India’s Economy is Booming and Declining at the Same Time: Ila Patnaik

KOCHI:
“India is at a stage where everybody is talking about the country’s booming economic growth as well as its declining economy. We hear how India is only second to China in economic growth. We also hear that there is a slump in job creation, investments and bank credits. How both the stories coexist is a puzzle. While one is about India’s potential long-term growth, the other is about the growth that we are experiencing at present,” said Dr Ila Patnaik, Professor, National Institute of Public Finance and Policy, New Delhi.
She was speaking on ‘Economic Growth in India: Trends and Cycle’ at the CPPR 14th Quarterly Lecture held here on Thursday. Dr Patnaik is former Principal Economic Advisor to the Government of India.
“India is an emerging economy, which functions differently from advanced economies. While business cycles in Europe oscillate between peak and trough, emerging economies grow continuously. In the case of India, growth rates vary from quarter to quarter. The Indian economy has had periods, when the economy has peaked to 10 per cent as well as slowed down to 4–5%. The average growth rate of India in the last 15 years stands at 6–6.5%,” noted Dr Patnaik.
India has in its favour three major economic advantages – a growing human capital, rising capital stock and numerous micro-economic drivers of productivity. India’s literacy rate has increased from 41% in 1980 to 72.1% in 2014. The rapid improvement in literacy will lead to increased supply and quality of labour. In the next decade, everyone entering the labour force will be literate and 20% of entrants to the work force will be graduates. India is also slated to achieve 100% female literacy rate. In the global space, India has an advantage of high-end scientific and technical labour force.
While comparing India’s growth in capital stock with other emerging economies, Dr Patnaik noted that India outperforms its peers. Though the value of projects under implementation has been increasing, several projects got into trouble in 2011-12 and are now ending up as non-performing assets. The gross fixed assets of major Indian firms are growing, except for certain slumps in recent years. The productivity rate of India is also showing positive trends. The developments in infrastructure, mobile technology and urban transportation confirm this trend.
Though data present a positive picture for India in terms of potential growth, India cannot afford to be complacent. The quarterly GDP growth rate in real terms has been declining. Though there has been an upward trend since 2014, GDP growth rates of the last few quarters are sliding. The first quarter of 2017 recorded 6.1% growth in GDP.
Slowdown in industrial production does not go with the healthy growth rate that is predicted for India. The net sales of firms are subdued. There is also a slide in bank credit to the commercial sector and under-implementation projects. This proves the dearth of major investments in the country.
Data on business cycles present a problematic picture. They indicate that India is still at the bottom in terms of net sales, investments, production and bank credits. Though we are not at zero growth rate, India is much lower than the potential growth rate. The downturn in investment cycle will affect trend growth. If investment does not pick up, capital stock will not pick up. There is a downward trend in the projects announced by the private sector.
The Central budget talked up pushing public investments in infrastructure. The government has limited capacity to increase public investments. Ideally, when the government increases public investment, it crowds out private investment. Despite two years of increase in public investment increase, private investments have not reciprocated. If this does not pick up, economic growth in India could taper off. Demonetisation and GST serve to bring the informal sector into the formal sector. However, on the question of Indian economy picking up, we come up with singular answers. Neither the government nor the critics have the right answer to the question, which leaves us in dire straits.
Contract enforcements, license regulation, policy uncertainty, law and order tax rates and tax administration are some of the major concerns India faces as an emerging economy. Though there is a cyclical downturn in investment now, India has good long term growth prospects. If the investment downturn persists, it can impact long term capital stock and growth. The policy framework for supporting investment needs to be improved for India to achieve its full potential.