Investment And Export-led Growth Is A Right Choice For India
From post-independence history, it is amply evident that; India needs a growth model relying upon the “investment and export led demand”. Consumption led growth is a misplaced choice; that will gradually slow down keeping India as a “lower middle income nation”. Therefore, recent trend in the decade 2012-22 needs review. India must enact requisite structural reforms for boosting investment and exports. Considering dip in financial savings, the investible resources must be deployed in a balanced manner delivering GDP growth in efficient manner for boosting exports, generating jobs and building human capital.
Post-independence, India inherited a fragile economy saddled with abject poverty, poor infrastructure and low industrialization. In 1950-51, the Public income (GDP) was barely Rs.10360 crores at market prices. India had tough challenges on every front such as, boosting GDP, reducing poverty, developing Industries, curbing imports, boosting food production, building infrastructure, strengthening defense and building institutions etc. India faced several famines, epidemics, oil crisis besides war with China and Pakistan.
Initially, about 97-98% of National income (GDP) was being spent in the consumption leaving no surplus for investment. Financial resources were also meagre for investing in to productive assets and infrastructure. The exports were not so encouraging. India was highly dependent upon the foreign loans and aids. Therefore, during initial three decades 1951-82, GDP growth (at constant price, 2011-12) was barely 3.8 per cent on CGAR basis.
In 1979-80, India faced negative growth of 5.2 per cent clubbed with oil shock. In such crisis, sixth Five Year Plan (1980-85) was prepared envisaging several reforms. Thereafter, investment (GFCF) and exports were accelerated. In sequel, during 4th decade 1981-92, GDP growth, improved to 5.1 per cent on CGAR basis.
Gulf crisis in 1990-91 compelled India pledging sovereign gold for avoiding sovereign default. Hence in 1991, India enacted historical reforms opening the private and global capital. In sequel, during 5th and 6th decades in 1992-2012, investment was accelerated to 34.3% and exports to 24.5 per cent of GDP. Despite several crisis and oil shocks, acceleration of GDP growth was satisfactory. In several years, GDP growth rate exceeded 8 per cent approaching to 9 per cent. That helped in building modern India, what we see today. Rural income also witnessed upsurge.
Unfortunately, during 7th decade 2012-22 decade, investment has declined from 34.3% to 28.6% of GDP; that must be restored and be exceeded above 36 per cent. India needs investment in “small business” for jobs and “large business” for mass production in efficient manner. India also needs investment in energy and logistics for reducing production cost in the entire economy. It also needs investment in health, education, water and sanitation for building human capital.
For boosting investment, the liberal and cheaper credits and easement of business and taxation laws are crucial. Simultaneously, India should prepare a composite plan for deploying its scarce resources such as, capital land, minerals and water in a logical manner. Young and talented human capital must be engaged in the productive activities.
During 2012-22 decade, the Private and Government consumption have increased from 67.3% to 70.7% of GDP; that has reduced “gross savings” by about 8% of GDP. Personal loans have increased from 18%% in 2012 to 28% of gross bank credit in 2021. Unlike developed nation, this model is not a right choice for India. India needs a model with “high savings” and “high investment” with moderate consumption.
During 2012-20 (pre-pandemic), the exports were declined from 24.7 per cent to 18.7 per cent of GDP. That must be restored and be exceeded above 28 per cent. In 2021-22, some revival is noticed but, the levy of export duty in current fiscal might hinder this revival process. Higher exports shall reduce trade deficit and stabilise Indian economy. For this, “global competitiveness” and “efficiency of economy” must be improved which doesn’t depend upon the producers alone but upon the host of policies and regulations. Eventually, that will also keep “cost-push inflation” under check.
Considering the constraints of capital resources, India must also develop such services which have export potential with lesser investment. The latent export potential of services in the niche area of education, health and consultancy (legal, engineering, finance and accounting) must be explored. There is also huge export potential of tourism and hospitality. For all these services, India must come out with a white paper and spend on the brand promotion. In the medium term, this might overtake exports of IT services.
By and large, the growth model of India should rely up on the “investment and exports” instead of “consumption” which shall automatically follow with the rise in public income. Artificial push to consumption is not a right choice; that might reduce next decade GDP growth about 5 per cent on CGAR basis which India can’t afford.
RP Gupta, Author of Book “Turn Around India”
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