Policy Action Needed To Counter GDP Slowdown

Policy and decision-makers in India should pay close attention to veteran banker Uday Kotak's recent remarks. He recently expressed his concerns about India's economic trajectory and pressing issues that, if unaddressed, could impact the country's long-term economic dynamism. His observations on the fading 'animal spirits' of Indian entrepreneurs and the impact of US policies on foreign capital flows warrant serious consideration and proactive policy responses. His insights offer a diagnosis of current economic challenges and an implicit roadmap for corrective action.

A robust entrepreneurial spirit has long been a hallmark of India's economic progress. The country has witnessed successive waves of entrepreneurs who built businesses from scratch, spurring employment, innovation, and wealth creation. However, Kotak warns that this traditional business dynamism is waning.

One significant shift he highlights is that the next generation of business families appears more inclined toward wealth preservation and investment management than toward running and expanding companies. This transition departs from the risk-taking and enterprise-building ethos that characterized their predecessors. If this trend continues, India could see stagnation in industrial and business expansion, potentially slowing economic growth and job creation.

This shift in mindset is driven by multiple factors. The government did take several initiatives to enhance the ease of doing business in recent years, yet regulatory complexities, high compliance costs, and policy uncertainties still plague wealth creators, thus making entrepreneurship less attractive than passive investment strategies. Additionally, the global economic environment, marked by rising interest rates and geopolitical uncertainties, has made business risks appear less rewarding compared to investment-led wealth management.

All this is coupled with international developments. With Donald Trump beginning his second term as US President, the American economy is on the upswing. This, Kotak said, is harming India's financial ecosystem. He talked about the "vacuum cleaner" effect wherein US monetary policies are drawing global capital toward American markets, reducing foreign inflows into emerging economies like India. This phenomenon has far-reaching consequences for India. Foreign capital is vital for financing the country's current account deficit, sustaining liquidity in financial markets, and supporting the rupee's stability.

Kotak's observations call for a strategic response from policymakers. The government must act decisively to counter these challenges and restore confidence in India's economic ecosystem. Several policy measures can be considered to address these concerns. To reinvigorate 'animal spirits,' policymakers should create a more conducive environment for entrepreneurship. This can include simplifying regulatory frameworks, reducing bureaucratic hurdles, and providing incentives for business expansion. Additionally, fostering an innovation-driven economy through better access to venture capital and startup-friendly policies can help attract young entrepreneurs back into business creation.

If foreign capital inflows are diminishing due to external economic conditions, India must develop stronger domestic sources of funding. Deepening the bond market, encouraging domestic institutional investors, and expanding credit access to micro, small, and medium enterprises (MSMEs) can mitigate dependence on volatile foreign capital.

India must engage more strategically in global financial dialogues to ensure its interests are protected. By working with international partners, India can advocate for more stable global financial policies that consider the needs of emerging economies.

In a nutshell, Kotak's warnings should serve as a clarion call for policy action. Proper and reasonable course correction will help the nation attain the goal of 'viksit Bharat.'