India’s medium-term economic growth potential is 6.5%, as exports are no longer a major driver due to protectionism and global uncertainties, said Bibek Debroy, chairman of the Economic Advisory Council to the Prime Minister. The unemployment situation continues to be a cause of worry, Debroy told FE’s Prasanta Sahu. Edited excerpts:
Capacity utilisation has reached over 75%. Does this indicate early signs of a robust revival of private investments?
There are different levels of government expenditure, a large part of which is of the Union government, particularly on roads, highways and railways. There has been quite a bit of Union government capex in the last two years. But, I don’t think there has been sufficient capital expenditure by state governments, as many state governments are facing fiscal strains due to revenue expenditure. On consumption, signs are already there that it is reviving. If consumption revives, then the private investment has to revive, as capacity utilisation increases with a slight time lag. However, investment revival is sector-specific.
Which are the sectors seeing private investment revival?
We can see a revival very clearly in many service and manufacturing activities, such as steel, pharma, construction and IT. The problem area, where it is not happening or not happening adequately, is the conventional power sector. If the economy is growing, say by 7%, either employment or productivity must be increasing. At an anecdotal level, employment is not increasing fast enough. If that is the case, productivity increasing means that investments must be happening.
How long can consumption demand revival sustain, in the face of interest rate tightening and lower demand from developed counties? Will it affect private capex?
It is incorrect to say that it won’t affect. We have not seen the end of the economic problems, whether it is in the United States or Europe. So, it is unreasonable to expect that exports will continue to do well. There are effects, particularly in sectors that are somewhat more dependent on exports.
Has the potential economic growth rate for India come down?
When we did 9-10% economic growth, the global economic environment was far kinder. There was not much protectionism. The export-to-GDP ratio was about 20% at that time and exports grew by at least 15% in dollar terms. So, exports contributed about 3.5% to GDP growth. If I accept the potential benchmark of 10% GDP growth, and I take away 3.5%, the growth will be down to 6.5%. Exports growth will not become zero, which is why I’m saying 7% economic growth. So, the trajectory has come down because one of the drivers (exports) doesn’t exist to the same degree. I would say that trend now for the next five years, or the aspiration for the next five years, is about 7%. Personally, I would be very surprised if we do more than about 6.5% in the next five years. Except for things like defence and railways, this is an aggregation of state rates of growth. If you look at the various states’ rates of growth, there is nothing to suggest an upward movement of the trajectory from 6.5% to 8% during the period.
Many structural reforms have been done. What more needs to be done to boost growth?
At the Union government level, a lot of reforms have been done. A lot depends on states on subjects such as efficient land markets, which is their domain. States must have efficient labour markets, which is much more than labour laws. It is about skills, the educational system and vocational education. Efficient capital markets mean there must be exit also. The Union government has taken steps to better target subsidies. The government has been talking about fiscal consolidation. It needs to do something about revenues, which essentially boils down to direct tax reform, apart from asset monetisation. On the taxation side, the big thing left is reforming direct taxes by removal of various exemptions. The question is the timing of that.
The unemployment situation is still a cause of worry. What should the government do about it?
Based on the Periodic Labour Force Survey, we find that employment has begun to increase compared to three years ago. But, overall, we have a problem because the employment elasticity of growth has come down over the years. Partly, modern manufacturing is much more capital-intensive than it used to be. In labour, there is a complete mismatch between education and skills valued by the market. So there is a huge agenda for the governments on skill formation and addressing the mismatch between supply and demand of labour.
States complain that the Centre is taking away their fiscal powers, be it on centrally-sponsored schemes or borrowings.
My personal view is that centrally-sponsored schemes should not be there, certainly those that are in the state list under the Seventh Schedule of the Constitution. If something is important enough, it should be a Central sector scheme with 100% Union government funding. We need to relook at the Seventh Schedule. If we are talking about starting the template for the next 25 years (for the nation), I would say that we need to take a relook at the entire Constitution.