New Delhi is abuzz with conversations about the economic horizon of India, as various leaders and economists weigh in on its current state and the potential pitfalls looming on the horizon. Central to this discourse is Congress General Secretary Jairam Ramesh, who recently highlighted what he calls "three dark clouds" threatening the Indian economy's growth prospects.
According to Ramesh, these clouds consist of languishing private sector investment, stagnant manufacturing, and declining real wages and productivity for workers. He blasted the current government for making bombastic claims about economic growth without addressing these fundamental issues, which he believes will strangulate progress if left unaddressed.
Ramesh pointed out alarming trends, such as the steep 21% drop in new project announcements by the private sector during the financial years 2023-24, starkly contrasting with the brief uptick following the COVID-19 recovery. "This lack of investor confidence stems from the government's inconsistent policies," he asserted. He argued this retreat from investment could lead to detrimental long-term effects on India's economic engine.
Apart from insufficient investments, Ramesh raised concerns over manufacturing, noting the lack of significant progress since the government launched the "Make in India" campaign ten years ago. He stated, "Manufacturing's contribution to GDP has hardly changed, and our share of global merchandise exports remains stagnant, unlike the rapid growth seen from 2005 to 2015.”
He cited the Annual Survey of Industries 2022-23, which revealed troubling figures indicating real wages and productivity for laborers have declined. Labour productivity growth fell from 6.6% to just 0.6% between the years 2014-15 and 2018-19, leading to weak consumption rates. This decline is particularly troublesome, he argues, as it restricts the consumption growth needed to fuel future investments.
Ramesh's comments echo broader academic and economic analyses. For example, economist John Lipsky recently stated, "India has the potential to sustain high economic growth and become developed by 2047, provided it focuses on necessary reforms." These reforms, he argues, must target regulatory and infrastructural issues to make the economy more attractive for both domestic and foreign investments.
Looking at the historical perspective, Lipsky noted how only three to four nations have successfully transitioned from developing to developed economies within the last century—Japan, Taiwan, South Korea, and China. He suggests India can emulate this success if it introduces substantial reforms and resolves its current economic stagnation.
The stakes are high, and with the looming election pressures, the government faces increased scrutiny of its economic management. Historical trends indicate rising oligopolization, coupled with high inflation rates and unemployment, indicating fundamental structural shifts may be necessary.
On another front, the shifting behavior of Indian households is also drawing economists' attention. Net financial savings of households decreased almost by half from 10% of GDP to 5.4% by the financial year end of 2023. Economists are now closely monitoring this trend, pondering its long-term impacts on the economy.
Experts like Gaura Sen Gupta, chief economist at IDFC FIRST Bank, posit these changing dynamics lead to increased reliance on foreign savings to meet investment demands. With domestic savings dwindling, discussions around the current account deficit (CAD) become pivotal, especially since FY24 estimates suggest it remains at only 1.3% of GDP.
Madan Sabnavis from Bank of Baroda referred to this as the changing nature of capitalization, highlighting how households may be shifting from traditional financial savings to investing directly in capital assets like real estate. This could signal overall growth but raises questions about sustainability.
This dual lens — Ramesh's concern over governmental inertia and economists' debates on household savings versus investments — encapsulates India's complex economic narrative. Just as Ramesh fears the government’s neglect of pressing issues could trigger stagnation, experts urge for corrective reforms to sustain growth trajectories amid changing demographic behaviors.
Challenged by both international competition and domestic inefficiencies, India's next steps will be closely watched by citizens, economists, and international investors alike. How the government navigates the space between urgent action and political expediency will significantly determine the economic path leading to 2047.
Ramesh's stark warnings pave the way for necessary discussions around economic reform and investment. He remains adamant, stating, "These choke points, if left unchecked, will strangle India's growth for years to come." It is evident India stands at a significant crossroads, shaping its economic destiny based on how it addresses these pressing challenges.
