India’s Growth Potential Untapped: Dr Ila Patnaik

Dr Ila Patnaik delivering CPPR 14th Quarterly Lecture on 'Economic Growth in India: Trends and Cycle'

Dr Ila Patnaik delivering CPPR 14th Quarterly Lecture on ‘Economic Growth in India: Trends and Cycle’

“India is said to be the fastest growing economy in the world, next to China. However, India has seen no substantial growth in job creation, investments or bank credits. It is hard to believe that both stories coexist. Data, however, shows that it does,” said Dr Ila Patnaik (Professor, National Institute of Public Finance and Policy, New Delhi). She was speaking on ‘Economic Growth in India: Trends and Cycle’ at the CPPR 14th Quarterly Lecture held in Kochi on July 27, 2017. Dr Patnaik is former Principal Economic Advisor to the Government of India.

“India is an emerging economy, which functions differently from advanced economies. While business cycles in Europe oscillate between peak and trough, emerging economies grow continuously. In the case of India, growth rates have been varying from quarter to quarter. Indian economy has had periods, when the economy has peaked to 10 per cent and slowed down to 4–5 per cent. The average growth rate of India in the last 15 years stands at 6–6.5 per cent,” said Dr Patnaik.

She noted that long periods of recession had the ability to pull down trend growth. She listed three major economic advantages that India had in its favour – a growing human capital, rising capital stock and numerous micro-economic drivers of productivity.

Elaborating on India’s human capital, Dr Patnaik said, “India’s literacy rate has increased from 41 per cent in 1980 to 72.1 per cent in 2014. The rapid improvement in literacy will lead to increased supply and quality of labour. Today, 70 per cent of the workforce are literate, among which 10 per cent are graduates. In the next decade, everyone entering the labour force will be literate and 20 per cent of entrants to the workforce will be graduates. India is slated to achieve 100 per cent female literacy rate, which is an important contributor to GDP and social growth. In the global space, India has an advantage of high-end scientific and technical labour force. The health status of the population is also on an upswing.”

While comparing India’s growth in capital stock with other emerging economies, Dr Patnaik noted that India outperforms its peers. Though the value of projects under implementation has been increasing, several projects got into trouble in 2011–12 and are now ending up as non-performing assets (NPAs). The gross fixed assets of major Indian firms are growing, except for a slump in recent years. The productivity rate of India is also showing positive trends. There have been huge developments in infrastructure, especially roads, railways and urban transportation, and communication technologies.

“In short, data present a positive picture for India in terms of long-term trend growth. Yet, India cannot afford to be complacent,” she said.

“The quarterly GDP growth rate in real terms has been declining. Though there has been an upward trend since 2014, GDP growth rates have been sliding for the last few quarters. The first quarter of 2017 recorded 6.1 per cent growth in GDP. Slowdown in industrial production does not go with the healthy growth rate predicted for India. The net sales of firms are subdued and bank credits to the commercial sector are sliding. Under-implementation projects that go up during periods of high activity are a marker of capital investment. The current fall in under-implementation projects underlines the dearth of major investments in the country,” she added.

IMG_2961

Data on business cycles indicate that India is at the bottom in terms of net sales, investments, production and bank credits. India’s actual growth rate is much lower than its potential growth rate. Contract enforcements, license regulation, policy uncertainty, law and order, tax rates and tax administration are other concerns. The policy framework for supporting investment needs to be improved for India to achieve its full potential.

“The Central budget talked about pushing public investments in infrastructure. The government has limited capacity to increase public investments. Ideally, when the government increases public investment, it crowds out private investment. Despite two years of increase in public investments, private investments have not reciprocated. If this does not pick up, economic growth in India could taper off,” warned Dr Patnaik.

“Demonetisation and GST are measures to bring the informal sector into the formal sector. We come up with singular answers to the question of Indian economy picking up. Neither the government nor the critics can offer a comprehensive answer, which leaves us in a difficult situation. India has huge growth potential but a lot more needs to be done to achieve this,” she concluded.

Dr Martin Patrick (Chief Economist, CPPR) moderated the question and answer session that followed. On Artificial Intelligence displacing jobs in India, Dr Patnaik said that India should not follow the Chinese model of creating jobs through manufacturing. As the Indian economy becomes more formal, capital will replace labour. Informal economy uses more labour than formal economy. Given that GST will reduce the size of the informal sector, labour displacement might happen faster in India. Informal economy is labour intensive, while formal economy is capital intensive. Hence, there cannot be a debate on what is good or bad.

On the policies of RBI and SEBI on NPAs, Dr Patnaik stated that NPAs were the major contributors to the slump in private investments in India.

“The first step to solving the issue is identifying NPAs. If you do not recognise your bad assets, you are further away from solving the problems,” she added.

On institutions becoming irrelevant post-demonetisation, she said that the law gave the RBI board the power to refer matters to the RBI management for working out the costs and benefits of a scheme. The functioning of the RBI board has not matched the functioning of other boards for many years. However, this fact was ignored for a long time, and only after demonetisation did people wake up to the reality. On changing practices, when it came to GDP calculation, Dr Patnaik said that she believed it was a technical issue rather than a calculated or political move.


Power point of the lecture by Dr Ila Patnaik on “Economic Growth in India: Trends and Cycle” at CPPR 14th Quarterly Lecture

 


 

*To watch the event video, click here: India’s Growth Potential Untapped: Dr Ila Patnaik

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