with a global financial slump that caused ripples and temporary disturbances across economies. In the current context, the question is how to use macro-economic tools judiciously to unlock India’s immense growth potential.
A certain rate of growth ensures smooth and uninterrupted progress for an economy. For India, it could be pegged at 7 to 8%, taking cues from experiences over the last 10 years and nullifying outliers such as Covid-19. Investment had a key role in the success story of economic growth, with its dual effects of (a) creating demand through income generation, and (b) productive capacity of the economy or the supply effect of investment. A balance of these dual effects could also be maintained over those years due to which there was no idle or excess capacity, neither a high inflation nor deflation scenarios due to supply or demand imbalances.
Moreover, India is a consumer economy with huge demand for products created within. This balance was maintained during external disturbances. The Say’s law of the market, the core of the classical theory of employment, states, “Supply creates its own demand.” This has worked and shall continue to work for India’s growth story for a long period of time. For a high-growth economy like India, growth and stability shall complement each other, as empirically proven through its history, in contrast to developed economies.
Advantages for India
India is already in the “takeoff” stage as defined in Rostow’s stages of economic growth, and this shall pave the way for the “drive to economic maturity” stage. The takeoff stage shall witness a high level of economic growth compared to developed economies that are already mature. Further, India has carried out an appreciable level of investment, especially in the form of basic infrastructure such as roads, bridges, seaports, airports, etc. These shall have a multiplier effect of 2.5 to 3.5 times on the country’s GDP in the coming years. A recent study by the Indian Institute of Management Bangalore stating that every rupee invested in India’s highway infrastructure has led to a `3.21 increase in the country’s GDP attests to it. The multiplier effects should continue, possibly for the next two decades, taking into account pipeline investments including in areas like bullet trains, rail station renovations, artificial intelligence, Unified Lending Interface, etc.
There are potential diversions from the income stream which tend to weaken multiplier effects — especially savings, strong liquidity preference, taxation, public investment, etc. However, as we are in the “takeoff” stage, the marginal propensity to consume (MPC) is greater than the marginal propensity to save in India. Thus, the higher the MPC, the greater the size of multipliers and lower the amount of leakage from the income stream, and vice versa. Moreover, with the new tax regime the focus is more on income generation than savings in unproductive sectors.
Accessibility to credit coupled with a supportive business environment is another major advantage. At one point of time, one had to depend on local credit offered at high rates of interest, up to 100% per annum. My own experience in this regard, around 15 years ago, running a tiny traditional coir/jute matting manufacturing unit, led to its closure. Today, there are specific and multiple government schemes such as PM Jan Dhan Yojana, PM Mudra Yojana, PM Vishwakarma Yojana, Stand-up India, and PM SVANidhi which ensure ease of credit and accessibility for the poor. These sections include India’s unutilised entrepreneurial talent, and they have much potential to contribute to India’s growth journey. Further, the aforesaid schemes are supported by the central government’s credit guarantee schemes, even for start-ups where India ranks as the third largest ecosystem globally. All new businesses generally have high productivity due to the large fixed investment component. Additional units of variable capital, such as labour, shall increase marginal output at a higher rate, and, aggregate output in higher numbers. This will be reflected in India’s overall growth.
Way forward
Investment promotion activities even at the district level need to be continued, with awareness of and opportunities from central as well as state government schemes. Investment opportunities should be unlocked with the help of a coordinated fiscal monetary push, as witnessed recently. Supply bottlenecks need to be plugged, wherever required. Technical progress needs to be prescribed especially in key traditional sectors. It could be labour-augmenting tech progress similar to the skilling exercise being undertaken by the Centre. The PM Internship scheme is an important step in this regard, equipping students to get absorbed in various sectors. Last, but not the least, there is a requirement for a coordinated fiscal and monetary boost, at appropriate intervals and supported by empirical data, to take India’s growth story forward.
The writer serves as director, ministry of finance.
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This article was first uploaded on March fifteen, twenty twenty-five, at zero minutes past three in the night.