India’s growth rate of GDP for 2016-17 will be 7.1% as against 7.9% and is projected for the next year at 6.5%; thanks to the spill over effect of demonetization. What is of added concern is that nearly 162 public sector projects and 242 in the private sector, with a total value of Rs.5.5 lakh crore, are stalled as per the Economic Survey. India’s investment, which reached a peak of 38% of the GDP (2007-08), is now around 30%. The exports show a significant decline; 13% drop in dollar terms. The non-performing assets for the banking system stand at 9% of the total advances and 12% for the nationalised public sector banks.
It is in the backdrop of this grim economic reality, the passage of the Goods and Services Tax is a watershed moment and should hopefully add 1% additional GDP by next year. Besides the new Bankruptcy Law and enlargement in the scope of foreign direct investment are also whiffs of fresh air. Reformists like C. Rangarajan are of the view “that the government must sharpen its focus on growth”, in which the government should promote the “animal spirits” of private investment. He also makes a strong case for ramping up our public investment; and go for a “haircut” to solve the NPA problem; thereby waiving these loans; much like the farmer loan waiver recently in UP. On the other hand, development economists like Prof. Jean Dreze feel distressed that social sector schemes like SSA, ICDS, and MDM are receiving a short shrift through lesser allocation in real terms. Maternity relief promised at Rs.6000/- to every mother in the informal sector has received a paltry budget allocation of Rs.3000/- crores; thereby depriving most mothers from this benefit. India thus is going through a curious blend of decelerating investment and persistent apathy towards the social sector, amidst the hype of resurgent india.
Several growth theories try to address this impasse; with prime leads taken by Harrod-Domar (1931), Solow (1957) and Kindleberger (1978). While Solow’s predominant concern was with total factor productivity of labour and capital for Harrod and Domar the warranted growth rate would be equal to the investment divided by the incremental capital output ratio. The ICOR is the amount of capital required to produce one unit of output; the higher the ICOR the less efficient is the use of capital. In India, our highest growth rate clocked was 9% (2007-08). This was due to 38% investment rate with an ICOR of around 4. However, since 2014-15 the investment has plummeted to around 30% and ICOR has increased to 5. The significant increase in ICOR is largely attributable to the stalled projects, twin balance challenge faced by the banking system and the corporate, as alluded to above. The public sector investment, which was 8% of the GDP, has now dipped to 4% and the private corporate investment also shows a declining trend. The total cost of projects initiated by corporate sector has come down from Rs.5560 billion in 2009 to Rs.954 billion in 2015-16.
The suggestion of Prof. Rangarajan for a haircut solution to the huge bank default has also been covered in the Economic Survey where it has been suggested that the government should create a Public Asset Reconstruction Agency duly empowered to write off loans. The fly in the ointment of such a proposition is the presence of oversight agencies like C&AG & CVC, who are likely to cry foul of a possible nexus between the government and the corporates in this regard. What, however, is distressing is the soft approach of the government towards recovery of loans from big corporate.
Besides, the courts have also an unenviable record in defending the defaulters through long winding court proceedings. Given the right political will, the government should opt, not for a haircut solution but for enforcing recovery, for which adequate legal provision with Bankruptcy Law is now in place.
The other area where the free market economists are often accused, is their scant attention for improving our tax collection. As against 16% tax to GDP ratio in most emerging market economies, India’s record is a pathetic 11%, with the projection for 2019-20 pitched at 11.9% only. This clearly shows that our tax enforcing mechanism is leaky and palpably corrupt. In this backdrop the budget speech of 2017-18, where the finance minister has highlighted how there is a mismatch between tax payments by rich assesses and their huge deposit during demonetization needs to be complimented. By imposing 65% tax on such huge unaccounted deposit, two lakh crores tax deposits is likely to come into the revenue stream.
Prof. Elhanan Helpman in a remarkable book “The Mystery of Economic Growth” has underlined the importance of productivity, innovation, education and R&D as the real forerunners of high growth. He brings out how improvement in Mean Years of Schooling by 4 years has contributed 30% growth in output in USA during (1950-90). Besides, a consistent expansion of R&D investment by ½ of GDP, led to 15% growth in US output. These experiences hold important lessons for India in terms of our allocation in quality education and R&D. As against an allocation of 3% in education and health, most of the high growth nations of the world invest close to 10% of their GDP. Besides, as against less 1% investment in R&D in India, the developed economies spend around 4 -5% in R&D and innovation. There hangs the tale of India’s disjunction between the growth and development imperatives. Prof. Kindleberger had underlined the importance of balanced growth, where social sector investment should be in sync with economic infrastructure allocation. In our quest for growth and investment, the right balance between growth and development seem to be have been given a go by. Productivity and R&D have to be at the heart of our development strategy.
The views are personal.
The author teaches Constitutional law