InclusionPast IssuesRecipes for Growth

Growth Stimulus in Enhanced Production and Capacity Creation

C Rangarajan, Chairman, Economic Advisory Council to the Prime Minister

We need to retrospect factors that have led to the slowdown – one is slowing down of savings rate and the other is slowing down of investment rate. The gross domestic savings of the country fell from 36.8 per cent in 2007-08 to 32.7 per cent in 2010-11 and the estimates are that in 2011-12 it might have gone down further. Two things stand out when you look at the domestic savings rate: household savings and financial assets have come down from 11.6 per cent in 2008 to 10 per cent, a decline of about 1.6 per cent over this period and it is estimated that in 2011-12 it might have gone down even further. But perhaps the most significant thing that has happened in relation to the savings rate of the public sector, i.e. comprising of the government and public enterprises–this has come down from 5 per cent of the GDP in 2007-08 to 1.7 per cent in 2010–11. This trends needs to be arrested.

Unless inflation is controlled the attraction of financial instruments as an abode of savings will remain dismal. Further, there has been an interest in gold as a form of hedging against inflation. Both the factors put together make people introvert as far as monetary decisions are concerned.

As far as investment rate is concerned, I would make three suggestions. First, we need to ensure that the target set both for production and capacity creation in the field of coal, power, roads, railways are fulfilled to act as a stimuli not only for the overall economy but also for private investment. A big jump in investment in roads can really lead to expanded demand for production of cement and others. We need to act decisively to ensure that the production and capacity creation targets set for key infrastructure sectors are met.

What we really need is to remove the frictions that have come in the way of fulfillment of the private sector projects. I do believe that there will be greater clarity as we go along during the year on land acquisition that is important for large-scale investment projects

Secondly, it is extremely important that the investment sentiment of the private sector, which has been affected for a variety of reasons, must be taken care of.

Thirdly, what we really need is to remove the frictions that have come in the way of fulfillment of the private sector projects. I do believe that there will be greater clarity as we go along during the year on land acquisition that is important for large-scale investment projects. As we act more both on land acquisition and the environmental considerations, I believe, we can move forward.

At the present juncture the revival of both savings and investment rate is crucial. We also at the same time need to look after the balance of payments issue. The current account deficit touched an unusually high level of 4.2 per cent of GDP in 2011-12. Even during 1991, our current account deficit was only 3.1 per cent of the GDP but the real problem with respect to the current account deficit is not so much the level of the deficit as much as the financing of the current account deficit. In 1991, we had extreme difficulty in financing the current account deficit but last year, we were able to manage the financing of the current account deficit but there were some drawdown of the reserves.

As a short-term measure we should encourage the capital inflows so that the financing of the current account deficit does not become difficult but at the same time we must act in order to see that the current account deficit itself remains at a lower level. We do expect the current account deficit in the current year, i.e., in 2012-13 to come down to something like 3.5 per cent from the high level of 4.2 per cent of the GDP last year. This will happen for two reasons. One, the gold imports will come down this year. As inflation comes down and as the attraction of the gold becomes less we should be able to import less gold. Two, if we increase the domestic production of coal then the import of coal that we are doing on a large scale will also come down.

Reforms are a continuum. We began with reforming the external sector or the fiscal sector and the banking or the financial sector. We moved on to improve the communication sector and so on. Therefore, what we really need to do now is to look at every sector of the economy and ensure that a competitive environment prevails there. Growth is extremely important

There is a common thread running through various measures introduced in 1991-92 and that is to increase the productivity and efficiency of the system which can be achieved by injecting a greater element of competition. Therefore, what we really need to do as we go forward is to see that in every sector of the economy we are able to maintain a competitive environment so that efficiency will increase. As efficiency increases then both the producers and the consumers will gain as a consequence of that.

Moving forward we must focus on two sectors: one, agriculture and the other is infrastructure, more particularly, power. We have seen in the last few years how even a small shortfall in agriculture can cause serious distortions in the economy. Therefore, if we want to avoid that kind of a situation we must ensure that agriculture grows at a steady rate of 4 per cent per annum as indicated in the various plan documents. An improved productivity in agriculture is important from the point of view of food security, reducing poverty and also ensuring a balanced regional development.

Let me conclude by saying that, reforms are a continuum. We began with reforming the external sector or the fiscal sector and the banking or the financial sector. We moved on to improve the communication sector and so on. Therefore, what we really need to do now is to look at every sector of the economy and ensure that a competitive environment prevails there. Growth is extremely important. It is only growth that will enable us to fulfill many of our socio-economic goals.

In the recent period we have initiated a number of schemes like expanded food security, rural employment guarantee scheme and Sarva Shiksha Abhiyan (SSA). All these were possible only because we were growing at a higher rate. Therefore, we must ensure that the Indian economy continues to grow at a high rate. As numbers indicate, only if Indian economy grows at 8 per cent per annum, the per capita GDP of India will grow from the current level of $1,600 to about $8,000 to 10,000, then only India will graduate from being a low income country to the middle income country and therefore.

Development must be inclusive, it must lead to poverty reduction and it must be environment friendly but at the same time we must ensure that growth remains high. In my view, growth and equity should not be posed as opposing considerations. They must be weaved together to produce a coherent pattern of development and therein lies the economic statesmanship.

C Rangarajan

C Rangarajan is Chairman, Economic Advisory Council to the Prime Minister
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