By SONAL VARMA
Today’s Indian economy has solid foundations. Balance sheets are clean; business confidence is high; supply-side reforms are progressing and fundamentals are in a good shape. There is high growth amid low inflation while twin deficits are in check.
Today’s Indian economy has solid foundations. Balance sheets are clean; business confidence is high; supply-side reforms are progressing and fundamentals are in a good shape. There is high growth amid low inflation while twin deficits are in check.
Yet, there are still gaps to fill. Beneath the strong headline numbers, the composition of growth is not yet broad-based. Private consumption has remained lackluster, and a broad-based private capex upcycle is not yet in sight.
While India is integrating into global value chains (GVCs), the benefits via higher overall exports are not yet visible. We also need to create millions of jobs for youth joining the working-age population.
There are also global uncertainties to navigate. Higher volatility, repeated supply shocks, higher geopolitical risks and climate change are the new normal. Against this backdrop, the agenda for the next five years requires prioritisation based on five key issues.
First, creating jobs. India needs both manufacturing and services-driven growth. This will require further investment in education and skill development. The education reform will take a longer time to take root and pay dividends, while skill training through focused, short training courses should bear more immediate returns.
India’s vast land resource means we can become the food producer for the world, if we implement reforms that boost farm productivity. Developing the food processing industry is a byproduct and can create jobs for many micro, small and medium enterprises or MSMEs.
Second, we need to push more forcefully on India’s GVC integration. This is a two-stage process.
The initial objective should be to gain export market share in low-tech manufactured goods. This requires lower tariffs on intermediate goods, entering into new free trade agreements, factor market reforms of land and labour, better infrastructure, lower logistics costs and judicial reforms. Subsidies and protecting local manufacturers from the threat of imports is acceptable in early stages, provided there is a sunset clause and domestic products are becoming more competitive.
The next stage involves moving up the value chain (i.e. — from basic to more advanced products). This needs improved quality of human capital and a focus on innovation, for which the government can offer incentives to firms that engage in more R&D spending.
It will also require the development of an innovative intellectual property rights framework.
Third, we can opt for an even faster pace of fiscal consolidation, but without compromising on public infrastructure spending. The government received a fiscal windfall via a higher RBI dividend, which can be used to lower the fiscal deficit and gross borrowings, thereby helping to crowd-in private investment and improve the prospects of a rating\s upgrade.
To augment tax revenues, rationaliaation of the Goods and Services Tax (GST) slabs and bringing excluded items like petroleum products into the GST net are still pending.
Fourth, greater centre and state coordination and cooperation are essential to implement the next leg of reforms involving the factor markets.
Finally, India needs to build resilience against future global shocks through ample foreign exchange reserves, counter cyclical macroprudential policies and establishing supply chains for critical minerals.
Importantly, amid elevated global uncertainty, Indian policy should be the epitome of stability. One way to implement this is by laying out the reform pipeline for the next five years upfront with clearly stated milestones.
This will give all stakeholders the needed time to prepare for the coming changes.India’s economy has come a long way from the days of the fragile five and twin balance sheet challenges.Now, it’s India’s time to race ahead.
The author is Chief Economist for India and Asia ex-Japan at Nomura
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