Economists recommend multi-pronged push to lift India's growth trajectory

India's path to a higher growth trajectory will depend on a mix of export diversification, domestic demand revival, and coordinated structural reforms, said leading economists at BS annual BFSI Summit

The recent pre-Diwali reduction in Goods and Services Tax (GST) rates could give a short-term boost to consumption sentiment, but economists warn it cannot substitute for structural growth measures such as investment revival, export diversification, and sustained reforms.

 

Speaking at Business Standard’s annual BFSI Summit in Mumbai on Wednesday (October 29), leading economists Sonal Varma of Nomura, Samiran Chakraborty of Citibank, and Aditi Nayar, Chief Economist at ICRA, said that while the tax cut comes at an opportune time, its impact is likely to be cyclical rather than transformative.

 

A short-term consumption push 

Samiran Chakraborty, Managing Director and Chief Economist, India, at Citibank, said tax policy is best viewed as a cyclical tool that can provide temporary relief to the economy but not alter its long-term trajectory.

 

 

“Anticipation was that the economy is in a cyclical slowdown and needs a cyclical boost,” he said. “It is also true that income tax collection as a proportion of gross domestic product (GDP) was on a sustained uptrend before the tax cut. There was a need for adjustment because inflation had gone up, but tax rates had not moved alongside.”

 

However, Chakraborty cautioned that such stimulus measures have a limited life. “There is a price effect and an income effect. Once you’ve bought an item you wanted, you won’t jump again. The price gets set in your head,” he said, adding that the longer-term impact will depend on how households channel the savings from lower GST.

 

“If the cut creates a positive narrative and improves sentiment, it can have a longer-lasting effect,” he noted.

 

Need to expand export market and prepare for competition there 

Meanwhile, Sonal Varma, Chief Economist, India and Asia ex-Japan at Nomura, said cyclical measures like GST cuts or rate reductions can only do so much without deeper structural interventions. “We need an all-out strategy to target growth,” she said. “Expanding markets in the US, EU, Latin America and Southeast Asia, improving ease of doing business, and developing niche, high-quality export products are all critical.”

 

But she cautioned that the rest of the world is also diversifying its trade partnerships, which means India will face stiff competition. “Exporters will have to compete and survive to gain market share,” she said, adding that India’s edge will depend on developing the right products and focusing on niche segments that combine low costs with high quality.

 

Focusing on state-level fiscal prudence 

Nayar said reforms must also focus on the state level, as fiscal conditions vary widely. “Each state needs to think about its own growth trajectory. Highly indebted states, in particular, need to lower their debt-to-GDP ratios to manage fiscal space more effectively,” she said.

 

Speaking about the various radical reforms introduced by Sebi and the Reserve Bank of India (RBI), Chakraborty added that while regulators have advanced significant reforms, “someone needs to tie them together and present a bouquet to investors to change the narrative.” This, he said, is going to invite more capital and contribute to the growth story of the country.

 

The panellists discussed the RBI Governor’s recent reference to “aspirational growth.” Nayar said the comment must be viewed in the context of potential GDP growth. “Around 6 per cent is still very good, but it is not as aspirational as we want or are entitled to,” she said.

 

Chakraborty added that while the term “aspirational growth” is not one economists are trained to use, it signals policymakers’ recognition that the economy’s potential cannot be captured only through past data. “Covid has disrupted how potential growth is measured. As market changes happen, aspirations change,” he said.

 

Varma explained the phrase in terms of employment generation and competitiveness. “If we need to create jobs outside agriculture every year, the rate at which other sectors can grow to absorb that labour is what aspirational growth means,” she said.