The household savings, which are the bulk of India’s
national investment, dropped from a high of 34% of GDP to about 24% of GDP
Non-household savings are about 5% of GDP. This
decline happened even before demonetisation and the decline continues
because of intrusive and sometime obnoxious tax measures.
The Goods and Services Tax (GST) a flop borrowed from
the United Progressive Alliance (UPA) government.
Despite my protest, it was introduced much as a
carnival in Parliament, with gongs reverberating.
The Ministry of Finance has brutally cut allocations
of the investments in infrastructure despite the urgent need for such
The economy needs about $1 trillion investment in
infrastructure to render “Make in India” a reality, but the actual
investment in sanctioned projects is valued even less in real terms than the
amount invested in the pre-2014 years.
The manufacturing sector, especially MSMEs (micro,
small and medium enterprises) which provide the bulk of the employment for
the skilled and semi-skilled in the labour force.
It has been growing at abysmally low rates of between
2% and 5%.
India’s agricultural products are among the cheapest
in the world, and despite a low yield per hectare, we are not able to
increase the yield to its potential maximum and at least double the
production and export the agricultural products abroad commensurately.
The agricultural sector that is the largest employer
of India’s manpower, is grossly under-performing.
When crude oil prices had steeply fallen over the four
years since 2014, and despite the dollar value of the rupee till mid-2018
having been steady at around Rs.65 per dollar, nevertheless both exports and
imports simultaneously declined over 2014-17.
The Union government also needs to give an alternative
ideological thrust to economic policy rather than try to improve on the
failed economic policies of the UPA, as is currently being done.
In particular, first, the individual has to be
persuaded by the government by incentives — for example, by abolishing the
income tax and not by coercion, such as harsh levies and taxes.
Of course, the state should make no promise to the
people without specifying the sacrifice required to be made by them to make
India can make rapid economic progress to become a
developed country only through a globally competitive economy, which
requires assured access to the markets and technological innovations of the
U.S. and some of its allies such as Israel.
This has concomitant political obligations which must
be accepted as essential.
Since the growth rate in the GDP is calculated as
equal to the rate of total investment (investment as a ratio of GDP) divided
by the productivity coefficient of capital (called “capital-output” ratio
which decreases with increasing productivity and vice versa).
A fall in the rate of investment and/or a rise in
capital output ratio means a decline in the growth rate in GDP.
To seriously address these priority problems, it is
essential to implement a new menu of measures:
(a) dramatic incentives for the household expectation
and sentiment to save; and
(b) lowering the cost of capital via reducing the
prime lending interest rates of banks to 9%, by shifting to a fixed exchange
rate regime of Rs.50 per dollar for the financial year 2019 and then
gradually lowering the exchange rate for subsequent years.