Essay about ONLY FASTER INFRASTRUCTURE CAN SUSTAIN THE GROWTH MOMENTUM

English_Master March 22, 2016 No Comments

ONLY FASTER INFRASTRUCTURE CAN SUSTAIN THE GROWTH MOMENTUM

Beating all expectations, the Indian economy grew at 9.4 per cent in 2006-07. Five years back if you had asked any expert tracking the economy, whether India could sustain a growth rate of over 8.5 per cent, the answer would have been an emphatic no. The pedestrian growth of below 5 per cent between 2000 and 2003 had made the Planning Commission target of 8 per cent growth for the Tenth plan (2002-03 to 2006-07) seem like a dream. With the economy growing at 8.6 per cent in the last four years, the actual growth for the Tenth plan touched 7.6 per cent.

And all this in the midst of inadequate infrastructure oil shock, volatility in the agricultural sector and rising inter­est rates. This growth makes India the second fastest growing economy after China. So what is behind India’s growth story? Is it sustainable?

The growth surge started in 2003-04 when the economy grew at 8.5 per cent. The momentum had both external and domestic triggers. Exports were growing despite a gradual appreciation of the rupee. Domestic consumption demand was boosted by low prices, rising per capita income and lower tax rates. A sustained increase in demand increased the capacity utilization, in turn creating a need for more investments. This pushed the investments to an all-time high of 33.8 per cent of GDP in 2005-06. This was complemented by a rise in FDI, which touched $19 billion in 2006-07. Thus, the consump­tion-led boom gradually turned into investment-led boom and the growth became more balanced.

Rising productivity due to increased openness and glo­bal exposure, too, contributed to the growth. High raw mate­rial costs and rising interest rates could not make a dent on the profit margins of corporate. Clearly, the growth momen­tum is broad-based and reflects the consolidation of dividend from reforms.

But is the economy overheating? Overheating typically happens in the boom phase of the economy when GDP growth exceeds the long-term growth potential. The producers of goods are not able to make enough goods to meet the rising demand. The resultant demand-supply mismatch creates in­flationary pressures and the high growth translates into higher inflation.

There is some evidence of excess demand putting pres­sure on prices in India. High credit growth, inflated asset prices, sharp increases in wages in some segments of the economy point towards pressure on price from the demand side. It is this overheating that the RBI is trying to address through higher interest rates.

With structural transformation fuelling growth, there is confidence on its sustainability in the medium run. Growth
will be moderate this year, as the rising interest rate will cool off demand. But over the next five years sustaining 8.5 per cent growth seems quite feasible. The economy has shown tremendous resilience to oil shocks and agricultural volatility.

A favorable demographic situation along with the availability of low-cost skilled labour will continue to spur the growth. By 2025, the working age population in India will be almost 14 per cent of the total world population in the work­ing age group. Strong growth is projected for middle and high-income categories. This will help in sustaining domestic de­mand-led growth.

But there are challenges, too. Inadequacy of infrastruc­ture is one of them. While the existing pace of infrastructure reforms may support 8.5 per cent growth some more time, sustaining it for extended periods will require faster reforms.

The second challenge emanates from demand-supply mismatches in human capital. Some of the fast-growing seg­ments of the economy like the financial sector and IT-ITES are facing shortage of qualified manpower which is pushing up the wages. In contrast, an army of labour is emerging which is potentially unemployable in the current pattern of growth.

Undoubtedly, India is in the takeoff stage right now. The challenges posed by infrastructure and demand-supply mis­match in human capital are not insurmountable. Appropriate policy action, at this juncture, can catapult India into a higher growth trajectory. For instance, a breakthrough in infrastruc­ture can give a significant boost to the industrial sector. Last but not the least, the policy needs to be tuned to ensure that the benefits of high growth are widely distributed.