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Possibly the biggest economic policy direction of the second Narendra Modi-led NDA government is the belief that India has to grow via private investment route. The mantra of “Minimum government, maximum governance” that was given in the first term finally found expression in the second term.
Led by a new finance minister, Nirmala Sitharaman, the government made it clear that it would do everything to create a conducive environment for this strategy to work out. As such, fiscal deficits were contained, even in the face of a once-in-a-century pandemic. Similarly, corporate tax rates were cut to historic lows. The government committed to raising capital expenditure and investing in infrastructure to “crowd in” private sector investments. There was a clear commitment to privatising public sector undertakings. Efforts were made to streamline labour laws. Even the farm sector was sought to be exposed to the greater play of market forces — although this faced vicious opposition and had to be reversed.
Yet, after all these efforts, private investments haven’t taken off.
During a public interaction last week (Hero Mindmine Summit), India’s Finance Minister, said something that suggested her patience was wearing thin on this issue.
“If it is not sort of impertinent to say now, I equally would like to say to the (Indian) industry: What is it that they are hesitant about even further? Since 2019 when I have taken charge of the finance ministry I have been hearing that ‘ooh, the industry doesn’t think it is conducive to invest’. Alright bring the (corporate tax) rate down. Tax rate was brought down. And I keep defending the industry, the private sector even when provocatively people have asked ‘what would you like to tell the private sector?’ We would do everything to give industry coming and investing here. ‘Give PLI (Production Linked Incentive)’. We have given PLI. I want to hear from the Indian Inc. ‘What’s stopping you?’ When countries and industries abroad think this (India) is the place to be, now, at this time. FDI (foreign direct investment) are coming, FPI (foreign portfolio investment) are coming. The stock market is so confident. The Indian retail investor believes in them.”
To be sure, investments have remained stagnant during the last eight years. Look at Table 1. It shows investments both in nominal terms and as a percentage of GDP. The best that investments have done (as a percentage of GDP) during the Modi years was in the very first year — 2014-15 — when they contributed 30.1% of India’s GDP. But since then they have stayed below the 30% mark.
Contrast this with the performance during the ten years of UPA rule. Under UPA, the worst performance was 30.7% in their very first year. What’s more, even that was better than the best under the current government’s rule. It is also noteworthy that the UPA’s record of high investments sustained despite the Global Financial Crisis of 2008.
In absolute terms, during the ten years of UPA rule, investments in the economy grew by 4.4 times. In the 8 years since, they have grown by just 1.9 times.
Perhaps this is the reason why the Finance Minister carried on and compared India Inc to Hanuman during an episode in the Ramayana where Hanuman displays diffidence about his immense abilities.
“Is it like Hanuman you don’t believe in your own capacity? In your own strength? And has there got to be somebody standing next (to you), saying, ‘hey, you are Hanuman. Do it’ And who is that person who is going to tell Hanuman. It can’t certainly be the government,” said Sitharaman in a tone that betrayed both disappointment and exasperation.
Few people noticed but perhaps the most telling moment came immediately after Sitharaman finished making her point. Sunil Kant Munjal of Hero Enterprise, who was interviewing her, did not miss a beat to quip: “May be that’s a role you have as well”.
So, why is India Inc. holding back?
In an interview to The Indian Express for the weekly show The Express Economist, Pulapre Balakrishnan, professor of economics at the Ashoka University, explained the issue in very lucid terms.
He said “Hanuman was driven by his devotion to his lord, to Rama. The private sector is not driven by devotion to anybody…they are driven by profits”.
Profits, in turn, require robust consumer demand. But, in India, that has been faltering.
Table 2 shows how the private final consumption expenditure (PFCE) — that is, the money spent by Indians for their personal use — grew during the UPA years and in the years since. During the 10 years under UPA, PFCE grew by 3.77 times while in the eight years since it has grown by just 2.17 times.
What’s worse is that, notwithstanding the rosy looking GDP growth rates, India has widespread unemployment. At the average level, incomes haven’t grown fast enough to sustain a consumption drive.
Moreover, it can be argued that India Inc is not convinced that the government has a workable plan to boost consumption in the coming year or two.
As Prof Balakrishnan said, “Hanuman is not flying because he is not convinced that the government has a great economic plan. So Hanuman is being perfectly rational in staying put!”
Watch the full episode with Prof Balakrishnan on The Indian Express’ YouTube channel.
What do you think the government should do to boost consumption and investments in the economy? Share your views and queries at email@example.com
Till then, stay safe.