After the election results are announced on May 23 and a new government at the Centre is formed, the focus must shift towards the reform agenda. As gross domestic product is assumed to be produced by combining physical capital and human capital at the economy’s overall level of productivity or total factor productivity, pushing up growth from 7% to 8% would require reforms that augment capital and labour. A report by HSBC says that the period from 2004 to 2006 reported a spurt in total factor productivity and the capital stock, raising India’s potential growth. Strong global liquidity and growth too helped, which pushed up India’s potential growth level to 8%.
After the global financial crisis in 2008, India’s growth started falling and all drivers of growth—capital, labour and total factor productivity—weakened considerably. Growth performance since 2015 has been different as the drivers are no longer moving in tandem. The report points out that the growth in the capital stock is falling, reflected in the decline in investment rate. Gross fixed capital formation dropped to 28.6% of GDP in FY18 from an all-time high of 34.3% as private sector investment remained stagnant at 11% of GDP during the period. Household investment, which accounts for small and medium enterprises, reported a steep fall—from 15.7% of GDP in FY12 to 10.3% in FY18.
The report underlines the fact that even if the new government does not undertake any new big bang reforms, but simply focuses on recently enacted ones like GST, IBC and digital payments to settle down, potential growth could rise from 7% to 7.5% through impact on total factor productivity.
In order to raise public investment in a fiscally responsible way, the government needs to raise revenues. Disinvestment, improving GST structure, enacting a new and improved Direct Taxes Code and monetising land holdings can help in raising funds. Higher fiscal revenues, the HSBC report says, will give some legroom for raising public, and thereby private investment, as higher public investment tends to crowd in private investment in the country.