Breaking out of the 6% GDP growth trap: A roadmap to 8% and beyond

In an aspirational India, which seeks to move from per capita per annum gross domestic product (GDP) of $2,800 to $20,000 by 2047 (the status of being a developed nation), the magnitude of growth is important. In my view, the four economic indices taken at two different points of time, as listed in the table, closely mimic the growth path our country has taken.

  The trend of these indices is captured over the past 25 years, which had a government led by Atal Bihari Vajpayee, two governments led by Manmohan Singh, and two led by Narendra Modi.

  The first two indices directly influence growth while the third and fourth reflect the fiscal capacity of the government to invest in critical areas that can raise total factor productivity and thereby growth.

  In the past 25 years, India’s growth rate has been stuck around 6 per cent except the period 2006-10, when India briefly reached 8 per cent (aided by the reforms in the earlier Vajpayee period and favourable global trade winds). The reason for this was that in this period investment reached 39-42 per cent (of GDP) and private investment was around 18 per cent. The investment levels are now at around 33 per cent and private investment is down to 9.8 per cent. The other worrying area is the declining employment intensity of investment, which requires a greater focus on investment in labour-intensive manufacturing.

On the fiscal side, the government’s ability to spend on growth-promoting sectors like health, education, and agri-research and extension has been stymied by the high interest payment, which takes a quarter of our revenue. The task, therefore, is clear if India has to move out of the chakravyuh of 6 per cent growth, these four economic markers have to move in the right direction. Here the government can set itself a reasonable target in the medium term (three-five years): The investment to GDP ratio of 37 per cent (these levels have been reached earlier), employment elasticity of 0.44 (reached in early 2000), the export to GDP ratio of 25 per cent, and the interest payment to revenue ratio of 20 per cent. These are reasonable targets and eminently achievable with the right policy mix. 

  First, the investment rate has to be stepped up and the main laggard here is private investment. To ensure higher investment and its employment orientation, the focus should be on four critical labour-intensive industries — textiles and apparel (both cotton and man-made fibre and technical textiles), leather and footwear, food processing, and toys.

  To make investment in these sectors attractive, all import duties on single-use inputs and intermediates going into these sectors should be brought down to zero, along with the abolition of all non-tariff barriers like quality-control orders (QCOs), which can be incorporated into our trade agreements being negotiated with the European Union, United States, and United Kingdom. In fact, this can be given to all countries across the board to increase choices for our manufacturers, especially in the small- and medium-scale sectors. 

Simultaneously, these industries must also enjoy the merit rate of goods and services tax (GST). In addition to trade agreements to improve market access for these sectors, they must negotiate investment treaties and focus our efforts on bringing in foreign direct investment to these four sectors — investment drives trade, not the other way round. Efforts must be made to persuade foreign investment in their strength areas — Swiss investment in food processing, German and Taiwanese investment in leather and footwear, and European and Japanese investment in textiles and apparel. This investment will also have the effect of crowding in private investment through the demonstration effect of transmission of better technology, quality, and good management practices. It would help to create the Maruti moment in these four critical sectors.

  On fiscal capacity, we must raise the tax to GDP ratio, which has been stagnant at 18 per cent, to at least 20 per cent by moving towards a simplified duty structure with fewer rates and phasing out all exemptions in both GST and direct taxes because they erode the fiscal base. The high interest payment is one of the reasons why credit-rating agencies don’t upgrade our credit status. While our ratio is 25 per cent for most of the developed countries and China, this ratio is in single digits. We, therefore, require a vigorous disinvestment strategy where the disinvestment proceeds should be used to retire debt while the monetisation of assets accruing to individual ministries must be retained for reinvestment.

  An improvement in fiscal capacity will help the government to enhance public expenditure in critical areas like health, education, and agricultural research and extension and boost total factor productivity in the economy, contributing to higher growth.

  In conclusion, the policy strategy outlined above is the way to break out of the 6 per cent growth trap and move towards 8 per cent, which can lift our people not only out of poverty but place them squarely in the middle class. An opportunity beckons amid the Trump travails.

The author is former member, Central Board of Indirect Taxes and Customs