DCorporation taxes have been halved to put the Indian economy on a double-digit growth trajectory and low-negative if adjusted for inflation. Despite all efforts, the actual numbers are often lower than expectations and forecasts. The latest GDP growth numbers are no exception, India’s GDP could grow by only 13.5 per cent in the April-June quarter against the RBI’s estimate of 16.2 per cent.
Despite the hype and chest-thumping about being one of the fastest growing large economies, India is far from achieving an aspirational double-digit growth rate.
But what is hindering India’s growth prospects – cyclical or temporary disturbances, or structural factors? And what does that mean for policy making, going forward.
Cyclical factors include a temporary ‘mismatch’ between supply and demand and are short-lived. For example, recently lack of containers Due to increase in freight charges affecting the margins of exporters; The Covid-induced demand-supply gap for PPE kits or hospital beds; or the availability of more homes than buyers or more vacant technical positions than skilled workers rising Salary bills for IT companies like Infosys and TCS.
Structural factors include long-term impediments to a country’s economic growth prospects.
The extent to which a given challenge is cyclical or structural in an economy has major implications for the effectiveness of monetary and fiscal policy. Monetary and fiscal policy can be relied upon to deal with cyclical factors that hinder growth. Thus, reduction in interest rates (or tax exemption on home loan interest) by the central bank can help meet the insufficient demand for cars and homes. Such interventions can prevent companies from laying off employees. But they will not be effective in dealing with the infrastructural challenges.
Presently, the Indian economy is facing a combination of both cyclical (temporary mismatch) and structural (long term or permanent) challenges. However it is the latter that has been hampering India’s growth prospects of late. To make matters worse, many of India’s cyclical problems are slowly turning into structural issues, often due to short-term focus and the adoption of contradictory policy measures by successive governments and self-serving bureaucracies.
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How structural diseases creep in…
Sugarcane price populism (in India, sugarcane prices are fixed by the central and state governments) aimed at garnering political support from an estimated 50 million sugarcane growers, turning the country into a structural surplus producer of sugar – India’s sugar producing more sugar than It can be consumed at home. Thus, it has to export or convert its excess sugar into ethanol. However, due to the costly raw material (sugarcane), Indian sugar mills would need a generous dose of export subsidy if global sugar prices correct sharply. Similarly, if crude oil prices fall, oil marketing companies face the dilemma of being slow to blend ethanol with petrol or helping them meet ambitious blending targets and bear operating losses. Will have. To make matters worse, sugarcane price populism is encouraging the cultivation of this water-consuming crop in the water-scarce regions of Maharashtra and Tamil Nadu, creating further ecological complications.
Similarly, India’s excessive raw material protectionism (helped by high tariff walls and production subsidies) is driving excess capacity in steel and other non-ferrous metals such as aluminium. Once the global commodity market cools down, India may have to deal with a steel glut if private investment sentiment doesn’t change or the financially constrained government is forced to cut its infrastructure spending. goes. Again, focus on policy Safety of Capital-intensive large-scale manufacturing (say, textile fibers) that absorbs thousands of unskilled and semi-skilled Indian workers is not helpful, at the expense of labor-intensive but small-scale manufacturing (eg, ready-made garments).
Furthermore, raising tariff walls increases the relative attractiveness of domestic markets as compared to foreign markets, and thus contradicts a policy of export promotion.
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…together with the ills of monetary policy
Increase in capital intensity (encouraged by) artificially low interest rates Despite high inflation by the over-adjustable RBI, and the neglect of small business entities, which tend to be more labor-intensive than large corporations) In a labor-intensive country like India, the problem of unemployment is taking a formidable form. SMEs will remain Troubled Efforts at forced formalization began with ill-advised demonetisation in 2016, followed by faulty design and implementation of the Goods and Services Tax (GST). created A compliance nightmare for small businesses and brought back Inspector Raj. Thus, it is no surprise that country’s unemployment rate zoom According to CMIE, the number of working Indians declined by 2 million to 394.6 million in August by 8.3 percent. This slow population growth and India’s world’s lowest Labor force participation ratio (proportion of country’s population either working or looking for a job) 40 percent or more comparison China (68%), Indonesia (68%), Republic of Korea (82%) and Vietnam (74%).
Low labor force participation and high unemployment rates (especially among youth) put a cap on India’s potential growth rate. Increased productivity can make up for lower workforce participation, but only to an extent. In addition, GDP growth will eventually start to slow down. In addition, fewer working people also mean less purchasing power and a smaller market size that will make it difficult for businesses to take advantage of economies of scale.
In addition, low interest rates encourage over-borrowing and sub-optimal use of scarce capital. The result is an increase in the incremental capital output ratio – which means that India will need more capital to maintain the same level of GDP growth. This will help in increasing the bad loans.
Similarly, reduction in corporate taxes – which does not necessarily include SMEs, sole proprietorship, and partnership firms as well as LLPs – will help. concentration With some large corporations increasing economic power and income and wealth inequality which will limit consumer demand and in turn increase GDP from the demand side.
Again, differential taxation of financial and non-financial income is promoting ‘financialisation’ of the economy, leaving the real economy behind. Why invest in a factory and take the trouble of dealing with archaic rules and regulations related to labor, and inspector raj, in addition to taking on all kinds of business risks – regulatory as well as non-regulatory which reduce the potential return on investment. are, say in construction. Why not invest in fast growing stock market/mutual funds (tax rates 10-15%) which can easily give 12-15 per cent returns. The Nifty index, one of the two benchmark indices, has given an average annual return of 12 per cent over the past 20 years. So why take chances? The side effect could be the loss of thousands if not millions of manufacturing jobs in the process.
Again, India is trying to achieve an increase in the investment rate which in turn will require an increase in its savings-to-GDP ratio. But the gross domestic savings-to-GDP ratio fell from 33.9 per cent in 2012-13 to 28.2 per cent in 2020-21. In addition, runaway inflation and stressed household finances may be on the rise, one of the reasons for the decline in savings. travel The rich and high net worth individuals (HNIs) have higher marginal propensity to save (MPS) than the poor. Low savings will adversely affect investment and in turn affect India’s GDP growth rate. The combination of high effective taxation and poor civic amenities may be a key factor driving the rich and wealthy out of India to low-tax destinations.
Unless India addresses these structural issues, its economic growth will remain sub-optimal. blaming Temporary glitches like a pandemic or a global slowdown will not help the country’s poor GDP growth.
Ritesh Singh @RiteshEconomist is a business economist and currently CEO, Indonomics Consulting, a policy research and advisory startup. Steven Raj Padakandla @ pstevenraj1 is a Faculty at IMT, Hyderabad. Thoughts are personal.
(Edited by Anurag Choubey)