Early advance estimates released by the Office for National Statistics (ONS) showed GDP at constant prices in FY22 was 1.26% higher than in the pre-Covid year of FY 20. In other words, India has recorded a growth rate of 0.63% per year in the post-Covid period. Although Omicron’s impact on the economy is less, the loss of GDP over the past two years is high. Also note that the pre-Covid FY20 year had a low base with 4% GDP growth. Therefore, the need to focus on higher growth in the next budget and in the medium term, ie beyond [email protected], is evident.
The quantitative and qualitative creation of jobs in the economy comes up against several difficulties: a) The unemployment rate is high in both rural and urban areas; (b) declining labor participation rates, especially for women; (c) the employment recovery is still below pre-Covid levels. According to the CMIE, employment in December 2021 was 2.9 million less than in 2019-20; (d) 85% of the workforce still works in the informal sector; (e) less than 5% of India’s workforce has formal vocational training; (f) manufacturing and services need structural change; (g) focus on MSME sector is necessary for higher employment rate.
It is necessary to have policies in the next budget and in the medium term to achieve economic growth and higher jobs. Some of these policies are reviewed below.
First, the last budget gave a boost to capital spending and infrastructure. This must continue in the next budget and in the medium term. The government has outlined a pipeline of infrastructure projects worth over Rs 102 lakh crore and an asset monetization pipeline of Rs 6 lakh crore to be implemented in the medium term. It is important that the government continues to focus on infrastructure and capital expenditure as this is a key driver for ‘India’s future’. Of course, all of these infrastructure plans depend on effective implementation and the creation of appropriate infrastructure models, as well as the generation of the necessary funding.
Second, it is well known that increasing exports is one of the main engines of growth and also important for job creation. India’s export growth has increased and is expected to reach $400 billion by the end of FY22. A worrying aspect of India’s export performance is the failure to increase the share of products with labor intensive in the export basket. In the post-Covid situation, there are several opportunities for India to fill the space vacated by China to boost exports. However, a problem in recent years is that India’s trade policy has become more protectionist by raising import tariffs. India is also expected to join the Regional Comprehensive Economic Partnership (RCEP) to integrate our industries into value chains in Asia.
Third, there is virtually no disagreement that India should aim for greater manufacturing growth for higher economic growth and the creation of more productive jobs. However, the share of manufacturing in GDP and employment has hardly increased over time. Production Incentive Programs (PLIs) can improve performance. However, further efforts are needed to improve the manufacturing sector. Likewise, there are many opportunities for India in the service sector. Major global service brands such as Google, Airbnb, Amazon, LinkedIn, McKinsey, Master Card, Visa, Fedex covering hospitality and consulting companies or food and beverages like Starbucks originate from the United States. Brand and customer orientation are important here. India can also think of more business in the service sector. Growing startups, including unicorns in manufacturing and services, are part of this effort.
Fourth, banking reforms are important because bank credit growth is a key indicator of economic growth. In the immediate term, interest rates could rise in India and globally due to rising inflation. This can increase the cost of capital. The credit to GDP ratio in India is only around 55%, compared to 100% and 150% in many other countries. Credit should flow to all categories of economic agents such as businesses, households, etc. It is true that bank credit growth increased to 9% in December 2021. But the NPA remains a problem for regular commercial banks (SCBs) and others. The macroeconomic stress tests for credit risk mentioned in the Financial Stability Report published by the RBI “indicate that the Gross Non-Performing Assets (GNPA) ratio of SCBs could decline from 6.9% in September 2021 to 8, 1% by September 2022 under the baseline scenario and to 9.5% under a severe stress scenario SCBs would, however, have sufficient capital at both aggregate and individual level even under stress conditions. stress”. The bad bank, a key initiative of the last budget, has yet to take shape. The role of fintech companies in the financial sector has increased dramatically. They may not be able to replace banks although compete on payments. Banks must also now focus on ESG (environment, social and governance) while extending credit. Big tech and digital push are also needed for banks. are.
Finally, the economy’s K-shaped recovery continues. Much of the corporate sector has been able to handle the pandemic and the stock market is doing well. On the other hand, informal workers, including day labourers, migrants, MSMEs, contact-intensive sectors, etc., have suffered greatly from loss of income and jobs. Policies should focus on boosting the MSME sector, increasing investment in agriculture and rural infrastructure, a boost in the social sector, including closing health and education gaps, protection schemes such as food grain distribution, cash transfers, MGNREGA in rural areas, urban employment guarantee schemes, etc. It will also create demand for the economy.
With regard to economic growth and employment, we must redouble our efforts to cover the losses and achieve steady and normal growth. The next budget and medium-term policies should focus on them. The goal of reaching a $5 trillion economy by 2024-2025 could be delayed by a year or two. Monetary policy is already very accommodative and this may not continue as there are headwinds such as rising inflation. In the short term, fiscal policy should play an important role in achieving growth and employment objectives by expanding fiscal space, while the fiscal deficit can be stabilized in the medium term. Increasing private investment may take a little longer.
This column first appeared in the print edition of January 29, 2022 under the title “Recover and rebuild”. The writer is Director and Vice Chancellor, IGIDR, Mumbai