Under the impact of the financial crisis, the Indian economy registered a growth of 6.7 per cent in 2008-09, after having posted a growth rate exceeding 9 per cent for three consecutive years. The recovery from the impact of the global crisis was however swift and sharp. The economy achieved a growth rate of 8.6 per cent in 2009-10, despite a severe drought. The growth rate rose further to 8.9 per cent in 2010-11. Then the decline began. In 2012-13, the growth rate came down to 4.5 per cent according to the old estimate and 4.9 per cent as per the new estimate. In 2013-14 the growth rate was 4.7 per cent and 6.6 per cent according to old and new estimates respectively.
The fact that stands out is that the decline in the output growth was much stronger than the decline in investment. The investment rate in 2007-08 was 38.1 per cent of GDP. By 2013-14, it had come down to 32.3 per cent, even according to revised estimates. With the incremental capital output ratio of 4, which has been normal for almost a decade even, this lower investment rate should have given us a growth rate of 8 per cent. But the actual growth rate turned out to be less. The rise in the incremental capital output ratio could have been either because projects were not completed in time or because complementary investments were not forthcoming. In some cases, this could also be due to non-availability of critical inputs such as coal and power. This then points to the fact that, in the short run, speedy completion of projects by itself can raise the growth rate. In the medium term, we however need to ensure that the investment rate goes up and the productivity of capital remains high. Only then can the country get back to the high growth rate path.
Going ahead, “Make in India” is a good guiding principle. It should imply producing for India and for the world. Making only for India will convert it into a form of import substitution. Making for the world makes the system more efficient. On the other hand, people wonder whether making for the world is even meaningful in the changed world context. It is true that extreme dependence on the external world can cause serious repercussions on the domestic economy, when the world environment suddenly changes, as in 2008 and 2009. India however is not in any such danger. India’s exports as a percentage of GDP is still modest at 25 per cent. Besides, India’s exports of goods do not constitute more than 2 per cent of the world’s exports. In this situation, making India the base for the production of goods and services for export to other countries is not a bad idea. But to convert this idea into reality, the Indian economy has to be much stronger in terms of infrastructure and the availability of good human capital. Productivity of capital must increase which implies a more efficient system of production.
Reforms must be part of a continuing agenda. The basic principle guiding reforms must be to create a competitive environment with a stress on efficiency. There are still several segments where controls dominate. A classic example is the sugar industry. We need to dismantle controls in a phased manner. The pricing of products should normally be done by markets. Exceptions should be made transparent and must be clearly articulated.