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Growth Prospects

Need for Investment Opportunities

By Dhurjati Mukherjee

The growth rate of the Indian economy had for long been a matter of concern though, in recent years, there has been a paradigm change in the situation. India’s economy has grown by more than 8+ per cent in the last three years and has averaged more than 6 per cent over the past decade, which obviously speaks of a dramatic change since the early 90s. In the current year (2006-07) also, there are expectations by many organizations of reaching a growth of around 7.7 per cent, while the Economic Advisory Council (EAC) to the prime minister has projected the figure at 7.9 per cent.

The recent report of the Reserve Bank of India (RBI) while maintaining that growth will be in the region of 7.5 to 8 per cent for the current year suggested that growth momentum of recent years is likely to continue.

The Prime Minister as also the Planning Commission Deputy Chairman have confirmed that the country could hope to reach 9-10 per cent growth in the coming years, basing this goal on high savings and investment rates in India. Dr. Manmohan Singh pointed out that savings rate is now 29 per cent of GDP and investment rate 31 per cent of GDP. The key drivers of economic growth, according to them are a business friendly economy, higher flow of FDI and surge in private sector confidence.

While industrial buoyancy has helped in maintaining the growth rate at around 9.5 per cent, it is the services sector, which has contributed the most and is expected to grow by almost 10 per cent this year. As is well known, the services sector comprises trade, transport, hotels, communications, business and financial services etc. Recent years have witnessed increasing services sector growth in most southern states. For instance, the states of Karnataka, Tamil Nadu and Andhra Pradesh have seen increasing levels of capital investment. These three southern states account for 21 per cent of the overall amount of project investments in the country as of June 2005 (and this holds good even now).

Infrastructural bottlenecks coupled with problems like inflexible labour laws, incidence of indirect taxes and multiplicity of procedures in starting operations has been holding up India’s attractiveness as a manufacturing base or export platform. However, for the country to maintain or accelerate the growth rate, the following challenges have to be seriously considered: greater private sector investment, specially in the various infrastructure sectors; part disinvestments of the public sector units (PSUs); structural reforms in areas of banking, finance and insurance; necessary changes in labour laws as has been done in many countries and even in China; more foreign direct investment in the energy, oil and gas sectors; all-round technological upgradation of products and processes to meet international standards; and suitable measures to make India an attractive destination for doing business.

The Confederation of Indian Industry (CII) had some time back floated a 10-point action plan to help the country achieve a double digit growth rate. The agenda talked of reforms in areas such as infrastructure, agriculture, entrepreneurship/self-employment, value-added tax, manufacturing, governance, fiscal management and exports. Though physical infrastructure development has received attention in recent years, there is need to further concentrate in these areas and develop world-class standards.

It is necessary here to refer to the agricultural sector which plays a pivotal role in the country’s economy generating employment to around 65 per cent of the work force though its share in the GDP has been steadily coming down and is presently around 21 per cent or so. The recent spurt in rural infrastructure development no doubt augurs well for this sector but what is needed at this juncture is modernization. The following steps need to be considered:

(i)                   multi cropping techniques to be adopted in all regions of the country;

(ii)                 easy availability of seeds and chemicals;

(iii)                emphasis on value added agriculture;

(iv)                agro processing units to be set up in a big way;

(v)              adoption of lab-to-land approach in letter and spirit to facilitate use of modern farming techniques and increase productivity; and

(vi)                setting up consortiums to help exporters.

Any future strategy would have to take into consideration the growth potential of industry, the services sector and also the rural sector. The services sector has possibly the greatest potential with the fast rate of growth and contributing around 51 per cent of the GDP. Similarly the industrial performance has shown remarkable results in the last few years but in the coming years manufacturing techniques would have to be improved further to match international standards.

Quality and cost are obviously the key words which Indian industry has to keep into consideration if it has to grow big and strong. According to a report by McKinsey’s India office, “our projections show that the economy must grow by 8 to 10 per cent a year or risk markedly higher unemployment” for which it has suggested attracting foreign direct investment. It has also pointed to the need to overcome opposition to privatization in India by creating a trust or special purpose vehicle on the lines of Temasek (of Singapore) to gear the growth process. And this needs to be given serious consideration. As far as the agricultural sector is concerned, the present government has rightly decided to give special emphasis for its revitalization to usher in a new era of prosperity for the rural economy but probably more investments are needed.

Apart from ensuring that growth rate is geared up, it would also be necessary to evolve an integrated strategy of development which would take care of poverty eradication and improve the lives of people all over the country. The Human Development Report 2005 poses a pertinent question: why has accelerated income growth not moved India into a faster poverty reduction power? Obviously tackling the problem will require emphasis on the rural sector and also on social infrastructure development.

However, the following may be considered in this connection: ensuring good governance at all levels; effective decentralization of economic and also political power; making local self government strong and powerful; stronger public-private partnerships inmost sectors; rethinking on subsidies and whether it reaches the really needy; tackling corruption; and ensuring transparency in government functioning.

In the coming years, India has possibly to grow at a higher rate to look respectable. Some believe that we ought to emulate the South-East Asian miracle. During the thirty-year period (1960-1995), economies such as Singapore, Hong Kong and South Korea grew at phenomenally high rates, often touching an impressive 10 per cent. If they grew at such high rates for almost three decades so can we. Thus a rise in real GDP is important for which the key emphasis has to be on development of infrastructure and PPPs.

Liberalization, privatization, open economies, research and development are possibly marvelous solutions to the growth dilemma but these will make a dent on our development efforts if there is simultaneous check on population control. China has succeeded on both fronts. If the population growth is kept below 1.5 per cent (compared to the present level of 2 per cent), there would be a quantum jump in India’s per capita GDP in the coming years. It is a well-known fact that with the large skilled manpower at our command, India could easily steal the limelight with a little more sincerity and dedication.---INFA

 (Copyright, India News and Feature Alliance)