Searching for growth

Integration with global economy must increase

India’s Chief Economic Advisor V Anantha Nageswaran recently argued that reforms in India had set the stage for growth between 6.5 and 7 per cent in the coming years. This dovetails with some recent official claims that India will achieve the $5-trillion economy mark in a similar time frame. In some sense, these expectations are not out of line with the past. Indeed, 6 per cent or so remains the baseline expectation of growth from India, given its fundamentals. This over time will ensure in nominal terms that it will breach the $5-trillion threshold limit. Yet there are nevertheless basic questions that should be asked of these numbers.

Most important among these questions is where this growth is expected to come from. In the past, it was not difficult to identify leading sectors of the economy — banking or telecommunications, for example, at different points in the past two decades — that served as champions of growth. Some of these sectors also served the purpose of raising productivity across the broader economy. It is not clear if there are any such sectors of depth and dynamism today. Seen in another way, consumer demand has been a lynchpin for growth in India — but here again there are concerns that it has run out of steam. Nor is the government deep-pocketed enough, given the pandemic, to sustain investment and growth on its own. There are welfare commitments to be met which are politically essential. In any case, India’s debt to gross domestic product ratio has now reached the level where additional spending, such as in industrial subsidies, cannot be the main driver of growth. The fiscal position simply will not allow that.

So, even given the baseline performance of the past, there are missing drivers of growth in India today. It’s not clear what will drive growth — certainly not the global environment. Over the coming year, global headwinds are likely to increase. Commodity prices face an uncertain trajectory, the geopolitical turbulence means that inflation will be a risk, and the era of easy money is finally ending. India’s efforts to create a growth trajectory will — again, unlike the past, especially the 2000s — not be accompanied by supportive global conditions. In this context, therefore, India and, in particular, the government will need to show greater initiative if growth expectations are to be met.

The primary underutilised source of growth momentum remains integration with the world economy and global value chains. India has not signed up to be part of major trading blocs like the Regional Comprehensive Economic Partnership or the Comprehensive and Progressive Agreement for Trans Pacific Partnership. That may be a missed opportunity. It can partially be made up by signing a network of deep and broad free-trade agreements. One with the European Union should in particular be a priority in 2023. But more broadly a pro-trade and pro-market attitude will pay dividends. Efforts to create national champion companies on the back of India’s large domestic market should take a back seat to increasing competitiveness and productivity more generally. It is the latter that will lay the groundwork for sustainable growth and meeting the targets the government has set for itself.