Even as the Indian economy emerged stronger after the second quarter GDP numbers, there are a few pain points that need to be addressed. Dipak Mondal and Monika Yadav in an interview with Sanjeev Sanyal, member, Economic Advisory Council of the Prime Minister (PM-EAC) discuss these issues.
Here’re excerpts:
The PM is likely to unveil a Vision Document for 2047. What are the broad contours of that vision?
The next 25 years, which is the Amrit Kal, is not merely the coincidence of it being the 75th to 100 year (of independence) phase. It also coincides with many other things that are happening. This is also the 25 years where we will be at our demographic peak. Between now and then, the proportion of the population of working age will rapidly rise and then fall.
This is a phase where we will first go past Germany in the next 18 months and then the next 18 months we will go past Japan to become the world’s third-largest economy. Our per capita income still needs to go through a sharp upwards shift. So our effort will be to go through that so that extreme poverty is completely eliminated.
This is the phase where we will emerge after many centuries as a global power – not just as an economy but also in a geo strategic sense. We missed the first industrial revolution, and didn’t participate in the industrial revolution 2.0 (of mid-20th century). We did participate in the third industrial revolution (IT and software boom) in a limited way. But as the world is embarking on Industrial Revolution 4.0, we have an opportunity of being a serious world power as technologies, which are now emerging like space technology and AI, we have capabilities. This is a real opportunity of providing global leadership in the new Industrial Revolution cycle.
So, the next 25 years is a very crucial phase in terms of a wider economic cycle. We are not just building an economy but rebuilding a civilization.
India’s Q2 GDP growth exceeded most estimates. The RBI has revised upwards FY24 growth to 7%. Do you think this rate is sustainable and will we see 8% plus growth in the near future?
We are achieving 7% growth in a difficult environment where we are not getting any help from exports, and the world has tightened monetary policies. So, we are achieving (such high) growth rate on our own steam under difficult circumstances suggests India’s economic machine is in good shape, and importantly without any macroeconomic stress – inflation is not spiking up, current account is not blowing up or foreign exchange reserves have not declined.We have been able to generate a 7% growth rate under these circumstances suggests this economy is capable of sustaining 8% plus growth rate in a benign external environment.
Manufacturing sector grew at 14% in Q2, but it was largely due to low-base effects. Share of manufacturing GVA as a percentage of GDP is below 14%. Can we achieve the target of 25% share of the sector in GDP?
The contribution of manufacturing gross value added (GVA) as a percentage of gross domestic product (GDP) will go up to 25%, but it will take time. The share of agriculture is falling, and we are building capacities in areas such as defence, chemicals, and electronics. There are a huge amount of industrial activities that are happening in the country.
There is this perception that rich people are leaving the country…
There may be some who are, but then there are also new people who are becoming rich through entrepreneurship, we are creating unicorns. Some people are moving back also. There’s a continuous churn. Have you done any research on how many people are coming back to India as well?
We want India to be a good place to live, including the rich, and we want our best entrepreneurs to live in India.
If there are issues, we are happy to fix them. But is it the case that a few thousand people moving out of India is destabilising our growth engine? Probably not. In any large country, a few thousand will always move out, but there are also those who lived abroad for years and are coming back setting up something here. Somebody has to research what the net number is, and if it is growing then we need to fix it.
Both pro and government critics have raised concern on quality of GDP numbers. As a member of PM-EAC what is your view, and how is the government addressing this issue?
There is a serious issue with the quality of GDP number, an issue that the PM-EAC has raised many times.
It is obvious that our statistics undercount economic activities. Almost all series are based on the base year of 2011-12. We need to update the base year and when we do it, our economic growth will be higher. These numbers understate economic development in the country due to the outdated base.
Is that the only problem, the base year?
This is the major problem. Other minor problems arise because of that. This is a serious problem -- you can’t have a base where you are still counting the number of transistors, black and white TVs, etc.
How frequently should we change the base year?
We should change it at least once a decade. When we are going through such rapid changes, you should change it more frequently because many new products are emerging. In 2011-12, smartphones weren’t with everybody, you didn’t have drones. Now it’s a major production item. There are 500 other things like this which are major items of production today but didn’t exist 13-14 years ago. You talk about rapid development but we are not going to account for it, how this
will work.
The tax-GDP ratio has been stagnant for a long time at around 17%. What is the government doing to address this issue?
The tax buoyancy is causing the ratio to go up. But you don’t want it to be at the European levels. If you have a European level tax-to-GDP ratio, you will also get European level growth. European tax rates have damaged their economy. So what is the ideal Tax-GDP ratio for India? That is a matter to be evolved. Nobody has done that exercise, but it is not the European level (at over 30%).
Are there other structural reforms that the government is looking into?
Everybody loves structural reforms like implementation of GST, Insolvency and Bankruptcy Code (IBC) or inflation targeting framework -- however, there are large number of reforms that don’t attempt to change the structure of the economy as such, but make the existing one work better. Those are called process reforms.
Thousands of such process reforms are being attempted, which are about making the current system work efficiently. Any such single reform may not be radical but cumulatively they have a huge impact on the economy. I am a big proponent of greater attention being given to these process reforms.
Most of these reforms don’t need big political debate, and they are relatively easy to do. They don’t even need big money to be done.For example, our patenting system -- we have to just expand it. Nobody is debating that we should not expand the patent system. You need to improve the judicial system, the way registration of land and property is done. These are process reforms and we need to do lots of them.