Economic Growth Revival – Hard Work Ahead
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Economic growth is likely to touch decade low of 5-5.5% this fiscal year. Rupee has depreciated more than 20% over the last few years, inflation has been high and consumer demand is also slowing down. In short, after a decade of rapid growth, Indian growth engine has slowed down considerably. Some of it is because of uncontrolled government spending, but I think there are also other deeper structural issues. ln this article, I will analysis what led to rapid economic growth over the last decade and what needs to be done to revive growth.

Over the last decade, starting from a low base, IT exports grew at an annual rate of 20%+. IT Services jobs are high income jobs in the Indian context and consumption demand of IT employees drove growth of many sectors in India (consumer durable, auto, real estate, media etc). Also, over the last decade, mobile penetration and media penetration increased dramatically and this led to productivity improvements throughout the economy cutting across sectors. However, these sectors are now slowing down. IT Service exports are likely to grow at less than 15% per year over the next decade due to the high base effect. Mobile penetration has reached a figure of 70% plus and as expected subscriber growth has slowed down over the last few quarters. Given that the big success stories of the last decade are not going to be the big growth stories over the next 10 years, India needs to find new high growth sectors which can propel job growth, productivity improvements and overall economic growth.

Let us look at which sectors have a potential to be the high growth sectors over the next decade. Insurance penetration in India is fairly low and reforms in that sector are likely to lead to significant employment growth. Banking sector reforms will also lead to more competition, productivity growth and increase in banking penetration in India. Retail and logistics sectors are likely to show productivity improvements as the sectors become more organized. However, it is important to keep in mind that retail sector growth and to some extent banking/insurance growth are dependent on the underlying consumer income growth which in turn depends on growth in other sectors of the economy (for example, IT sector over the last decade). I find it hard to identify too many other services industries which can contribute meaningfully to net job creation and rapid income growth over the next decade. This brings us to the manufacturing sector. It is a fairly well known fact that rapid growth in manufacturing exports was the principal reason for many Asian countries becoming middle income/rich economies. In India, performance of manufacturing exports has been disappointing. Manufacturing sector in India mostly caters to domestic demand. Recently, Government has taken a few steps to boost growth of the manufacturing sector. Government has come up with a National Manufacturing policy and the government is hoping that globally competitive National Manufacturing zones will come up next to the Delhi-Mumbai Industrial corridor (DMIC) – similar to Coastal Chinese manufacturing SEZs.

I think these measures are unlikely to be sufficient for any meaningful pickup in manufacturing growth and exports. Unless government puts a concerted effort to cut red tape, reform labor laws , improve infrastructure and impart skills to the labor force (in partnership with the private sector), I don’t think the manufacturing sector and in turn the overall economy is likely to go back to 8-9% growth rate on a sustainable basis.

Will discuss some of these issues in detail in my future posts.

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