Rakesh Mohan, 2019, Moving India to a new Growth Trajectory: Need for a Comprehensive Big Push

 India reached GDP of about US$2.6 trillion in 2017 when Chinese GDP had already reached about US
$12.2 trillion.
 Growth trajectory: same as previous readings (Vijay Joshi Ch2)
 Minimum aspiration must be to achieve a decent standard of living for almost all Indians, need to escape the
“middle income trap” doubling of per capita income in each of the next two decades 8 percent per year
for GDP. feasible to eliminate poverty
 Needs predominant policy emphasis on economic growth over other objectives, with the understanding that
social welfare and poverty elimination will also be accomplished with the achievement of high growth.
 Need for interconnectivity of policy measures between different aspects of the economy
 excessive centralisation should be avoided

Golden Era of Growth: 2003-08

High growth due to benign investment climate and improved corporate profitability, reasons:
 Restructuring measures by domestic industry in the previous period (1997-2003)
 overall reduction in domestic nominal and real interest rates
 fiscal consolidation
 strong global demand
 easy global liquidity and monetary conditions
 Net household financial savings were adequate to meet the financial needs of both the government and the private
corporate sector during this period.

Monetary management succeeded in containing inflation, reasons:

 government’s agricultural support price policy- setting minimum support prices low
 generalized lowering of inflation globally beginning in the latter half of the 1990s

Infrastructure investment was also stepped up by about 1 percent of GDP: investment in roads

Current Deceleration: 2012-18

Growth slowdown during 2012-14 (after some recovery from 2008 crisis)
macroeconomic policy response to the crisis –overshooting of the stimulus, both monetary and fiscal,
which sowed the seeds for inflation and current account pressures
 Subsequent monetary tightening, had the expected dampening impact on economic activity and
growth
 quality of the fiscal stimulus (tax cuts, increased revenue expenditure on subsidies) added to
demand pressures mirrored in high inflation.
 delayed and incomplete withdrawal of the fiscal stimulus led to crowding out of private
corporate investment
 current account deficit (CAD) widened
o slow growth in exports
o High domestic inflation and negative real interest rates on deposits encouraged gold
imports
o Fuel subsidies leading to high demand for imported petroleum products
 deceleration in industrial growth
Key policy recommendation: need for prudent fiscal policy, a low and stable inflation environment,
appropriate capital account management, and a focus on infrastructure investment.
Possible Future High Growth Scenario 2022-2035

Aspiration expressed in NITI Aayog’s “Strategy for New India @75”

Projections aim to provide a consistent macroeconomic framework for returning Indian annual GDP growth from
around 7-7.5 percent in recent years to a consistent 8-9 percent over the period 2020-35.
 Gross fixed capital formation (GFCF) rate to increase from about 31 percent in 2012-18 to around 33-
35 percent during 2020-25 and ascending to 35-38 percent during the five-year period 2030-35
 Rates of domestic savings (including all three- household, private corporate and public savings) would be
about 31-33 percent during 2020-25, rising to 33-36 percent during 2030-35
 external savings at around 2-2.5 percent of GDP to be consistent with sustainable CAD.
 Even with agricultural growth of 4% pa, GDP growth of 8% is not possible without manufacturing
growth approaching 10%.

Financing Growth (Sources of Projected Growth)

Household Savings
 dramatic fall in net household financial savings from the high of 11-12 % of GDP in 2007-08 to 7% in recent
years
 need to be restored to 10%, and then to 13 % by 2030-35
 measures taken towards greater financial inclusion:
 Jan Dhan Yojana, introduction of new mobile related financial technology and payment systems etc.
 need to be accompanied by measures to channelize savings to productive uses
 need to sustain low inflation for positive real returns to savers
 Food- inflation containment will also depend on rural infrastructure in terms of both transport and
energy, mainly a public sector function

Private Corporate Sector Savings

 Maintenance savings and investment at the current level of about 10 -12 and ascend to higher levels of
12-15 percent of GDP in 2025-35

Public Sector Savings

 two broad categories: government per se and public sector enterprises
 Government saving: 1.1 % of GDP in 2007-08, and have remained negative after that
 PSEs: positive saving rates 3-4 % of GDP through 1990s and 2000s, now fallen to less than 2.5%
 Measures: fiscal correction embodied in the new FRBM framework; reducing central subsidies,
particularly energy subsidies, from 2.6% of GDP in 2012-13 to around 1.6% now
 public sector savings projected to increase from 1.5% of GDP to 3% in 2020-2025, rising to 3.5% by
2030-35
o if government saving positive and PSE saving at 3-4%

Fiscal issues
 current total public sector borrowing requirement (PSBR) is almost 9 percent of GDP,
consuming total household sector financial savings, crowding out private corporate investment
demand
 lasting damage of sudden tax cuts: gross tax/ GDP ratio of the central government recorded fall
from 12% in 2007-08 to 10% during 2009-15, 11% approx. in 2018-19; introduction GST
should help overtime increasing collection of indirect taxes
 for projected increase in public investments, enhancement in public savings through higher tax
 revenues is essential

External Savings
 Indian exports were growing at 20-25% pa since 2002, except 2008 and 2009, stagnated since then
 Accounting for global trade slowdown, still aim for exports growth at 11-12% between 2020 and 2035
 With this scenario, CAD level between 2.0-2.5% of GDP

Manufacturing
 acceleration in manufacturing growth to double digits and sustaining it
 become competitive in labor-intensive sectors (like China)
 need labor and land reforms
 stabilize inflation, and real exchange rate, to encourage exports
 improvement infrastructure is required, especially power, transport, logistics etc.

Infrastructure Investment
 Infrastructure investment would need to increase from around 5% of GDP to 8% in 2020s and
beyond
 Investments in ports, airports, transport linkages and trade logistics for expansion of trade
 creation of adequate skilled manpower for future usage of labor in manufacturing
 Public sector investment required in sectors such as electricity, railways, roads and bridges
 Private sector investment expected in communications, ports, airports, commercial vehicles
 Investments in transport (including railways), both public and private, need to increase by around 1% of
GDP above current levels