India at 75: A lot now rides on how we raise the investment rate, says Dr C Rangarajan

Dr Rangarajan feels focus on investment rate has to be accompanied by a need to ensure efficient use of capital and therefore an eye on the incremental capital-output ratio, on a development strategy that builds on our comparative advantage and in identifying and supporting some of the sunrise industries specific to India like food processing.

RBI annual report 2021-22 points to a gross domestic investment rate has been falling from an average of 38.0 between 2009-10 and 2013-14 to 30.7 in 2019-20 and to 27.3 in 2020-21.

There is enough and more literature in economics analysing the development planning and five year plan strategy unleashed by the political and intellectual nous of the 1950s India. Fast forward to the post-COVID world riddled with uncertainties and the journey of Indian economic history seems both eventful and challenging. There have been phases of slow growth, characterized by what economists called the Hindu rate of growth of 3 per cent or the high growth periods between 2003 and 2008 when the rates of annual economic growth averaged between 8 and 9 per cent.  Experts however will see a much more complex journey coloured by several nuances and policy interventions – from years of high tariff rates, restricted imports regime with curbs on investment, emergence of state-run monopolies  to finally the economic liberalization unfolding in 1991 followed by intense globalization and more recently attempts at de-globalisation.

What matters is where does India stand in its economic growth journey today and what are the big concerns at the moment. Financial Express Online spoke to Dr C Rangarajan, economist and the former governor of the Reserve Bank of India (RBI) and he has this to say: while we have made substantial progress in terms of aggregate income and now harbour hopes of emerging as a $ 5 trillion economy, “the tasks going forward are very clear if India is to emerge as a developed economy with a high per capita income. For this, the investment rate needs to go up, focus has to be on a good incremental capital-output ratio which tells us how efficiently the capital is being deployed, focus also needs to be on the strategy of development that aligns with our comparative advantage and the government stays focused on identifying  the sunrise industries that need all the growth enabling support.”

He recognizes that “the problems are manifold but the solutions really lies on achieving and sustaining a high economic growth rate of 8 to 9 per cent. If you want to become a developed country you need to grow each year at 9 per cent for two decades.”

Even becoming a $ 5 trillion economy, he says, “means we need to grow at 8 to 9 per cent per annum for five to six years consecutively. Therefore, the task before us is to first ensure the investment rate is raised.”

The Reserve Bank of India (RBI) annual report 2021-22 points to a gross domestic investment rate (as a percentage of GDP at current prices) has been falling from an average of 38.0 between 2009-10 and 2013-14 to 30.7 in 2019-20 and to 27.3 in 2020-21 (the last available figure). Ideally, Dr Rangarajan feels the number should be 33 or 34. What also needs to go up in sync is the gross domestic savings rate (as a percentage of GDP) which during the similar time periods slipped from an average of 33.9 to 29.4 to 27.8 in 2020-21. Here again, the ideal preferred number is four or five notches higher.

But then, according to Dr Rangarajan it is equally important to ensure that the capital is efficiently put to use and therefore the incremental capital output ratio stays at around 4:1, which he feels is ideal. So, an investment rate of 34 per cent and an Incremental output ratio of 4:1 would mean (the former when divided by latter) an 8.5 per cent growth rate.

So, what needs to be done to trigger a higher investment rate? This, says Dr Rangarajan, is closely linked to the strategy of development that is being sought.  “The development of the Indian economy cannot be uni-dimensional. For instance, it cannot be only export-led growth or driven by any one sector unlike the case in some of the South Asian or East Asian countries and even China later witnessing rapid growth with focus on exports. This may not be route that we need to necessarily take,” he says.

But then, he also reminds that he is in no way suggesting any dilution in the emphasis on exports. “We will have to continue developing the export sector because it also promotes efficiency within the system since you need to compete with the rest of the world. But at the same time developing a strong domestic sector is also important,” he says. After all, to him, a strong export growth cannot happen without an equally strong domestic manufacturing capability. This, also needs to be accompanied by a strengthening of the services sector where the country has a proven efficiency to showcase.

“We also need to identify very quickly areas in which we have strengths. The sunrise industries in the years ahead will be different for different countries. For India, it will be for example the food processing industry as it indirectly helps agriculture by making use of agricultural products.”

On the role of state and that of the private sector, he says, “typically, expectations are that the public investment will need to go up because it will help crowd-in private investment. But then, this is true in a crisis period. But today, as we go along, we have to see that the private investment in both corporate and non-corporate spaces picks up and we create an environment in which this will happen.”

In this, the role of the government, he says, would lie in identifying and supporting the sectors that hold out the promise. This does not take away the responsibility of the government to develop the infrastructure, not only in terms of roads and transportation but also in terms of power.  The recent developments like the Russia-Ukraine war have also made the economy seem vulnerable with import-dependence on items of critical nature. The oil imports, for instance. While, there is no immediate solution, he feels, we could look at diversifying the sources of imports. Also, India could explore a stockpile strategy as far as imports of crucial items are concerned, as is being done by some of the other countries.

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