The policy focus has been to increase the quality of employment by raising the share of formal sector jobs and simultaneously improving the productivity of the informal sector, says S Mahendra Dev, chairman, Economic Advisory Council to the Prime Minister. “Structural transformation from agriculture to industry and services over time will increase quality of employment further,” he told Prasanta Sahu in an interview. The noted economist also expressed the hope that credit growth would improve further in the next few months due to a rise in rural and urban demands. “Monetary transmission seems to be taking place. The coming months may witness more transmission to lending rates with a lag,” he said. Excerpts:
Q: Incremental capital output ratio (ICOR) is hovering around 5. Gross Fixed Capital Formation at current prices has slipped to below 30% in FY25. Aren’t these raising serious concerns about the productive capacity of the economy?
The trend in the ratio of nominal gross fixed capital formation (GFCF) to GDP shows that it was around 29% and 30% in current prices from FY14 to FY25, so there was no decline in the ratio. The real GFCF/GDP ratio is at 33.4% in FY25. It is expected to increase further in future with increase in both government and private investment which will increase productive capacity. Regarding ICOR, there is a technological relationship between GFCF and Growth. But we do not have this direct measure and therefore ICOR is empirically estimated as investment rate divided by the percentage change in real GDP. The trend shows ICOR is volatile and should improve with technological progress.
Q: Are we settling for a medium term growth rate of around 6 per cent? How feasible is to move into a higher growth trajectory ?
The present GDP growth of 6.5% is a reasonably high growth and it is fastest among large economies. In order to become a developed country by 2047, it has to grow 7% to 8%. Investment and exports are two engines of growth. Some increase in investment rate including domestic and foreign private investment, efficiency in capital use and enhancement of total factor productivity will boost growth. Rise in savings in the economy is important for higher investments. Structural transformation of the economy in output and employment from agriculture to manufacturing and services are needed for higher growth.
Some other sources of growth are India’s increasing young workforce, rise in human capital, fast growing digital technology including AI, urbanisation and enhancement Of women’s work participation rates. In achieving higher growth rate for India, the policies of states play an important role.
How do you see the trend of rising outward FDI? Net FDI inflows plunged to a low level in FY25
India’s FDI inflows has increased by 14% in FY25 although there was a moderation in net FDI. There was net outward FDI and a rise in repatriation. Several people have clarified that we should look at gross FDI as exits and repatriation are part of the process and indicate the sign of a mature market. Unless you enable exit, the country can’t attract investment. It was also mentioned that outflow of FDI should be seen something extending the global reach of Indian industry. Higher gross FDI also indicates that India continues to remain an attractive investment destination.
Liquidity has improved due to RBI measures. But bank credit growth is low. What are the reasons? Has there been transmission of reduction in repo rate?
There has been a significant increase in liquidity due to RBI measures. But, credit growth moderated to around 9.5% in June, 2025. Banks are losing their share in credit as corporates are going to bond markets and commercial paper.
Hopefully, credit growth will improve further in the next few months due to rise in rural and urban demand. Monetary transmission seems to be taking place. The coming months may witness more transmission to lending rates with a lag. Treasury bill yields are 140 basis points lower compared to that of last year. Higher liquidity has done its job to some extent although credit growth depends on demand and other factors apart from liquidity.
How do you debate on inequality in India in the wake of the latest World Bank report in this respect?
The World bank data shows that inequality based on consumption Gini coefficient declined from 28.8 in 2011-12 to 25.5 in 2022-23. Even if we compare only consumption inequality across countries, India’s rank is still high. Our estimates based on National Sample Survey (NSS) data also show that consumption-based Gini declined from 31.0 in 2011-12 to 28.2 in 2022-23 and 25.3 in 2023-24. There is some criticism that NSS does not capture consumption by the rich. This issue is relevant for many other countries.
The World Bank also gives income-based Gini coefficient based on world inequality data base. These estimates are based on several assumptions. We have to wait for the official survey data to estimate income inequality in India.
How do you see the employment scenario in the country? Isn’t low labour force participation a cause for concern?
The recent trends in labour force participation rates (LFPR) show that it increased from 49.8% in 2017-18 to 60.1% in 2023-24. LFPR for males rose from 75.8% to 78.8% while for females it increased from 23.3% to 41.7% during the same period. The government has several measures to further enhance participation rates for women.
Regarding employment scenario, the approach has been to increase quality of employment by raising the share of formal sector employment and simultaneously improving the productivity of the informal sector. Structural transformation from agriculture to industry and services over time will increase quality of employment further. Although capital intensity is rising, there is lot of scope for labour intensive manufacturing. Growth of MSMEs is also part of the agenda. Manufacturing and services are becoming more skill intensive. Therefore, push by the government on Improvement of skills is an important step and increases employability.
What is the impact of automation and AI on employment?
The role of automation has increased in industry. This may reduce employment in certain sectors and increase in some other sectors. It is possible that overall employment may increase or remain the same. Similarly, use of AI in service and other sectors has increased over time. The new age technologies such as AI and IOT (Internet of Things) lead to demand for certain activities while reducing demand for some other activities. Nobel Laureate and MIT economist Daron Acemoglu argues that current AI tools are likely to impact only about 5% of jobs and contribute around 1% to global GDP. He believes that the excitement around artificial intelligence adversely impacting jobs may be overblown.
What is the approach of the government to improve agriculture growth and farmers’ income?
The average growth rate of agriculture during the last 8 years 2017-18 to 2024-25 has been at 4.6% per annum. The government has many price and non-price policies for reducing uncertainties, rising farm incomes and achieving price stability.
Government policies are focusing on (a) raising investment in rural infrastructure (b) improving diversification of cropping patterns and exports (c) technology, research and extension including digital technology to boost total factor productivity (d) providing remunerative prices to farmers (e) enhance rural infrastructure for markets, warehousing, cold storage, and efficient supply chain management (f) strengthening FPOs (g) improving irrigation water management (h) having a climate resilient agriculture (i) encouraging organic and natural farming. Recently, cabinet has cleared the Prime Minister Dhan-Dhanya Krishi Yojana (PMDDKY) which seeks to improve agriculture development further in 100 districts. Some studies have shown that programmes like PM-KISAN is not only a cash transfer programme but it also helped in raising credit and investment.