Global Economy

Low private investment is a weak spot in the economy: Montek Singh Ahluwalia

Montek Singh Ahluwalia, who was Deputy Chairman of the erstwhile Planning Commission of India during 2004-2014, tells Shantanu Nandan Sharma that the economy is clearly recovering from the depressed levels of 2020-21. But he adds, “The critical question is whether, after the recovery next year, will we only get back to the growth rate of 4 to 5 percent which prevailed immediately before the pandemic, or to the much higher growth of earlier years?”
Edited excerpts of the email interview:

How much of a positive impact do you anticipate in this year’s GDP because of robust export numbers so far?
The export data released by the Commerce Ministry for April to August is indeed very good. It shows export growth of 64.4 percent in rupee terms. Some of the growth may reflect exchange rate changes. We also have to see whether this is just a reflection of the recovery in world trade as economies all over the world recover from the pandemic. There are concerns on whether it will continue into the rest of the year because shortages of containers has led to a sharp rise in transport costs which could weaken performance. As a general rule however high export growth is good and government should give top priority to attending to practical problems exporters may have.

What’s your projection of GDP growth for the current fiscal?

The economy is clearly recovering from the sharp contraction experienced last year. This will make us the fastest growing major emerging market, but that only reflects the fact that we had the largest decline last year.

The recovery is not even across sectors. The formal sector, especially in manufacturing, measured at the mid point of the year seems to have got back to the pre pandemic level of output. However, there are many areas which are not there yet, for example, travel, hotels, restaurants etc. The informal sector remains in trouble, but we do not have direct estimates of its performance. The CSO, in making GDP forecasts, has traditionally assumed that the informal sector grows at the same rate as the formal sector, but this may not hold in the current situation. In fact the process of formalisation – which is in itself desirable —means that in some areas the expansion of the formal sector may be causing a displacement of the informal sector.

I expect that the GDP in 2021-22 will be back to the 2019-20 level. This implies a growth of around 8 percent from the depressed base of 2020-21. The RBI has estimated 9.5 percent growth, and this has been used as an official estimate. It is probably exaggerated because it does not adequately reflect the fact that the informal sector is doing much worse than the formal sector.

However, the growth rate in the current year is not the real issue. The real challenge is how to ensure that once the recovery is over by next year, we don’t just get back to the 4 to 5 percent growth observed before the pandemic. This will not lead to the kind of employment growth we need. We should aim at 7 plus percent, calibrate our policies to that objective, and also judge success against that target.

As consumption and investment play a far bigger role (than export) in determining the GDP what’s your advice to the government for boosting those two areas?
We can assume that private consumption will revive automatically as growth resumes, employment increases and household incomes expand. The consumption needs of the poor are in a different category. This does need special attention. Some steps have been taken, but more can be done for the duration of abnormal conditions. There are reports that demand for work under MNREGA exceeds what is on offer because states don’t have funds. There is a case for providing extra funds even at the cost of a slightly higher fiscal deficit. Government can help to restore household confidence by ensuring that the ambitious vaccination target is met. This will help overcome the uncertainty about possible third waves of the pandemic, which may be holding back households from spending what they earn.

Reviving investment is even more important if we want to get back to higher growth over the medium term. Private investment will only revive after capacity utilisation in the economy gets back to normal levels and potential investors see the need for expanding capacity. Since this may not happen until next year, there is a case for expanding public investment in many areas where it is clearly necessary such as health and transport infrastructure.

This may increase the fiscal deficit but I think the increase will be accepted by markets. I am not saying that fiscal deficits no longer matter. They do, and our deficit is higher than most other emerging market countries. However, it is now well recognised that an increase in the deficit to finance public investment in infrastructure is much better than an increase due to subsidies. Crowding out private investment is one of the worries about public investment. However, higher public investment today may crowd in private investment in the years ahead, at which time the public investment can be phased out.

Of course, much depends upon whether we believe that growth will otherwise be below potential. If the policy makers believe we are on target for 9.5 percent growth in the current year, with high growth to follow in the years ahead, they may not be persuaded about the need to do more. This underscores the importance of getting the facts right in making policy.

Which are the pockets in the Indian economy that you are still worried about?
In the short run, the informal sector is a clear problem area. Job losses in this sector have triggered migration back to rural areas and the returned migrants have taken up low productivity and low wage jobs in agriculture. They are technically shown as being employed, but this is really disguised unemployment, with a significant decline in income. That is one of the reasons consumption demand is depressed. Private investment is also very low and this is a weak spot. It is difficult to imagine an acceleration in GDP growth to the high levels we enjoyed earlier without a significant revival of investment.

The pandemic has also triggered almost two years of lost education for the bulk of our children. The top 20 percent or so, that have access to good quality internet and devices, probably coped quite well because of online education. However for the vast majority, especially in rural areas, there has been a major regression. These students will fall further behind as they return to schools and enter higher classes because they will not have the foundational skills to keep up.

Unless we can launch remedial schemes for these children to make up the lost learning opportunity, they will bear a heavy burden of educational loss which will affect their income earning capacity in future.


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