Supply side measures can brighten the country’s growth prospects

The optimism of Reserve Bank of India Governor Shaktikanta Das regarding the Indian economy is not ungrounded. “I would not hesitate to say that India’s GDP growth in FY24 will exceed 7.6 per cent, it might be closer to 8 per cent,” he opined. It may be recalled that the government’s second advance estimate was 7.6 per cent growth for this fiscal. Reiterating the seven per cent growth for 2024-25, as predicted in last month’s session of RBI Monetary Policy Committee, he said that he was optimistic about next year's GDP growth. This is in line with the State Bank of India’s Ecowrap research report which said on March 1, “The third quarter GDP numbers jolted the psyche and cognitive framework of most in markets. Most likely, the growth this fiscal could be within striking distance of eight per cent”.

Ecowrap has presented facts and arguments to buttress its optimism. It has lauded the government for ensuring people’s quality of life and stopping leakage of benefits through direct benefit transfer or DBT, with the per capita GDP at current prices crossing Rs. two lakh for the first time, including a rise of constant prices.

The Centre’s gross capital formation (GCF) touched a high of 4.1 per cent in 2022-23, up from 3.6 per cent in 2019-20, the SBI report said, and added that this also had a domino effect on private sector investment that jumped from 11 per cent to 11.9 per cent over the same period. The report highlighted the rise in gross savings and decline in incremental capital output ratio (ICOR), both positive developments. Meanwhile, Crisil’s outlook report also painted a decent picture of the Indian economy, pegging a growth rate of 6.8 per cent for 2024-25. The MPC, while upbeat about the growth prospects, also highlighted possible challenges and headwinds in the foreseeable future. These include volatility in crude oil prices, softening in the growth of selling prices of manufacturing firms, and higher input cost pressures of services and infrastructure companies in the fourth quarter of the current fiscal. There are other concerns too. While there is some evidence of increased private sector investment, it is not to the expectations of the government and experts.

In her Interim Budget, Finance Minister Nirmala Sitharaman hoped that the lower borrowings would help crowd in private investment. However, that is yet to happen. One reason is that there is usually a lag between policy announcement and its good effect. The situation is worrying regarding foreign direct investment. The net FDI in India—inflows minus the outflows—declined by almost 46 per cent in April-November 2023, decreasing from $19.76 billion in April-November 2022 to $13.54 billion in April-November 2023. This has to change. The MPC report said that effective supply side responses may keep food price pressures under check. This implies that the government must augment supply side responses in other policy interventions too. For too long our decision makers have relied on Keynesian measures; it is time to make a paradigm shift and introduce more liberalizing steps. Concomitantly, the government must ensure that dirigiste impulses, which are embedded within the system, are kept in check so that animal spirits of entrepreneurship could be unleashed.