For India to grow: it must hugely step up private investments. The Economic Survey makes this compelling case, recognising the high positive correlation between
private investment and growth that drives exports and creates more jobs. If India aspires to become a $5 trillion economy by 2024-25, it needs to sustain a real GDP growth rate of 8%. This, says the Survey -- that is dotted with examples of
China and other East Asian economies on investment led growth -- calls for action on multiple fronts: lowering the cost of capital, moving to a tax system that fosters innovation, and giving a fill-up to micro medium and small industries. The prescription (survey calls it strategic vision) makes sense, but is really not out of the box.
Just a week ago, the RBI in its financial stability report sounded a note of caution saying that reviving private investment demand remained a key challenge. “The domestic economy hit a soft patch in the last quarter of 2018-19 as private consumption, the key driver of GDP, turned weak. This along with subdued new investment pipeline and a widening current account deficit have exerted pressure on the fiscal front. This has implications for the government’s market borrowing programme and market interest rates” it said.
In the fourth quarter of FY 19 GDP slowed down to 5.8% against 6.6% in the preceding one and 8.1% in the year earlier. Performance in sectors such as agriculture, manufacturing that generate jobs, was sub-par. Fixed capital formation, as a proportion of GDP, is inching up -- gross fixed capital formation expanded 10% from 9.3% in the previous fiscal. But there is a distance to go.
The biggest challenge to private investment is bad loans in the banking system. The bankruptcy code is working, but has to work far better for banks to be nursed back to health and start lending again. The government must pay urgent attention to bringing the bond market to life to make lending for long term projects such building highways viable. This will lower the risk of bad loans, kick-start infrastructure projects and revive animal spirits in the economy.