Spend to grow -C Rangarajan and DK Srivastava
-The Indian Express
Government should explore all avenues to expand capital expenditures
From a level of 8.1 per cent in the fourth quarter of 2017-18, quarterly GDP growth fell to 5 per cent in the first quarter of 2019-20, a fall of 3.1 percentage points. The slowdown of the Indian economy is no longer in dispute. Thankfully, the government has come out of denial mode. The critical question is: What should be done to reverse the process? Is the downturn cyclical or structural? Any downturn that happens because of a weakening of demand is cyclical. On the other hand, if there are fundamental weaknesses in the structure of the economy, these need to be removed to sustain high growth. Successful implementation of the structural reforms in 1991 pushed India’s potential growth rate to a high level. What we are witnessing in the Indian economy is a combination of the two. Several sectors such as automobiles and housing are facing a sharp weakening of demand. And there has been a significant fall in the savings and investment rate. Within household savings, the proportion of savings in financial assets has sharply declined. Apart from these, a significant growth-stifling factor is the weakness of the banking and non-bank finance sectors due to both cyclical and structural reasons.
The central government and the RBI have responded with a number of policy initiatives. The RBI has reduced the repo rate by 110 basis points since February 2019, reducing it from 6.5 per cent to 5.4 per cent. The central government has also undertaken a number of steps post the 2019-20 budget which include — withdrawal of enhanced surcharge on foreign portfolio investors, a public sector bank consolidation plan, additional depreciation rates for vehicle manufacturers, additional credit support for housing finance companies and recapitalisation of public sector banks. The slowdown appears to be continuing in spite of these measures.
The saving rate has fallen from 34.6 per cent in 2011-12 to 30.5 per cent in 2017-18. The investment rate, which is dependent on the saving rate supplemented by net capital inflows, has also fallen from 39 per cent of GDP in 2011-12 to 32.3 per cent in 2017-18. This persistent downward trend of the saving and investment rates has led to a fall in India’s potential growth rate to below 7 per cent. Any additional fall below the potential growth rate may be due to cyclical factors.
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