Now that Modi Government 2.0 has assumed office, it faces the gargantuan task of mending a dawdling economy that is witnessing dwindling growth. NPAs, allegations of misrepresented growth numbers, and suffering PSUs bring added levels of complexity. According to official data released in May, growth slowed to a meagre 5.8 per cent in the last quarter of FY2019, with India losing the title of ‘fastest growing major economy’ to its more populous neighbour, China.
As every macro-economist tells us, growth has four major levers — consumption, investment, exports, and government spending. Deep dives into each of these areas show cause for concern. Automobile sales, an indicator of consumption, have been dipping consistently. As per the Society of Indian Automobile Manufacturers, May saw the seventh consecutive decline in monthly sales, and passenger vehicle sales recorded the steepest decline in 18 years. Sectors such as FMCG and real estate are also seeing cautious spending. Given that India is a consumption-driven economy, with household consumption accounting for 60 per cent of GDP, these trends are especially worrying.
More FDI inflows will kickstart growth
India saw huge growth in FDI inflows, from $23 billion in FY2013 to $40 billion in FY2016. After that, over the past three years, growth has plateaued. Marginal increases brought FDIs to $45 billion in FY2018, which then dipped to $43 billion in FY2019, of which $16 billion was attributable to the Walmart-Flipkart deal.
To kickstart growth and address unemployment, that has doubled from 4 per cent to 7.6 per cent in the last two years, immediate steps to attract FDI are imperative. Contributing only 12-14 per cent of GDP over the past two decades, the manufacturing sector is in critical condition and needs immediate attention. Increased FDI in manufacturing can bump up its share to 16-25 per cent by 2023, generating around 120 million jobs.
According to Moody’s, the government’s target of 3.4 per cent fiscal deficit in 2019-20 seems improbable due to high spending and low revenue growth. This May, India’s trade deficit widened to $15.36 billion. Prudent fiscal policies are needed to counter this ballooning deficit. Although India’s trade has been hit by the ongoing US-China trade war and the removal of India from GSP (generalised system of preferences) by the US, the spat still presents a great opportunity.
US and China together account for 21 per cent of India’s exports. Analysis shows that for items on which the US had imposed tariffs on China, India had exports equivalent to 47 per cent of its total exports to US. And for the items on which China had imposed tariffs on US, India had exports equivalent to 46 per cent of its total exports to China. India should tap this opportunity to enter these markets aggressively and increase exports to both these giants.
When three factors are struggling to drive growth, government spending must increase and provide impetus by incentivising borrowing, thereby putting cash in the hands of the people. Data from the Ministry of Statistics and Programme Implementation show that government spending is growing faster than GDP, and even though government expenditure only makes up about 10 per cent of GDP, this seems to be propping up growth for now.
Demographic positives
While government pumping in money is one short-term way to boost consumer spending, it also typically leads to higher inflation and bad loans. As things stand, banks are in bad shape with barely sufficient reserves and increasing NPAs. With a rising fiscal deficit and a need to support banks, the government’s funds have various uses and cannot further drive growth.
Any story on India is incomplete without mentioning its strong demographic dividend. The working age-group of 15-59 years accounts for 62.5 per cent of India’s population, which is more people than entire populations of the US, Indonesia, and Brazil together. While this is India’s strong suit, it is only so if it can effectively leverage this dividend. With 12 million people joining the workforce annually, we need to grow at a rate that can add the same number of jobs, otherwise this dividend is only a fancy number on paper.
As we come close to wrapping up the second decade of this millennium, India is poised at a strong position of potential growth, but with a plethora of challenges. Growth must come in a sustainable, inclusive, and holistic fashion to build a solid nation for posterity. India must look at all four levers of growth in light of global conditions if it is to stamp its authority on the world map.
(The writers are in EPGP 2019-20 at IIM Bangalore.)