Need of new reform agenda to revive India’s growth story


In this decade of rapid developments in the global economy vis-a-vis emerging new economic stance in the United States, emerging protectionism in the advanced economies, recovery in Global trade; turn around in China’s economic growth and various geo-political issues, India stands on the cusp of major change, a transformation that could lead to unprecedented economic growth.

The Indian economy has been observing various changes, turmoil and adjustments in the form of reforms during the past two-three years. Two key reforms undertaken in the regime of Hon’ble Prime Minister Shri Narendra Modi primarily historic demonetization drive and newly introduced GST have been both bane and boon for our economy which is quite evident as per the GDP estimates for Q1 and Q2 for FY2017-18.The economy still hasn’t revived from the aftershocks of cash crunch as the consumption demand has been impacted severely and the teething problems associated with GST implementation are still persisting.

According to the much awaited CSO data released by Ministry of Statistics and Implementation recently, real GDP registered an increase in the growth rate from 5.7% in the Q1 of FY18 to 6.3% in Q2 of FY18. Also, quarterly Gross Value added (GVA) registered an increase in growth rate from 5.6% in Q1 FY18 over 6.1% in Q2 of FY18.

However, while comparing the Q2 GDP and GVA of FY18 with Q2 GDP and GVA of FY17, it is observed that the economy was performing much better during the corresponding period last year I FY17 as both GDP and GVA(7.5%, 6.8%, at 2011-12 prices) figures were in the promising trajectory.

Though, there is no denial thatQ2 GDP growth at 6.3% is better and has charted moderated sequential recovery led by a broad-based uptick in the industrial sector in comparison to dismal figure of 5.7% in Q1; but this not in line with expectations as growth was expected at around 7% in the current quarter.

Various international organizations such as IMF and World Bank among others have envisaged India’s growth rate for FY18. IMF has projectedIndia’s growth at around 6.7%, whileWorld Bank forecasts India’s growth to accelerate to 7% by 2017. Also, our very own Reserve Bank of India (RBI) has projected growth rate of 6.7% for FY18. Considering the current growth rate and keeping in line with RBI projections, the Indian economy thus would have to grow at 7.4% in the next two quarters to register a growth of 6.7% in FY18.

Further, upon analyzing the CSO data, it has been observed that significant improvement in the GVA growth of manufacturing and mining and quarrying sector has contributed majorly in underpinning the growth recovery of Q2 FY18. Although manufacturing volume growth was not as strong on the basis of restocking after the goods and services tax (GST), however rising commodity prices and fewer discounts led to a revival in earnings.

However, the segments which still need a boost are agriculture and services sector who are still lying in the lackluster trajectory. Thegrowth of agriculture has not picked up as the sector grew at 1.7% in Q2 FY18 in comparison to 2.3% in Q1 FY18 though a major growth was expected in agriculture vis-a-vis good monsoon. Also, the services sector registered decline in its growth rate from 8.7% in Q1 to 7.1% in Q2 FY18. Further, the construction sector registered a marginal growth of 2.6% in Q2 FY18 from 2% in Q1 FY18 which needs to be facilitated, going forward.

The analysis of quarterly estimates of expenditures of GDP in Q2 FY18 observed that the uptick in growth of gross fixed capital formation (GFCF) to 4.7% in Q2 FY18 from 1.6% in Q1 FY18 has been in line with the turnaround in capital goods output (+3.7% in Q2 FY18, -4.2% in Q1 FY18), while it lies somewhat at odds with other trends related to investment activity, including project announcement and completion.

There has been a mild decline in growth of private final consumption expenditure (PFCE) in Q2 FY18 which is correlation with the up fronting of consumption to Q1 FY18, to take advantage of discounts that were offered prior to the introduction of the GST. Also, Government final consumption expenditure (GFCE) recorded an unsurprising slowdown in Q2 FY18 given the front-loading of spending by the Government of India (GoI) after the early presentation of the FY18 Budget.

Now, the question which arises here is how to go forward to bring our GDP growth back to its full form and move two steps up again in the global rankings from being third largest growing economy in the coming years. The need of the hour is to make New India where the economy will be in double digit growth trajectory, the manufacturing sector will be globally competitive, the agriculture sector will be sufficient to sustain the rising population and millions of jobs will be created for socio-economic development of the nation, income levels of the people will be growing exponentially, farmers’ income will be doubled, taxation system will be simple, ease of doing business will become a reality and standards of living will improve.

Following are the five key reform agendaswhich are needed to bring about a transformation in the country and to recover the economic growth rate in the coming quarters:

1) Reforms in the taxation

First major intervention which is required to resolve the teething problems associated with GST whose implementation effects are still hovering over GDP rates in Q2. Although, Government is concerned with further reforms in GST to rationalize the tax rates. The recent amendments announced by the GST Council are appreciable but there is a need to overhaul all the slabs and rates. The tax slabs should not be more than three (0%, 5% and 14%) and the peak rates should not be more than 14% to increase the tax base in the economy and to make India an attraction in terms of rationalized and simple tax regime and to make GST a true representative of Good and Simple Tax. Further, to remove the procedural bottlenecks from GST, instead of deferring the reverse charge mechanism, it should be eliminated. Also, setup of an Advance Ruling Authority is the need of the hour for both industry and individuals.

Going ahead, reforms in GST should be followed by reforms in direct taxes as direct taxes are not in synch with our efforts for simplified tax regime; the tax slabs are too scattered which need to be streamlined and rationalized so that more and more people start paying taxes and the tax base in the economy is increased which will further boost economic growth.

2) Agri sector reforms

Although there have been slew of reforms being launched in the country such as Pradhan Mantri Fasal Bima Yojna, Pradhan Mantri Krishi sinchai yojna, E-NAM, soil health card schemes etc., however the reality which is evidentially proven by low figure of GVA estimates for agriculture sector in Q2 FY18 which is infact lower than both Q1 FY18 and Q2 FY17 estimates forecases there is need of emergent measures at the ground level. The key reason for low agri growth can be linked with low kharif output despite good monsoon which clarifies that necessary measures should be taken at the earliest to bring the agri-output from fields to the markets through improved storage facilities and transportation so that no produce is wasted. This rise in agri production would raise farmer’s income, improve demand, enhanceagriculture sector growth and further overall growth.

3) Improve ease of doing business scenario

India has improved commendably in the recent Ease of Doing Business Rankings released by World Bank by jumping 30 spots up from 130th in 2017 to 100th in 2018. There is still a long way to go to facilitate overall ease of doing business scenario in the country. The industrial sector growth still needs to be pushed up from 7% in Q2 FY18 to around 12-15% in the coming quarters which would trigger India’s economic growth to higher trajectory. Thus, major steps must be taken to improve the ease of doing business in all the states including starting a business, registering property, resolving insolvency, construction permits, getting credit, protecting investors, paying taxes and trading across borders as our rankings in these parameters are not improving or are stagnated . Further, major stress should be given facilitate ease of doing business for MSMEs in order to encourage industrial development. Also, sectors such as steel and logistics industries are facing severe bottlenecks as the costs of manufacturing are high. Thus, it is the most opportune time to build trust among the industry.

4) State of the art infrastructure

Fourthly, logistics infrastructure, transportation and connectivity are very important since the role of adequate transportation and efficiency of logistics is essential for a strong building in the economic growth momentum. So state of the art infrastructure must be a cause not an effect.

Here, it is meant that if state of the art infrastructure is available to businesses then economic growth will follow and achieve its potential. Further, considering our thrust and need for infrastructure development, the infrastructure sector can become a major growth vehicle for manufacturing and services sectors which will ultimately enhance their respective GVA growth, thus overall overall economic growth rate.

5) Improve socio-economic condition primarily skill development and employment

The major battle which India is facing is falling consumption demand which is yet another pivotal reason for low growth rate. This decline in consumption demand can be linked to low purchasing power of the individuals due to high unemployment rate which can be further associated with lack of necessary skill sets required to be employed in the company. Thus, the government must focus on skill development of the youth to tap the vast potential of the demographic dividend. The skilling should be done in such a way that it matches the requirement of the industry to make the youth job ready. There is a need to strengthen the University and Industry linkages to enhance employment opportunities in the economy and to enhance research and development activities in the industry for the promotion of R&D activity.

Going ahead, the continuation of the reform measures would pave the way for strengthening of economic growth in the coming times given the right reforms are being adapted at the right time. It is very essential to note that economic policies need to be designed in a manner that the redistributing process does not feed off the public finances and the growth process itself is not hampered. Thus, to achieve this objective, inclusive development needs to be combined with consolidation of public finances, financial stability, employment generation and economic growth.