Can India get back to 8-9% growth?

Tue, 4 Mar Pre-Open

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India's growth has been faltering over the last 2-3 years. With growth lingering in the 5-6% range and policy bottlenecks hurting infrastructure prospects, scaling the 8-9% figure, as witnessed in the past, seems to be a difficult task. However, it is not impossible. Currently, triangular issues of food inflation, current account deficit (CAD) and fiscal deficit are plaguing India. Hence, a calibrated three pronged strategy that can eliminate these concerns can lay a solid platform for future growth.

For instance, in order to eliminate food inflation, India needs to improve its storage facilities. Part of the inflation is due to wastage arising from poor storage infrastructure. However, another critical reason for rising food inflation is hike in minimum support prices (MSPs) which are intended to protect the interests of the farmers. Little can be done to tame MSPs as it would reduce farming incentive.

However, laws that govern the marketing and distribution of the produce like Agricultural Produce Marketing Committee (APMC) need an overhaul. Such archaic laws are the primary reason for higher volatility in food prices. Basically APMC is a platform established to regulate trade in agricultural commodities. However, farmers are being exploited in this mandi trading mechanism. Also, there are many middlemen in this chain trade. This increases food prices since mark up increases as you move ahead in the chain. Hence, there is an urgent need to revamp the agricultural laws.

The second issue pertains to rising CAD which in simple words means excess of imports over exports. Considering India imports majority of its crude requirements, historically it always ran a deficit. The situation worsened when gold imports started rising exponentially. This put pressure on the Indian rupee. While very little can be done to curb oil imports, localization efforts should help in bringing down imports of the other items. Steps should be taken to boost manufacturing by providing incentives. Also, skill sets of workers should be enhanced which shall help improve productivity and also reduce reliance on imported electrical goods. This will help curb CAD.

Last but not the least is to tame fiscal deficit. It arises when government expenditure exceeds receipts. Concrete steps must be taken to bridge the fiscal gap rather than just milking the PSUs and raking in additional revenues by the way of special dividends. While complete subsidy eradication may not help the poor, government should at least take steps to ensure that subsidy is directed properly. Misdirecting subsidy (diesel subsidy that is used for guzzling SUVs) is a wasteful expenditure that must be avoided. Lastly, a thought must be given to revamp the taxation system by bringing more people in the tax net. Tax evasion is rampant in India. Hence, suggestions that enhance the taxable populace must be considered. This shall increase government revenues and bridge the fiscal gap.

If these three devils of inflation, CAD and fiscal deficit are overpowered, then the economy will get the necessary platform to bounce back once global scenario improves. If not, India may well perpetually slip into the sub 6% kind of growth category.