Economic prospects

Interventions needed to support long-term growth

The Department of Economic Affairs on Monday came up with a review of India’s economic performance over the past decade. Although it is not the Economic Survey, which will be released before the full Budget after the Lok Sabha election, the review highlights the reforms implemented by the Narendra Modi government. It notes the economy is expected to grow 7.3 per cent this financial year and many believe growth will be around 7 per cent even next financial year. Growth in the economy has indeed exceeded expectations, and the fact that India is growing at this rate despite relatively unfavourable global conditions is commendable. The government implemented several reforms over the past decade and recovery from the pandemic has been stronger than expected. However, there are challenges that could affect potential growth over the medium to long run.

Among the most notable reforms, the government has implemented the Insolvency and Bankruptcy Code, 2016. Along with the merger of public-sector banks and their recapitalisation, it helped address the twin balance-sheet problem. As a result, the Indian banking sector is currently in its most favourable position in over a decade. Healthy corporate and bank balance sheets have not only reduced macroeconomic risks but will also support private investment. Another noteworthy reform implemented in the past decade is goods and services tax (GST). After years of relative underperformance, the tax system is showing signs of stabilisation and increased revenue. The government should now aim to rationalise rates and slabs to further improve its performance. The government took several other initiatives, such as the Real Estate (Regulation and Development) Act, decriminalising minor economic offences, liberalising foreign direct investment in various sectors, and adopting flexible inflation targeting.

Some of these reforms will support growth over the medium to long run. However, there are at least two important issues that need immediate policy attention. The government opted for increased capital expenditure to support growth after the pandemic, which slowed fiscal consolidation. As a result, according to estimates, India’s public debt is expected to increase this year, partly because of lower nominal growth. Public debt worth well over 80 per cent of gross domestic product is always a source of macroeconomic vulnerability for a country like India. Higher debt and interest payments are also affecting government spending. As an analysis by this newspaper showed, with an increase in interest payments, expenditure on health and education as a proportion of total expenditure has declined in recent years. The government thus needs to reduce the fiscal deficit at a faster rate to bring down public debt.

The other big policy challenge is generating quality employment. The review notes the unemployment rate, according to the annual Periodic Labour Force Surveys, declined from 6 per cent in 2017-18 to 3.2 per cent in 2022-23. Policymakers, however, should read these numbers carefully and not underestimate the nature of the challenge. It is worth noting that over 57 per cent of workers reported to be self-employed and over 18 per cent were helpers in their household enterprises. Meanwhile, about 22 per cent reported to be engaged in casual labour. The employment mix underscores that the Indian economy is unable to create quality jobs at the scale required. This factor alone has the potential to significantly undermine India’s long-term economic growth prospects.