NITI Aayog vision for higher economic growth: Part- II

The Indian government claims that public expenditure has taken the place of private investment in driving growth in the current phase. However, this phase has also witnessed fiscal consolidation with the fiscal and revenue deficit brought down to 3.5 percent and 2.1 percent of GDP, respectively, in 2016-17.

This could be achieved through additional revenue mobilisation, mainly through a sharp increase in indirect tax collections. Rather than passing on the drastic fall in international crude oil prices in the last three years to the domestic consumers, the government has chosen to increase excise duty collections from the petroleum sector from 0.7 percent of GDP in 2013-14 to over 1.4 percent of GDP in 2016-17 (Petroleum Planning & Analysis Cell, GoI).

The hardening of international oil prices makes this revenue mobilisation strategy of the government unsustainable. Recent steps like demonetisation, income disclosure schemes, the policy thrust towards digitisation of payments and the rollout of the GST are all aimed at increasing revenue mobilisation.

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It remains to be seen whether these measures can lead to an increasing trend in revenue mobilisation, enabling higher levels of public investment and expenditure. Evidence so far does not reflect any such trend.

Hardening international oil prices alongside increasing interest rates in the US and other advanced economies, in the backdrop of a growth revival, can also have adverse impact on India’s current account balance, exchange rate and inflation.

The improvement in the external balance seen in the recent years has mainly been on account of declining oil prices, coupled with a rise in FDI inflows. Portfolio investors, however, have already changed direction with FPI outflows bringing the rupee under pressure.

While the government has embarked on an ambitious export promotion strategy under the ‘Make in India’ initiative, the rise of protectionist trends within the US and other advanced economies do not provide a conducive environment for an export-driven growth strategy for India.

The political-economic developments around the globe rather add to the uncertainty in India’s external economic environment.

Whether India has entered into another phase of high economic growth, as was witnessed in the last decade, is not clear at this point of time. It will depend much on how the three factors discussed above play themselves out.

The plan panel proposed major changes in the agricultural produce marketing committee act, the law that sets in place systems to ensure farmers get a fair deal for their produce and are not exploited. Once implemented by states, the APMC changes will be one of the biggest reforms in the country. The panel has also drawn up an agricultural marketing and farmer-friendly reforms index to assess and encourage states to implement new rules.

At present, more than two-thirds of Indian states have not been able to reach even the halfway mark of reforms score in the year 2016-17. Preparing for second Green Revolution. Increasing crop yields to feed 1.23 billion Indians is high on the agenda of the government.

A task force, headed by Niti Aayog vice chairman Arvind Panagariya, also suggested ways of raising agricultural productivity and making farming remunerative for farmers. The panel suggested reforms in land leasing policies, ramping up of land records and land titles, preparing the country for the second “Green Revolution” in eastern states, and addressing farmers’ distress.

After the demonetisation of high-value notes in November, Niti Aayog has driven new initiatives to push Indians to go for digital payments.

It has been training officials of various ministries, at the central and state levels alike, to adopt digital modes of transaction. It announced award programmes for businesses and individuals to use cashless transactions. The Centre allocated Rs 50 crore to states for moving 5 crore no-frill Jan Dhan accounts to the digital platform.

What can be done with fiscal consolidation

• Improving health, education and access to water
• The plan panel came up with indices for measuring states’ performance in health, education and water management.
• The indices helping states gauge the results of social programmes, compete with each other and share best practices and innovations.
• The Aayog also suggested clubbing various social programmes and centrally-sponsored schemes under 28 umbrella projects.
• The panel suggested changes in Swachh Bharat Abhiyan, skill development, poverty measurement, Atal Innovation Mission.
• Higher growth is the best way of lifting standards of living, as has been demonstrated by China in recent decades.
• Attaining and sustaining this level of growth is feasible, but will need policy action on various fronts—as has also been highlighted in NITI Aayog’s action agenda.
• A 2016 working paper published by the Reserve Bank of India (RBI) noted that India’s potential growth slipped to about 7% during 2009-15 compared with 8% during 2003-08. The Indian economy is estimated to have expanded by 7.1% in the last fiscal.

Four broad areas to focus:

In order to push both potential and actual output growth, policymakers should focus on at least four broad areas.

Strengthening macroeconomic fundamentals

Firstly, policymakers should focus on strengthening macroeconomic fundamentals. A sound macroeconomic environment is a prerequisite for sustained higher growth.

• India has made significant progress over the last few years on this front, and all efforts should be made to attain the medium-term fiscal and monetary policy targets.
• The N.K. Singh committee has proposed a new fiscal architecture that will reduce the level of total debt stock with steady reduction in fiscal deficit.
• On the monetary policy side, the RBI’s rate-setting committee is targeting 4% inflation on a durable basis. Continued progress in both these areas will help strengthen economic stability.
• One of the reasons for softer growth in recent years is a decline in savings rate. Higher growth in the last decade was backed by higher savings. India’s savings rate is estimated to have declined from the level of about 37% of the gross domestic product in 2007-08 to under 30% in 2016-17.
• India will need higher savings to sustain higher growth. A stable macro environment should augment savings and investment.

Fix the banking sector

Secondly, policymakers should focus on high levels of non-performing assets—particularly in public sector banks, which are a drag on investments and growth.

• The sector needs a fresh road map in the short to medium term that not only addresses the current problem, but also provides the necessary checks and balances so that a similar situation is avoided in the future.
• NITI Aayog’s action agenda has suggested auctioning assets to private asset reconstruction companies.
• For a durable solution, the government should reconsider its role in the sector. A significant reduction in government holding in banks will augur well for the economy.

Further, India also needs a lively corporate bond market as it will provide an alternative source of financing and reduce the pressure on the banking sector. A vibrant, competitive and stable financial sector will help push investment and growth in the medium to long run.

Improvements in land and labour markets

In order to sustain higher growth, the government will need to make it easier for businesses to acquire land and hire labour.

• India is a country of small enterprises. The latest economic census shows that on an average, enterprises in India employ only 2.24 workers. The small and informal nature of business enterprises in India affects productivity and is an impediment to growth.
• One of the reasons for having too many small enterprises is rigid labour laws. The government should work on creating a flexible labour market, which will allow businesses to take advantage of economies of scale.
• Similarly, the government also needs to make it easier for businesses to acquire land. A number of projects are stuck because of land acquisition problems. Reforms in these markets would require greater coordination between the Centre and states.

Reforms in government functioning

• Finally, the government needs to review its own functioning and change in a way that allows the market to attain its full potential.
• For instance, it will need to withdraw from commercial activities through privatization and focus on strengthening regulatory capabilities. Further, it should always be careful about the unintended consequences of intervention.
• The recent decision of the Narendra Modi government to impose price caps on coronary stents is an example of exactly what the government should not be doing. Price caps inevitably result in shortages with adverse consequences. The government should always avoid such decisions.

Expected Questions

• Higher economic growth is seen as a solution for all India’s social and political problems and the best way of lifting standards of living. Do you agree? Give arguments in favour of your answer.
• In your opinion, how can India achieve higher and sustainable economic growth? Critically analyse.
• NITI Aayog has rolled out a vision to achieve real GDP growth rate of 8 percent annually over a fifteen year period and maintaining annual government expenditure at around 27 percent of nominal GDP. Are these optimistic long-term projections for the Indian economy justified, given the current macroeconomic and financial conditions? Critically analyse.
• Evaluate the transformation in policy affected by NITI Aayog in comparison to planning model.
• What should be the priorities areas to attain sustained economic growth in the coming decades? Examine in the context of NITI Aayog’s 15 years Vision Document.

Syllabus

General Studies 3

• Indian Economy and issues relating to planning, mobilisation of resources, growth, development and employment.

General Studies 2

• Government policies and interventions for development in various sectors and issues arising out of their design and implementation.