After growing at an average of 8-9 per cent for most of the last decade, Indian economic growth almost halved last year.
Despite some improvement in the latest quarter, overall growth this year is likely to be below 5 per cent.
The most significant impact of this has been on manufacturing. Growth fell to just 1 per cent last year and has been in the negative so far in the current fiscal, drying up job opportunities.
The decline is also accompanied by persistently high inflation. While rising unemployment has restricted demand, high inflation has squeezed demand further.
The services sector, the cornerstone of India’s growth story in the past two decades, is also being impacted by the industrial slowdown.
This is mainly felt in trade and transport, a major part of the overall services that have strong inter-linkages with manufacturing.
Such contraction in real economy is making businesses apprehensive, with increasing input costs putting more pressure on their pricing power and so thinning down margins.
As a result, new projects are pushed back as investors are in a ‘wait and watch mode’. India, therefore, is slowly falling into a recessionary trap — a ‘consumption drought’ has set in the economy alongside an ‘investment famine’.
Road blocks The question, therefore, is how can we return to the earlier high growth path? Because, unless we revive demand and push growth to earlier high levels, inclusive growth will remain elusive.
One of the clear-cut ways to improve the situation and boost investment sentiment is by removing infrastructure deficiency. But the efforts so far leave much to be desired.
Despite huge spending plans on infrastructure, as earmarked since the 11th Five-Year Plan and continued in the current Plan, we have been unable to spend even half of the planned expenditure, with the situation bring abysmal in core sectors such as power, roads, railways and ports.
For instance, India’s freight transport remains heavily reliant on roads — more than 60 per cent, against 22 per cent in China.
This makes it more expensive and time consuming, besides being less environment-friendly. The average turnaround time for a ship at an Indian port has worsened to 4.2 days from 3.85 days four years ago, while it has improved significantly in China to less than a day from 5.8 days in 2006.
As a result, our average logistical costs remain high, at around 14 per cent of GDP vis-à-vis less than 8 per cent elsewhere. This not only leads to loss of potential growth opportunities and employment, but also erodes our overall competitiveness, globally.
Time to fast-track Therefore, it is highly imperative to fast-track investments, especially in the infrastructure domain, to bring India back on the high growth path.
Stringent tax laws are another stumbling block for doing business in India.
Besides the increasing levels of tax incidence, multiplicity of taxes at both State and Union levels, the industry also suffers from retrospective effects of tax ruling. Huge amounts of tax revenues remain under dispute — estimated to be Rs 2.56 lakh crore in 2011-12.
What’s the way forward? The onus of levying tax should be left to states, with the Centre receiving a fixed share of the total tax receipts.
Hence, there is an urgent need to implement the Direct Taxes Code and Goods & Services Tax, which can build a unified market. Investment decisions can then be made purely on economic concerns, free of any tax considerations.
It is clear that efforts by the RBI to anchor inflationary expectations by increasing interest rates are simply not working.
This is because the current inflation is driven by rising food prices, courtesy inefficient supply and non-uniform rise in minimum support prices.
So, it is important to augment supplies through better productivity and by avoiding large wastage in the supply chain.
This calls for more investment in infrastructure, particularly in warehouses and cold-storages.
Moreover, there is a need to take a re-look at the buffer stock norms for foodgrain. Any excess could be liquidated for market use, which at the current rate is well over 50 million tonnes.
In the meantime, the RBI should take a break from the current monetary tightening mode as it is only restricting the demand for manufactured goods and their production. The central bank’s target variable also needs to be changed to core (non-food) inflation as is the case elsewhere.
Growth on agenda The government can even consider borrowings on a temporary basis, a course of action that it seems apprehensive about.
It fears that will breach fiscal deficit targets and jeopardise its poll prospects. But we must rise above electoral politics when the country’s long term health is at stake.
No doubt, we will increase the risk of fiscal profligacy. But the moot point is demand needs to be revived at any cost, and if we overshoot our fiscal deficit target for this, so be it.
The government can always minimise that through better tax compliance, bolder disinvestment programmes and utilising the cash surplus of PSUs to boost investment.
I still feel India has the potential to achieve a 7-8 per cent annual growth on a sustained basis, provided we implement the policy decisions already taken and foster an enabling environment that makes us more competitive.
This is also important to cash in on the inherent growth drivers — positive demographic dividend, low manufacturing imprint (scope for more employment), or burgeoning middle class with rising purchasing power to uplift the economy.
For that, it is imperative that a broad minimum consensus should be evolved among all stakeholders, government, industry and civil society, on core economic issues, so that it helps the industry do its business without worrying about political fall-outs.
I also believe that growth and inclusion can go together if we empower the people with basic education, health and skill development, so that everyone is encouraged to participate in the growth process.
This is the right way to go about ensuring inclusive growth.
(The author is Director, JK Organisation.)