To Spur Investment, Fix Structural Issues

India’s earlier growth was a result of flourishing investments. Now, the economy is running on a single engine — consumption

- Duvvuri Subbarao

Three years ago, the Indian economy clocked a quarterly growth rate of over 9 per cent. Now, growth has slowed to nearly half that rate, printing at 4.7 per cent for the latest quarter (October-December 2019). Most estimates place growth for the current fiscal year, ending March 2020, at 5 per cent, and for 2020-21 at 6 per cent. This is an astonishing slowdown for a country that, until recently, enjoyed bragging rights as the fastest growing large economy in the world.

What explains this growth slump? Although there is a cyclical component, there is now consensus that the problem, at its heart, is largely structural. To understand the structural causes behind the slowdown, it is necessary at first to look back to the turn of the century, when an extraordinary investment boom set India off on a remarkable growth trajectory.

Investment boom

An important consequence of India’s momentous economic reforms in 1991 — which lifted controls on production and liberalised markets — was to unleash the huge reservoir of entrepreneurship that remained pent up for decades. As the economy gradually but surely broke out of the stranglehold of the proverbial “Hindu rate of growth”, entrepreneurs were hungrily scouting for investment opportunities. Meanwhile, a significant, albeit silent, consequence of the reforms was to remove the urban bias that had ruled economic management until then, and shift the terms of trade toward the rural sector. Rural incomes went up, pushing up demand for consumption goods, which in turn pushed up demand for investment.