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Calibrating a Strategy for India’s Future Growth

Context:

India’s growth for the fiscal year 2023-24 is currently estimated at 7% by the Reserve Bank of India, while the International Monetary Fund (IMF) and the World Bank have set it at 6.3%. Looking ahead, the IMF forecasts an annual growth of 6.3% up to 2028-29. India’s future growth strategy needs to be adjusted considering changing global conditions.

Relevance:

GS3- Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Mains Question:

Raising the savings and investment rates, improving the skill acquisition of youth, and adopting an employment-friendly technology must be the focus areas in calibrating a strategy for india’s future growth. Analyse. (15 marks, 250 words).

Concerns Raised by the Current Status quo:

  • The trend towards deglobalization is evident, influenced by geopolitical conflicts like the Russia-Ukraine and Israel-Hamas wars.
  • These conflicts have led to sanctions, disrupting supply chains and international settlements, particularly for countries with restricted access to systems like SWIFT.
  • Global real GDP growth has decreased, resulting in reduced demand for global exports.
  • Many nations, including India, aim to decrease reliance on imported petroleum due to supply uncertainties and price volatility.

Export- Centric Approach:

  • India’s export-led growth strategy, prominent during 2003-04 to 2008-09, reaching a peak of 25% of GDP in 2013-14, has shifted.
  • In 2022-23, exports constituted 22.8% of GDP, following a dip to 18.7% in 2019-20 and 2020-21.
  • The former export-centric approach may not be viable for India anymore, necessitating the formulation of a new growth strategy.

Investment Rate in Medium Term

Status of Saving Rate:

  • In the medium term, India will need to depend relatively more on domestic growth catalysts. Achieving and sustaining a real growth rate of 7% or more, especially, hinges on the importance of domestic savings.
  • The estimated nominal saving rate for 2022-23 is approximately 29%. A concerning aspect is the observed decline in the household sector’s savings in financial assets, dropping to 5.1% of GDP in 2022-23 from an average of 7.8% in the pre-COVID-19 period from 2015-16 to 2019-20 – a decline of 2.7% points.
  • This decline includes a 2.2% point increase in the change in gross household financial liabilities and a 0.5% point decrease in the change in gross household financial assets.
  • While these changes may be temporary responses post-COVID-19, if these trends persist, they pose a significant risk to India’s growth potential.
  • This is because the surplus financial savings of the household sector are crucial for the government and the corporate sector to draw resources from to meet their investment demand beyond their own savings.

Significance of Savings:

  • Savings are translated into gross fixed capital formation (GFCF) by adding net capital inflows and subtracting changes in stocks, valuables, and discrepancies.
  • The estimated nominal investment rate, i.e., GFCF relative to GDP, was 29.2% in 2022-23. However, the deflator of capital goods is lower than that of all goods, and the movement of the relative deflator of capital goods is somewhat volatile.
  • Utilizing the five-year average of the relative magnitude of the two deflators, the nominal investment rate of nearly 29% would yield a real investment rate of around 33%.
  • To achieve investible resources amounting to 35% of GDP, enabling a 7% growth with an Incremental Capital-Output Ratio (ICOR) of 5 (its value in 2022-23), a 2% point increase is required. If the ICOR is lower, the achievable growth would be higher.

Enhanced Employment:

  • Developing strategies for increased employment poses a unique challenge for India in the next three decades, as a large and potentially employable population seeks jobs in the midst of progressively more labor-saving innovations and technologies.
  • According to United Nations population projections, India’s working-age population is anticipated to peak at 68.9% in 2030, while its overall dependency ratio is expected to reach its lowest point at 31.2%.
  • These trends underscore the need for a heightened allocation of resources for training and skilling India’s expanding working-age population.
  • The growth of employment is intricately linked to GDP growth and the composition of output. The growth rate of the working-age population is projected to gradually decrease from 1.2% in 2023-24 to 0% in 2048-49.
  • In 2022-23, based on the Periodic Labour Force Survey (PLFS), the worker population ratio, indicating the number of employed individuals in the population above 15 years of age, rose to 51.8% from 44.1% in 2017-18, reflecting an average annual increase of 1.5 percentage points.

Steps Needed:

  • Looking ahead, non-agricultural growth must be sufficiently high to absorb labor transitioning from agriculture, estimated at 45.8% in 2022-23 by the PLFS.
  • Additionally, it needs to accommodate the labor-substituting impact of new technology.
  • Facilitating the integration of productivity-enhancing technologies, including Artificial Intelligence (AI) and Generative AI, would contribute to overall growth.
  • India has committed to specific targets for reducing carbon emissions due to global climate concerns. During the COP26 Summit in 2021, India pledged to decrease total carbon emissions by one billion tonnes between 2021 and 2030 and achieve net-zero emissions by 2070.
  • India’s initiatives include the Green Grids Initiative (GGI), One Sun One World One Grid (OSOWOG), and a focus on the adoption of electric vehicles, as well as ethanol-based and hydrogen fuels.
  • Technological changes that promote climate goals may potentially reduce the growth rate, but this adverse impact can be minimized by prioritizing the growth of the service sector, which is relatively climate-friendly.

Fiscal Responsibility:

  • Maintaining fiscal responsibility targets is crucial for sustaining growth. In recent times, there has been a notable deviation from achieving fiscal responsibility goals.
  • To uphold growth close to its potential, it is imperative to reduce both the combined fiscal deficit and debt-to-GDP ratios to 6% and 60%, respectively.
  • This approach ensures that the burden of interest payments relative to revenue receipts remains within acceptable limits.
  • Achieving these targets would lead to a balanced or surplus revenue account for both central and state governments, subsequently reducing government dissavings and enhancing the overall savings rate of the economy.

Conclusion:

In the medium term, India’s growth performance is expected to face adverse impacts from various factors, both domestic and external. To achieve a growth rate of 7% to 7.5%, the country needs to focus on increasing savings and investment rates, enhancing the skill acquisition of young entrants to the labor market, and adopting a technology mix that is conducive to employment.


February 2024
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