Central Idea

• India has had an established track record of high growth, with an average annual GDP growth of 6.6% in the decade leading up to the Covid-19 pandemic. In fiscal 2023, India is seen growing at 7%, making it the fastest-growing large economy. But with an imminent global slowdown and the full manifestation of the lagged impact of interest rate hikes since May 2022, the economy is expected to decelerate and grow at 6% in fiscal 2024.

Indian economic growth prospects

• Growth accounting: Growth accounting provides a useful framework to analyse medium-term prospects by decomposing their drivers into the contribution of capital, labour and efficiency.
• Economic growth next five years: Indian economy expected to grow at 6.8 per cent per year for the next five years with 52 per cent of it from capital, 38 per cent from efficiency and 10 per cent from labour.
• Changing growth model: The growth model is changing to an infrastructure and manufacturing-driven one.
• Capital spending: The Union Budget has raised capital spending by almost a third in high-multiplier infrastructure segments. But such support to capex will moderate in the years to come, given fiscal consolidation pressures.
• Investment ratio: Investment as a percentage of GDP has already touched a decadal high of 34 per cent in fiscal 2023. So far, the onus to lift the investment ratio has been shouldered by the government. The contribution of the private sector to investments is set to improve, primed as it is with healthier balance sheets, cash reserves and low leverage.
• Contribution of productivity to growth: The creation of physical and digital infrastructure in conjunction with efficiency-enhancing reforms will raise the contribution of productivity to growth. The economy is expected to continue seeing efficiency gains from reforms such as GST and Insolvency and Bankruptcy Code (IBC).

What is holding back a swift and broad-based lift in private investments?

• Economic uncertainty, primarily, and geopolitical events to a lesser extent.
• Sustainability challenge looms for the manufacturing sector as manufacturing and infrastructure growth are carbon-intensive.
• Low-quality skilling of the workforce is holding back its contribution to growth.
• Quality and the skilling of the workforce
• Falling labour force participation of women

What is holding back in Labour’s contribution to growth?

• Labour’s contribution to growth is likely to be low not because India does not have sufficient people in the working-age group, this cohort is 67 per cent of the population and is set to expand by 100 million over the next decade. It is the quality and skilling of the workforce that is holding it back.

Why private investment is essential for Indian economic growth?

• Capital formation: Private investment helps in creating capital formation, which is essential for economic growth. It helps in building infrastructure, creating jobs, and generating income, which in turn drives consumer spending and boosts economic growth.
• Innovation: Private investment is often associated with innovation and technological advancements. Companies that invest in research and development (R&D) can develop new products and processes that can boost productivity and create new markets. This, in turn, can lead to increased profits and more investment in R&D, creating a virtuous cycle of innovation and growth.
• Employment: Private investment creates jobs, which is critical for economic growth and development. When companies invest in new projects or expand their operations, they often need to hire additional workers, which reduces unemployment and boosts consumer spending.
• Foreign investment: Private investment is also an important driver of foreign investment. When companies invest in India, they often bring new technology, skills, and expertise that can help boost local industries and drive economic growth.
• Tax revenue: Private investment can also help increase tax revenues, which can be used by the government to fund public goods and services such as education, healthcare, and infrastructure.

Steps taken by the government to encourage private investment

• Investment-Friendly Policies: The Indian government has launched several investment-friendly policies, such as Make in India, Start-up India, and Digital India, to encourage private investment in the country.
• Infrastructure Development: The government is investing heavily in infrastructure development, including roads, railways, airports, and ports, to create a conducive environment for private investment.
• Tax Reforms: The Indian government has implemented several tax reforms, such as the Goods and Services Tax (GST), to simplify the tax structure and make it more investor-friendly.
• FDI Liberalization: The government has liberalized foreign direct investment (FDI) norms in several sectors, including defense, insurance, and retail, to attract more foreign investment.
• Insolvency and Bankruptcy Code (IBC): The government has implemented the Insolvency and Bankruptcy Code (IBC), which has made it easier for businesses to exit, and has increased investor confidence in the Indian economy.
• Production Linked Incentives (PLI): The government has launched the Production Linked Incentives (PLI) scheme to encourage manufacturing in India and make it more competitive globally.
• Easing of Business Regulations: The Indian government has eased several business regulations to improve the ease of doing business in the country and attract more private investment.
• Skill Development: The government has launched several initiatives, such as Skill India and Pradhan Mantri Kaushal Vikas Yojana, to develop the skills of the Indian workforce and make it more attractive to investors.

Facts for prelims: Steps taken by the government to encourage labour force participation of women

 Way ahead

• Focus on green transition: As the manufacturing and infrastructure growth are carbon-intensive, so it’s important to have a significant and simultaneous focus on green transition. Having a high sustainability quotient can only embellish India’s credentials as a production destination.
• For instance: Research suggests that between fiscals 2023 and 2027, over 15 per cent of India’s capex could be towards green initiatives involving renewable energy, transportation, altering the fuel mix, and green hydrogen. In the fragmented geopolitical milieu, which is shifting towards supply-chain diversification and friend shoring, India can attract foreign investments.
• Enhancing labour force participation of women: The labour force participation of women is falling. This will have to be reversed through employment policies and investing in the health and education of women.
• For instance: According to a World Bank report in 2018, India could add 1.5 percentage points to its GDP growth by improving the participation of women in its workforce.

Conclusion

• India is going to become a $5 trillion economy by fiscal 2029, given the current growth dynamics. However, the impact of climate risk mitigation will be felt across revenue, commodity prices, export markets, and capital spending. To win the growth marathon, India’s focus must be sharp on the drivers of pace.

Mains Question

Q. Highlight India’s growth prospects in the next five years? Discuss the significance of private investment for economic growth and enlist factors that holding back the private investment.

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