Economy strengthened by two domestic factors

What is the issue?

• India’s real GDP growth hit a road bump in FY17 as growth slowed to 7.2 % y-o-y in the first three quarters. Growth will pick up again to 7.6 % this year.
• This will be strengthened by two domestic factors (demographic dividends and higher productivity).

What are the issues that need sorting?

• India’s working age population will exceed overall population growth for at least two more decades. In turn, this will lead to a sustained fall in its dependency ratio.
• This demographic dividend needs to be harnessed effectively, through higher labour absorption and job creation.
• India’s labour force is presently highly fragmented and concentrated in the unorganised sector.
• Hence labour issues need to be addressed on three counts:
  • Growth needs to be inclusive and generate sufficient employment; the employment elasticity to growth has been receding in recent years;
  • The workforce needs to be skilled; and
  • A high proportion of casual/informal labour needs to be covered by employment rules and regulations.
• If tapped effectively, faster growth in India’s working age population will crucially to the overall GDP growth.

What are the productivity prospects?

• Firstly, India’s incremental capital output ratio (ICOR) has eased to 4.0 in the first three quarters of FY16-17 from 6.3 in FY12-13. Part of this decline can be attributed to an easing investment-to-GDP ratio.
• Secondly, labour productivity has been softening. Labour productivity per person employed eased from 10 % in 2010 to 4.8 % in 2016, according to the US Conference Board estimates.
• Slower productivity and thereby slower output and incomes have kept per capita GDP at depressed levels for a long time.
• Part of this dip was attributed to better efficiency brought about by technology and innovation.
• Hence, there is sufficient headroom for productivity levels to improve and raise growth levels.

What were the reforms undertaken?

These productivity gains are expected to get another shot in the arm from ongoing and upcoming reforms like.

• The execution of labour reforms and land acquisition has been pushed to State governments, but changes here are expected to be gradual.
• The operating architecture will be tightened by rationalising the number of documentation/clearances, simplifying the legal framework, lowering the number of institutions, etc.,
• FDI will be encouraged by lifting sectoral caps, beefing up infrastructure capacity and improving the ease of doing business.
• To improve the rollout of FDI, the Cabinet will phase out the Foreign Investment Promotion Board (FIPB) from April 2017.
• In return for a strong consumption-driven market, foreign investments will bridge part of the funding gap for infrastructure projects and provide technological know-how to expand the domestic manufacturing base.
• Simplifying the taxation structure is the next priority, with the rollout of GST in July 2017 under close watch.
• The GST system’s long-term benefits include better transparency, higher revenue generation, a wider tax base, collection efficiency, formalisation of the economy and limiting tax evasion/corruption.
• Plans to increase use of technology and digitalisation across sectors including banking services, healthcare, education, start-ups etc.,
• Expanding the manufacturing base, this will be positive for job creation given its better absorption levels.
• Promoting social sector programmes like financial inclusion and direct benefit transfers which will help plug leakages.
• Formalising the economy and encouraging the scaling-up of manufacturing activity (smaller unorganised sector).
• Addressing corruption/lower tax evasion with closer scrutiny on deposits after the banknote ban, income declaration schemes, the Benami Property Act, plugging tax loopholes through changes to the double taxation agreements, amongst others.
• On a positive note, these changes are taking place at a favourable time in India when inflation is benign amidst a narrower current account deficit, rising foreign reserves, credible fiscal consolidation efforts, and bullish domestic markets.

Source: Business Line