Indias growth model needs a revisit
Authored by RP Gupta, Author of the book - Turn Around India
As per IMF, India shall become 5th largest economy in FY-2023 and is likely to be 3rd largest in FY-2028 surpassing the UK, Japan and Germany. This is because, in the past several decades, India’s GDP growth has been higher than in these nations. Currently, India’s GDP growth is the highest in the world despite its decline in the past 6 years. In such a fast-growing economy, falling employment and the consequential rising poverty are indeed unusual. Therefore, India must revisit its growth model. The benefits of growth must flow to the population at the bottom of the pyramid. For this, let’s peep into the basics of GDP, as invented by Simon Kuznets, a Nobel laureate of USA, in 1934-35.
During 1935-40, the entire world recognised that; GDP is the National income, which is a sum of total “value addition” during the production of “goods & services”. This is used for “consumption” and “capital expenditures” by the public and government besides financing the “Trade deficit (goods & services)”. In the case of “Trade surplus”, it adds to GDP.
The national income is distributed among the participants of economic activities in the ratio of capital (interest and rent), knowledge and labour (wages) deployed by those individual participants. The entrepreneurs (self-employed) manage such productive activity and get their share of national income in the shape of “profits” by deploying “risk capital”.
Therefore, India must enlarge the “labour participation ratio (LPR)” in productive and economic activities. Currently, this has tumbled to about 40 per cent of the “total employable workforce” (above 15 years of age) which is about 1085 million. LPR was 50.3 per cent in 2016 and 52.9 per cent in 2011. In other nations, it is 60 per cent-75 per cent.
Out of the total workforce, the “Active workforce” (job holders and job seekers) has reduced to about 435 million from about 500 million in 2016 and 475 million in 2011. It reveals that; several persons have lost hope and exited the job market. New addition in the workforce at 10-12 million per year was also deprived.
This is the root cause of growing poverty; which must be resolved by increasing LPR in productive activities. For this, the GDP growth model must be compatible. Failing which, the benefits of growth shall not reach the majority of households causing distress. Therefore, India must revisit its GDP growth model; which must change with time and needs. For better appraisal, let’s visit the pattern of job distribution.
As per the 5th employment survey, 2016, about 46.6 per cent of the job-holders are self-employed persons, about 36.4 per cent are casual and contract labours and the balance 17% are getting a regular salary. It means that; about 80 per cent - 82 per cent of job holders are employed in the unorganized “small business”, mostly in the micro and small sector and farming sector. Out of which, about 45 per cent - 50 per cent are self-employed persons including farmers. More so, such majority of job holders are having low incomes below Rs 10,000 per month.
Considering the complexity, the priority should be attached to generating more jobs by improving LPR. Thereafter, we shall ponder; how to raise their income level. During the interim period, inflation should be controlled on best effort basis and some interim relief should continue for meeting their essential needs.
For generating low/middle-income jobs, the Agriculture and MSME sectors must prosper through proactive policy. Farmers are true entrepreneurs; those can generate huge jobs. They need remunerative prices, cheaper inputs and protection from natural calamities. Ways and means must be designed for this with an affordable fiscal burden. Consistent and calibrated export could be the right choice. Food processing industries should be integrated with attuned intervention by the government. The role of FCI should be changed as a marketing and storage facilitator. This could be a game changer in the agro sector.
The MSME sector, particularly the micro and small businesses, are the next big job provider. But those are mostly under stress after 2016. They need liberal credits and tax incentives and exemptions. Regulatory easement and simplification of tax laws will motivate them to expand and formalize their business. That will enhance income and generate more jobs. In the medium term, this might surpass agriculture in crafting new jobs with lower middle income.
India also needs large businesses for mass production in an efficient manner. They outsource goods and services and support small businesses. However, those may be pursued for boosting exports and replacing imports. For which, radical reforms must be enacted. They should also invest in the infrastructure for improving the efficiency of the Indian economy, particularly in the energy, minerals and logistics sectors.
By and large, India needs a mixed economy of small, medium and large businesses. In the developing phase, small businesses and agriculture need incentives. Gradually, those will expand and join to formal economy. This is the story of most Asian countries including China and Japan. Thereafter, the regular salaried jobs with middle/high income will grow at a faster pace.
In my opinion, the growth model should be investment and export-led and not consumption-led. High interest, stringent NPA norms, tough regulations and criminalization of business laws are deterrents to new investment. For a capital-scarce country like India, investment needs and priorities must be worked through a composite plan. For exports, India should be globally competitive and not depend upon Rupee depreciation.
As per world history, faster growth had been achieved through rapid industrial growth only. Currently, industrial growth is not so promising and the participation of small businesses is declining. GDP growth is heavily dependent upon components such as, “public and administration expenditures” “direct tax collection” and high-end services. Such a growth model needs total review.