11

RAKESH MOHAN and MUNEESH KAPUR

Pressing the Indian Growth Accelerator

Policy Imperatives'

Introduction
India's real GDP (gross domestic product) growth averaged almost
2003-04 to 2007-08,
9 per cent per annum during the 5-year period
and
but then growth slipped substantially, reflecting both domesticunder
global factors. Real GDP growth fell to 6.7 per cent in 2008-09quickly
but
the impact of the North Atlantic financial crisis (NAFC),
benefitting
rebounded to an average of 7.7 per cent during 2009-2012
monetary
from the unprecedented large and coordinated fiscal and
averaged
stimulus. However, subsequently (2012-2014), annual growth
volatility in international
under 5-6 per cent.? Softer global demand, domestic inflation,
financial markets on the back of the NAFC, higher
among the main factors that led to the
and governance issues have been
investment and growth deceleration. peculiar to
Slowdown in growth in the post-NAFC period is not
developing economies) have, as
India. Since 2012, EDEs (emerging and
and protracted manner. Growth
a whole, slowed down in a synchronised average in more than 70
pre-NAFC
rates since 2012 are lower than the
cent of the EDEs, which points to a broad-based slowdown (IME
per
b,c). However, the growth slowdown in India during 2012-2014
2014
been more severe than the group of EDEs, which would suggest that
has slowdown impact.
domestic factors have compounded the global environment, the strong
Going forward, given the adverse externalbe repeated in the EDEs
maynot
growth momentum of the 2000s
2-3 years even if the tavourable factor accumulation and
Over the next (Cubeddu et al., 2014).
to prevail
productivity growth of the 2000s were subdued, with growth rates less
Recovery in global trade is still very
 INDEPENDENCB UMA KAPILA (ED.)
INDIAN ECONOMY SINCE
318

than half those recorded in the1990s and 2000s up to therisis. There

'mediocre'
is a risk that the world could get stuck for sometime with a
level of growth (Lagarde, 2014), but also a perceptionthat the global
economy might see an extended period of secular stagnation (Summers
2013). Similarly, concerns have been expressed that, going forward, the
Indian growth rate is likely to be lower (IME 2014a; Nagaraj, 2013).
More generally, Pritchett and Summers (2014) argue that cross-country
analysis indicates that abnormally rapid growth is rarely persistent;
regression to the mean is empirically the most salient feature of
economic growth. In developing countries, episodes of rapid growth
are frequently punctuated by discontinuous drop-offs in growth and
accordingly, these authors expect that growth in China and India will be
much less rapid than is currently anticipated.
Recent economic developments augur well. Amongst the major
EDEs, sentiments have turned in favour of India: the IMF in January
2015 revised downwards its growth prospects for major EDEs other
than India, while keeping its growth outlook unchanged for India (IMF
2015). The subsequent upward revision in India's growth estimates by
the Central Statistical Organization (CSO) for 2012-2014 and the 7 per
cent plus growth in advance estimates for 2014-15 also provide grounds
for optimism for the scenario painted in this paper, but it will require
sustained policy efforts on a continuing basis. The Union Budget 2015
2016 (presented in February 2015) with its announced push towards
infrastructure investment, amidst continued fiscal consolidation, adds to
the realism of the scenario presented in this paper.
Against this backdrop, the key policy concern for India is: despite a
relatively adverse global environment, can growth be revived back to the
high growth phase of 2003-2008 in an environment of macroeconomic
and fnancial stability-low and stable inflation, moderate CAD (current
account deficit), moderate fiscal deficit and a strong financial sector?
These are the issues addressed in this paper, which is concerned with
painting a scenario whereby India can return to the golden growth
trajectory in the medium to long-term, exhibiting the kind of policy and
animal spirit synergies that characterised the 2003-2008 period. This
scenario assumes that some degree of normalcy will return to the global
economy, and that India also addresses its own growth impediments in
the next couple of years. The objective is to demonstrate that return to
a sustained high growth path is well within the realms of feasibility for
India, but it will require sustained policy efforts on a continuing basis.
Inorder to do this, it is helpful to understand the long-term growth
dynamics of the Indian economy since independence, the special
pRESSING THE INDIAN GROWTH... " RAKBSH MOHAN and MUNEESH KAPUR
319

features of the golden period of 2003-2008, and the contributing

domestic factors for the current slowdown (Section I). We then provide
one possible growth scenario for the medium and long-term (Section
II) and outline the key features of policy imperatives that are needed to
stimulate such sustained growth (Section IV).
The Indian Economy: AStory of Consistent Growth
India's growth since independence is often characterised as having
been slow tillthe late 1970s, with a pick-up in the subsequent period.
However, a closer look at the growth dynamics indicates a consistent
acceleration in growth since the 1950s, except for an interregnum during
1965-1981 (Mohan, 2011a).Industrial growth was not slow in the entire
30years after Independence as has often been believed. Stagnation only
set in during the mid-1960s (Table 11.1), There has been a continuing
and consistent acceleration in growth of services over the decades that
really accounts for the corresponding acceleration in overall GDP growth
(except for the 1965-1981 interregnum). There is nothing particularly
special about service sector growth during the 1990sand 2000s, except
that the acceleration over time has continued. The slowdown in growth
during the 1965-1981 period, 'the darkest in the post independence
economic history of India', can be attributed to the various restrictive
policy actions put in place during this period that effectively closed the
Indian economy and slowed down Indian economic growth, just when
various East Asian countries were opening up and accelerating their
growth (Panagariya, 2008).
The slowdown in growth witnessed during 1965-1981 was
reversed
during the 1980s, with the initiation of reform measures aimed at
increasing domestic competitiveness. Beginning in the early 1990s,
growth impulses gathered further momentum in the aftermath of
comprehensive reforms encompassing the various sectors of the
economy. These included: ex-ante real devaluation of the rupee in
1991, industrial deregulation, a significant opening of the
FDI (foreign direct investment) and foreign economy to
technology, gradual trade
liberalisation, substantial reduction in tax rates and rationalisation of
the taxation structure through the 1990s,
deregulation of interest rates.
reduction in statutory pre-emption, and improvement in the
fiscal interface.4 These reform measures were monetary
of enthusiasm by the private sector as greeted with a great deal
increases in its investment intentions. demonstrated tremendous
by
There was, however, some loss of the growth
latter bhalf of the 1990s which momentum in the
coincided with the onset of the East
 INDEPENDENCE UMA KAPILA (ED.)
INDIAN BCONOMY SINCB
320
(%)
(5.8)(2.4)
3.1 (5.2)
0.4 0.2 (7.1)(6.0)
(5.8) 6.2 (4.9)(1.3)
4.9 5.0
4.9 (5.9) 0.3 6.7 (-9.3)-3.2
-9.2 (-3.3)
2014
2012
4.6

20127.7 3.6 7.3 8.0 8.9 7.3 8.1 9.2

2008 8.6 7.6 10.1-9.0-3.0

200320088.7 4.9 8.8 9.7 9.8 8.8 7.5 5.8 16.2 5.5 10.0-5.4-0.3

1997
2003
4.6 5.0 -2.9-0.3
5.4 1.0 4.3 4.2 7.9 5.3 4.6 6.5 6.7

19975.7
1991 3.7 6.9 7.5 6.4 5.5 4.6 3.8 5.2 9.6 5.9 -2.4-1.0

Growth
1990
19915.3 4.0 5.9 4.8 6.1 5.5 4.5 3.4 13.6 10.310.0-2.9-3.0

11.1
Table
GDP
19905.4
1981
Real 3.5 6.9 6.4 6.4 5.6 4.2 7.2 6.2 6.8 11.6-3.0-1,8
base.
India's 2011-12
19813.2 2.1 4.1 3.9 4.2 3.2 3.2 5.3 3.9
1965 9.0 8.8 -1.5-0.6
with
series
1950
19654.1 2.9
6.6 6.6 4.9 4.3 3.7 6.6 6.9 3.8 8.9 -1.8-1.2
NASIndia,
new of
Bank
the
Merchandise
Account
Balance/GDP
on Reserve
based
Formation Current
Deficit/GDP
Account
Government
Consumption India;
are
Private
Consumption parenthesis
of
ltem Capital Government
Manufacturing
GDP
(market
prices)
GDP
(factor
cost)Agriculture WPI
Inflation
CPI
Inflation
fixed in
IndustryServices Figures
Gross CSO,

Memo: Note:Source:
1. 2. ii) iv)
3. 1. 2. i) ii)
3
PRESSING THE INDIAN GROWTH... RAKESH MOHAN and MUNEESH KAPUR
321

Asian financial crisis, setbacks to the fiscal correction process, quality

of fiscal adjustment, slowdown in agriculture growth affected by lower
than normal monsoon years, some slackening in the pace of structural
reforms, monetary tightening to contain inflation, and containment of
theexcessive enthusiasm and optimism with regard to investment plans
in domestic industry that had followed the 1991 deregulation. Then, as
in every episode of economicslowdown, it was the manufacturing sector
that was notable in exhibiting sluggish growth. In each episode, it was
the revival of manufacturing growth that then led to sustained overall
economicgrowth. We seem to be seeing a similar phenomenon this time
around, although there are some key differences as well.
The Golden Era of Growth: 2003-2008
After 2003-04, there was a distinct strengthening of the
growth momentum. Restructuring measures by domestic industry,
overall reduction in domestic nominal and real interest rates, fiscal
consolidation, improved corporate profitability, a benign investment
climate, strong global demand, and easy global liquidity and monetary
conditions all contributed to the high growth during 2003-2008. Growth
during this period was broad-based, with all the three key sectors
agriculture, industry and services-contributing to the momentum.
There was a marked acceleration in both public and private investment
in this period.
The progressive reduction in fiscal deficit freed up resources for
investment by the private corporate sector. This improvement was
underpinned by an improvement in gross tax/GDP ratio of the Central
government and containment of subsidies. Thus, the significantly higher
public sector and private corporate sector savings rates, in conjunction
with a broadly stable household savings rate, led to a substantial increase
in the overall savings rate of the economy, making more resources
available for the significant increase in domestic investment that
occurred.
It is also noteworthy that monetary management could succeed
in containing inflation during this period, despite an unprecedented
volume of inward capital flows. This was facilitated by the multiple
instrument approach, including innovations such as the market
stabilisation schemethat was used to sterilise the impact of large and
volatilecapital Aows (Mohan and Kapur, 2011). Notably, inflation during
this high-growth period was broadly similar to that in the preceding
period, even as global commnodity inflation was substantially higher
during this period. On the other hand, the increase in MSPs (minimum
 INDIAN BCONOMY SINCE
INDEPENDENCE UMA KAPILA (ED,)
322

Support prices) in respect of agricultural commodities during 2003-2008

was lower than that in 1997-2003, which in turn was lower than i
1991-1997. Thus, the government's agricultural support price policy was
favourable towards the objective of inflation control during 2003-2008.
although this policy might have also benefited from the generalised
lowering of inflation beginning in the latter half of the 1990s. The
financial sector also performed well, with continuous improvements in
asset quality and effciency indicators, thereby contributing significantly
to increased investment in the private sector (Mohan, 2011b).
Infrastructure investment was also stepped up by about one per
cent of GDP over the period, with the increase divided roughly equally
between the public and private sectors, thereby increasing the share
of private sector investment in infrastructure. A notable increase took
place in investment in roads, whereas that in the railways kept stagnant
as a share of GDP. Improvements in infrastructure then contributed to
the high growth in manufacturing and trade.
Consistent Growth in Savings and Investmnent
The secular uptrend in domesticgrowth since independence is clearly
associated with consistent trends of increasing domestic savings and
investment over the decades. Gross domestic savings increased from an
average of 11 per cent of GDP during 1950-1965 to over 33 per cent of
GDP in 2003-2008; over the same period, correspondingly, the domestic
investment rate also increased continuously from 12 per cent to 34 per
cent (Table 11.2). A significant feature that emerges from these trends
in savings and investment rates is that Indian economic growth has been
financed predominantly by domestic savings.
The recourse to foreign savings-equivalently, CAD-has been
rather modest in the Indian growth process. We may also
twodecades of the 1960s and 1980s, when the CAD increased note that the
marginaly
towards 2 per cent of GDP, were followed by significant BoPs (balance of
payments) and economic crises. The increase in the CAD in 2011-2013
led to similar difficulties. The long-term upward trends in
savings and
investment have, however, been interspersed with phases of stagnation,
influenced particularly by developments in government finances.
The Great Slowdown: 2012-2014
The growth slowdown during 2012-2014 has occurred after almost
adecade of consistent high growth, including a sharp recovery fromthe
2008-09 crises. This reflects a number of factors (Kapur and Mona
DDESSING THE INDIAN GROWTH... " RAKESH MOHAN and MUNEESH KAPUR
323

Table 11.2
Savings and Investment Rates
(per cent to GDP)

(% to GDP) 1950 1965- 1981- 1990- 1991- 1997 2003- 2008- 2012
Item 1965 1981 1990 1991 1997 2003 2008 2012 2013

Savings
1. Household Sector 7.0 10.8 13.3 18.5 16.5 21.0 23.2 23.7 21.9
(a) Household
Financial 2.1 3.9 6.6 8.5 9.7 10.0 11,2 9.8 7.1
(b) Household
Physical 4.9 6.9 6.7 10.1 6.8 11.0 12.0 13.9 14.8
2. Private Corporate
Sector 1.2 1.4 1.7 2.6 3.6 3.9 7.2 7.8 7.1
3. Public Sector 2.6 3.9 3.7 1.8 2.2 -0.3 2.9 1.2 1.2
(a) Public
Authorities 2.3 2.9 1.1 -1.1 -0.7 -3.6 -1.1 -1.7 -1.6
(b) Non-departmental
Commercial
Enterprises 0.3 1.0 2.6 2.9 2.9 3.3 4.0 3.0 2.8
4. Gross Domestic
Savings 10.8 16.1 18.7 22.9 22.3 24.5 33.3 32.7 30.1
Investment
1. Gross Capital
Formation 12.9 17.1 22.5 24.9 23.2 24.9 33.4 36.2 34.7
(a) Public
Sector 5.6 7.9 11.3 10.6 9.1 7.2 7.8 8.7 8.1
(b) Private
Corporate
Sector 2.4 2.3 4.5 4.3 7.3 6.3 12.5 11.6 9.2
(c) Household
Sector 4.9 6.9 6.7 10.1 6.8 11.0 12.0 13.9 14.8
2. Valuables 0.4 1.1 2.0 2.6
3. Errors &
Omissions -0.5 -0.3 -2.0 1.1 0.2 0.0 0.3 -0.5 0.1
4. Total
Investment 12.3 16.8 20.5 26.0 23.5 24.9 33.6 35.7 34.8
Saving-Investment Gap
Overall -1.5 -0.7 -1.8 -3.1 -1.2 -0.4 -0.4 -3.0
-4.7
Public Sector -2.9 -4.0 -7.7 -8.8 -7.0 -7.5 -4.9 -7.5 -7.0
Source: Central Statistical Organization,Government of India; Reserve Bank of India
 INDIAN ECONOMY SINCE INDEPENDENCE
" UMA KAPILA (ED)
324

2014). First, while the macroeconomic policy response to the NAFC

both monetary and fiscal policy--was admirably rapid, there was, at
least with hindsight, overshooting of the stimulus, which sowed the
seeds for inflation and current account pressures. Subsequent monetary
tightening , though somewhat tepid, then had the expected dampening
impact on economic activity and growth. The efficacy of monetary
policy to deal with inflation in this period was blunted by the persistent
inflation in food items, which required monetary policy to be ina
relatively tighter mode for a longer period (Anand and Tulin, 2014).
Second, the quality of the fiscal stimulus, which focused on tax
cuts and increased revenue expenditure (particularly in subsidies) while
keeping capital outlays stagnant, added to demand pressures, which were
then mirrored in high inflation. That the growth recovery in 2008-2012
was on steroids is reflected in the very large unprecedented growth in
the rate of government consumption (see Table 11.1). The withdrawal of
the fiscal stimulus has also been hesitant and slow. There was an attempt
to keep up public investment in roads and power through a step-up
in PPPs (public-private partnerships) along with the fiscal stimulus
in 2008-2010, but then a steep decline took place after that, thereby
contributing to the growth slowdown, particularly in manufacturing and
in key infrastructure sectors.
Third, the delayed and incomplete withdrawal of the fiscal stimulus
led to crowding out of the private sector, which might have also
hampered private corporate investment. The extraordinary growth in
gross fixed capital formation observed in 2003-2008 almost halved
in 2008-2012. Simultaneously, the high nominal
interest rate in an
environment of subdued growth also impacted corporate profitability
and investment. The availability of domestic resources for the
private
corporate sector was squeezed from all sides.
Fourth, the CAD widened well-beyond comfort levels by 2012-13.
The global environment has imparted headwinds: growth in
volume of
global exports of goods as well as goods and services' combined during
2012-2014 was almost a third of that during the 2003-2007 period,
which then impacted Indian exports and overall growth. High
inflation and negative real interest rates on deposits domestic
imports; incomplete pass-through of international crudeencouraged gola
oil prices to
domestic fuel prices led to greater demand for imported petroleum
products; and appreciation pressure on the real exchange rate from large
capital flows further added to CAD pressures.
Furthermore, in contrast
to previous episodes of large capital flows, there was little
foreign
exchange intervention: foreign exchange reserves were not increased
pRESSING THE INDIAN GROWTH... . RAKESH MOHAN and MUNEESH KAPUR 325

and the real exchange rate appreciated while the CAD Widened. In fact,
capital inflows were encouraged through continued opening of the
capital account, particularly to potentially destabilising debt flows.
Fifth, a key feature of the great slowdoWn is the near collapse ot
manufacturing growth in 2012-2014, which has been near zero during
this period (according to data on index of industrial production) an

almost unprecedented event for the Indian economy since independence.

This is difficult to understand since until 2012, manufacturing growth
averaged in exXcess of 8 per cent. Given the macroeconomic factors
outlined above-some monetary tightening, higher inflation, private
sector crowding out, slowdown in global demand and real exchange rate
appreciation, a slowdown would have been expected, but a collapse to
zero growth is puzzling. One additional factor for weak manufacturing
activity in this period is the emergence of policy bottlenecks, such as
obtaining environmental permissions, fuel linkages, or carrying out
land acquisition which led to stalling of a number of large projects.
This may in turn have discouraged new investment (Government of
India 2013), particularly in infrastructure projects and manufacturing.
Restoration of sustained high overall growth will be critically dependent
on reinvigoration of the manufacturing sector.
Some caution is however needed in analysing the recent industrial
performance based on the IIP (index of industrial production), given
that IIP data have indicated much lower growth than that indicated by
the Annual Survey of Industries (ASI) in the past few years.For example,
during2008-2012, the IIP indicated an annual average industrial growth
of 4.7 per cent, while the ASI data (net valued added adjusted for
wholesale price index (manufactured products) inflation indicated an
annual growth of 9.1 per cent. In 2012-13, on the other hand, the ASI
data indicate an even lower growth than the IIP L) 2.5 per cent versus
1.1 per cent]. ASI data for 2013-14 are not yet available.
The assessment of manufacturing growth (and overall real GDP as
well) has now been further complicated by the new series on National
Accounts Statistics (NAS) released in January 2015, with 2011-12 as the
base year. The revised NAS series indicates manufacturing growth of 6.2
per cent and 5.3per cent in 2012-13 and 2013-14, respectively, vis-à-vis
the estimates of 1.1 per cent and () 0.7 per cent in the earlier (2004-05
base) series (see Table 11.1). The difference is attributable to the chanmge
in the compilation methodology for manufacturing from the factory-level
value addition approach (based on ASI data) to the headquarter-level value
addition (based on the Ministry of Corporate Affairs database); the new
methodology now captures in-house services like marketing and presents
 INDIAN BCONOMY SINCE INDEPENDENCE
" UMA KAPILA (ED.)
326

full value of what that company is delivering (Sen, 2015). As noted earlier.?
a more thorough assessment of these growth dynamics and the intensity
of the slowdown would be possible once a consistent data series for the
earlier years is also available in the new series.
Al these macroeconomic and policy developments contributed to the
great slowdown during 2012-2014. Overall, the key policy messages from
the 2012-2014 slowdown reinforce the messages from the 2003-2008 high
growth phase: need for prudent fiscal policy, a low and stable inflation
environment, appropriate capital account management, maintenance of a
competitive real exchangé rate, and a focus on infrastructure investment.
The 2012-2014 episode also flags the issueof containing the CADwithin
prudent limits, although the CAD is ultimately a reflection of other
domestic macroeconomic and financial policies.

Getting Back to High Growth: A Simulation for 2017-2032

India reached a per capita GDP of around US$1500 and overall GDP
of about US$1.9 trillion in 2013-14. What should be our aspiration for
growth over the next couple of decades? Given the progress made over the
past two to three decades, it is not unreasonable to aim for doubling of per
capita income in each of the next two decades. That implies a per capita
annual growth rate of around 7 per cent on a sustained basis, and over
8 per cent per year for overasll GDP. Even then, Indian per capita income
would be around $6000(2011-12 prices) by 2035, and GDP would be in
the region of US$8.5 to 9trillion. Even if this relatively ambitious growth
path is achieved, India's GDP in a couple of decades would be just over a
half of US GDP today, and per capita income would be about 12 per cent
of the current US level. Thus, the aspiration of such a growth objective
should be seen as a reasonable but ambitious one. But is it feasible?
Placed in a historical and comparative perspective, it can be noted
that, broadly speaking, East Asia's GDP increased ten-fold over about 30
years (1975-2005). If India achieves the kind of growth outlined above
for a similar period of three decades, it would also achieve a comparable
expansion. There are only a handful of countries that have achieved
sustained growth over such long periods and thereby succeeded in
escaping the `middle income trap'. Thus, given the continuing high levels
of poverty in India, it is essential that we persist in our efforts to do so,
but recogise that such a sustained high growth cannot be taken for
granted:it will need sustained efforts.
Going forward, for annualised GDP growth to return to around
8-9 per cent, it is apparent, and consistent with the messages from
the overview in the previous section, that both domestic investment
PRESSING THE INDIAN GROWTH... RAKESH MOHAN and MUNEESH KAPUR
327

and saving levels will have to increase significantlyfrom their current

somewhat depressed levels. One such consistent scenario for growth
and corresponding savings and investment levels has been put out by
the National Transport Development Policy Committee (2014) in its
recent India Transport Report: Moving India to 2032. The simulations
reported here are essentially taken from this Report.6 The simulations
rely on the fundamental accounting identity of standard national
income accounts, and include detailed information on key items such
as investment and consumption/savings (disaggregated into public and
private components) and net exports/imports. Projections of these
components, in turn, are based on past relationships and trends, while
also taking into account the government's announced medium-term
fiscal plans. They are also conditioned on the expected practice of sound
macroeconomic and financial policies. The growth and investment
relationship draws upon historical productivity estimates reflected in
incremental capital output ratios, supported by estimates on TFP (total
factor productivity) that has been achieved in recent years. Implications
of the investment and growth projections for BoPs--both current and
capital accounts--and the overall external sector sustainability are also
factored in, while also imposing a cap on the recourse to sustainable
foreign savings. The projections are the preferred point estimates,
picked following consultations with a broad range of stakeholders in
government and in the private sector (NTDPC, 2014).
The projections aim to provide a consistent macroeconomic
framework and their implications for returning Indian annual GDP
growth to around 7 per cent in the near future and then ascending to
8-9 per cent in the following quinquennial periods from 2017-2032.
The results then provide some assessment of the feasibility of achieving
such a growth objective, should the return to such a growth path be seen
to be within the realms of reality? Another way of interpreting these
projections is to see the results as implications of achieving such a high
macroeconomic
growth path: what they imply for the evolution of key
variables.
capital formation)
This scenario entails the GDCF (gross domestic
toaround 39 per cent
rate to increase from about 35 per cent in 2012-13
period 2027
during 2017-2022 and further to 43 per cent by the 5-year about 36 per
savings would be
Z032. The corresponding rates of domestic
cent during 2027-2032. These
Cent during 2017-2022, rising to 41 per major components of
Projections envisage an increase in all the three
Savings-household, private corporate and public savings (Table 11.3).
 INDIAN BCONOMY SINCE INDEPENDENCE " UMA KAPILA (ED.)
328

Table 11.3
Savings and Investment Rates: Projections
(Per cent to GDP)
2007-08 2012-13 2017-18 to 2022-23 to 2027-28 tto
2021-22 2026-27
2031-32
Actuals Projections
Gross Domestic Savings 36.8 30.1 35.9 38.6 40.9
1. Household Sector 22.4 21.9 24.5 26.3 27.9
(a) Household -
Financial 11.6 7.1 11.4 12.3 13.0
(b) Household -
Physical 10.8 14.8 13.1 14.0 14.9
2. Private Corporate
Sector 9.4 7.1 8.5 9.1 9.6
3. Public Sector 5.0 1.2 2.9 3.2 3.4
(a) Public Authorities 1.1 -1.6 -1.2 -1.2 -1.3
(b) Non-departmental
Commercial Enterprises 3.9 2.8 4.1 4.4 4.7
Gross Domestic
Capital Formation 38.1 34.8 38.9 41.1 43.3
(a) Public Sector 8.9 8.1 10.0 10.0 10.0
(b) Private Sector 29.2 26.7 28.9 31.1 33.3
Memo:

Foreign Savings
(CAD) 1.3 4.7 2.5 2.5 2.5
Capital Flows, Net 8.6 4.8 4.3 4.3 4.6
(a) Foreign Investment,
Net3.5 2.5 2.7 2.7 2.9
(i) Direct Investment 1.3 1.1 1.7 1.7 1.9
(ii) Portfolio Investment 2.2 1.4 1.0 1.0 1.0
(b) Debt and Other
Flows, net 5.1 2.3 1.5 1.6 1.8
(i)Disbursemnents 4.0 4.2 4.3
(ii) Repayments 2.4 2.5 2.5
Foreign Exchange Reserves
(a) Increase 7.4 0.2 1.8 1.9 2.1
(b) Stock 25.0 15,7 18.8 20.3 22.0
External Debt 18.0 21.0 22.6 22.1 21.8
of which: Short-term 3.7 5.2 4.0 4.3 5.1
Debt Service 3.6 3.8 3.8

Source: RBI; National Transport Development Policy Committee (2014).

While the projections may seem ambitious, they appear to be

reasonable and achievable, given that the domestic savings rate and the
pRESSING THE TNDIAN GROWTH... RAKESH MOHAN and MUNEESH KAPÚR
329

investment rate had reached as high as 37 and 38 per cent, respectively,

in 2007-08. The fact that Indian savings and investment rates have
exhibited a secular uptrend since independence, although interspersed
with some short periods of stagnation, also provides comfort in the
Jikelihood of reaching the projected savings and investment rates. Or
course, these projections are contingent on the pursuit of sound and
stable macroeconomic and financial policies and continuing structural
reforms, as elaborated in the rest of the paper. In this scenario, the
absorption of external savings has been kept at around 2.5 per cent of
GDP throughout the period, which is judged to be consistent with a
sustainable CAD. We draw out the implications of this on the trajectory
of BoPs, capital filows, and desired foreign exchange reserves.
What do the projections imply for overall efficiency of the economy?
One crude measure of productivity is the ICOR (incremental capital
output ratio). International experience suggests that the best ICORs
achieved for any sustained period fall in the region is about 3.5 to 3.6.
Indian ICORs have ranged between about 3.5 and 4.5 for much of the
past three decades (Figure 11.1 and 11.2). Our projections embedded
in the desired growth paths of GDP and GDCF imply an ICOR of about
4.2 over the next couple of decades. We are therefore assuming a
relatively high level of effciency in resource use, but which is consistent
with Indian historical achievements and also other recent evidence on
productivity. For example, according to estimates in RBI (2014), the
trend rate of growth in TFP of the overall economy increased from 1.1
per cent per annum during the 1980s and 1990s to 2.3 per cent during
the 2000s (2000-01 to 2008-09), led by manufacturing and service
sectors (Figure 11.2). Overall, the contribution of TFP growth to real
GDP growth increased from 21 per cent during the 198Os and 1990s to
30per cent during the 2000s. For the next two decades, we can expect
the TFP growth tobe at least of the same order as was recorded during
the 2000s. If infrastructural shortages are addressed satisfactorily,then
TFP growth can easily exceed the one estimated for the 2000s, which can
provide an upside boost to growth prospects.
Even with relatively optimistic agriculture growth scenarios of
around 4 per cent per year, overall GDP growth rates in excess of 8 per
cent are really not possible to achieve without a very major restoration
of manufacturing growth in India to annual growth rates approaching
a sustainable 10 per cent. Even with such an optimistic manufacturing
growth scenario, the share of manufacturing in Indian GDP would not
exceed 15 per cent, while agriculture can be expected to fall below 10 per
cent, in 20 vears, Whereas such a high rate of manufacturing growth was
indeed achieved during 2005-2008, it has since tapered off and collapsed
 INDIAN BCONOMY SINCE INDEPENDENCE " UMA KAPILA (ED)
330

to almost zero during 2012-2014. The achievement of the kind of growth

projected here is thus critically dependent on the revival of competitive
Indian manufacturing in a sustained fashion over the next couple of
decades.
Flgure 11.1
Incremental Capital Output Ratios
14 ¬
12

10

1980s 1990s 12000s

Note: Incremental capital output ratio is computed as the ratio of average investment rate to average
annual growth during the specific period.
Source: World Economic Outlook Database (April 2014), International Monetary Fund.

Figure 11.2
Estimates of Total Factor Productivity Growth
6.9

4
Percent 2.8
1.8 1.72.1 2.3
0.7 1.1 1.1
0.2 0.0

-2 -0.7
-1.6
-4

-6
Agriculture -4.2

1980-81 to 1999-2000 2000-01 to 2008-09

Source: RBI (2014).

PRESSING THE INDIAN GROWTH... RAKESH MOHAN and MUNBESH KAPUR 331

Financing Growth
Domestic Savings
We first examine how the investments projected could be financed.
We begin by assessing the way different constituents of savings can be
expected to behave: household savings, private corporate sector savings
and public sector savings. Household savings have been the bedrock of
domestic savings in India, exhibiting a steady increase over the years.
They reached about 21 per cent of GDP during 1997-2003 and ascended
further to just under 24 per cent during 2008-2012. We have therefore
projected a slow increase to about 28 per cent by 2027-2032. From
the point of view of financing of investment by the public and private
sectors, it is the household financial savings that are important. Net
household financial savings increased from about 6-7 per cent of GDP
during the 1980s to about 10 per cent in the 1990s, stabilising at this
level thereafter. It is only in the very rècent years that they have again
fallen to around 7 per cent, as savings appear to have been directed to
gold. In the near future, we expect financial savings to be restored to
the earlier 10 per cent level, as inflation subsides, monetary conditions
stabilise and households begin to obtain positive real interest rates on
their deposits and other financial savings. Financial savings are then
projected to increase gradually to around 13 per cent by 2027-2032. This
would appear reasonable with increased financial depth and inclusion
in the economy as income increases at the kind of pace projected. We
would, in particular, expect increasing shares of savings going into
contractual saving such as insurance, provident and pension funds.
This tendency should get accentuated as urbanisation gathers pace and
people have to insure themselves for their retirement. The unfolding
demographic structure is also conducive to savings.
Adistinguishing feature of the golden era of growth (2003-2008)
was the dramatic increase in private corporate savings from 3.9 per cent
of GDP during 1997-2003 to about 7.8 per cent during 2008-2012. It was
the buoyant profitability of that period and high corporate investment
levels that induced the private corporate sector to keep such high levels
of retained earnings-or we could reverse the causation: it was the high
levels of proftability that allowed high retained earnings that helped
greatly in financing high levels of corporate investment. Restoration
of private corporate investment will critically need enhancement of
profitability so that private corporate savings again reach their earlier
level of 7.5 per cent of GDP within th¹ next 3-4 years. We have then
projected them to increase to 9.5 per cent by 2027-2032.
 INDIAN BCONOMY SINCE INDEPENDENCE . UMA KAPILA (ED.)
332

It is necessary to restore confidence in future Indian growth for

corporate investment to increase again in the next couple of years.
This brings us to the desired trajectory of public sector savings, which
consist of two broad categories: public authorities and non-departmental
commercial enterprises. Public authorities include government
administration and 'departmental enterprises', which are essentially
commercial government enterprises that are not corporatised (e.g.
railways), and 'non-departmental enterprises' are the corporatised
public sector enterprises. As a consequence of the fiscal stimulus of
2008-09, savings turned distinctly negative after having become mildly
positive at 0.5 per cent of GDP in 2007-08, which was a remarkable
turnaround from ()5 per cent in 2000-01. This broadly corresponds to
the revenue deficit of the Centre and States combined. Interestingly,
both departmental and non-departmental public enterprises have
maintained consistent positive saving rates of between 3.5 and 4.5 per
cent of GDP over the past decade and a half. With the slow unwinding
of the fscal and revenue deficits, government savings have
remained
in negative territory, though some improvement has taken place in the
last couple of years. With such a correction, not only will public sector
savings improve but the crowding out of the private sector would also
be reversed. It is essential that the envisaged fiscal correction does take
place over the next 2-3 years: as the revenue deficits of both central
and state governments approach zero, government savings could
again
attain positive levels as in 2007-08. Only then will it become feasible
for private sector investment to increase to the magnitudes projected.
Accordingly, we have projected overall public sector savings to increase
from the current level of just over 1 per cent of GDP to 3 per cent in
2017-2022, rising to 3.4 per cent by 2027-2032. It is possible that even
greater improvement can take place, particularly if the overall tax/GDP
ratio can be improved over the years.
The plausible projections of savings enhancement made above in
each of the three main segments: the household sector, the private
corporate sector, and the public sector, yield a good possibility of gross
domestic savings increasing from the current 31-32 per cent level to
about 36 per cent in 2017-2022 and 41 per cent in 2027-2032.

External Savings
In recent years, there has been a great deal of stress laid on
mobilising external savings to finance Indian investment for growth,
particularly in infrastructure. In estimating the maximum feasible level
of external savings that can be mobilised to finance overall investment
pRESSING THE INDIAN GROWTH... RAKBSH MOHAN and MUNEESH KAPUR
333

in India, it is important that such external capitalflows should be

sustainable from the point of view of servicingsuch inflows over tine.
This was done in the National Transport Development Policy Committee
(NTDPC) modeling framework by utilising a debt sub model which
projects the implications of debt flows servicing needs over time. For
a country with an increasing size of its economy as projected, even
relatively small proportions of its GDP start assuming large absolute
magnitudes from the point of viewof international capital markets.
Net capital flows that are absorbed by the economy as a whole are
identically equal to the CAD. Considerations for sustainability indicate
that the CAD should not exceed around 2.5 per cent of GDP on a
continuous basis. As the CAD increased to levels exceeding 4 per cent of
GDP in 2012-13, we have already seen the kind of instability that can be
caused by adverse developments in international financial markets.
Indian exports have grown at a healthy pace since 2002, significantly
faster than world exports. In fact, the total exports of goods and services
almost doubled as a share of GDP between 1998-2002 and 2008-2012,
reaching a level of about 22 per cent of GDP. Except for 2008-09 and
2009-10, which were crisis years for global trade, Indian exports of
goods and services have been growing at 20-25 per cent per year since
2002. In view of the protracted current slowdown in global trade, and
the low probability of a revival of the high growth rates achieved earlier,
we are projecting a relatively slower pace of growth at 11-12 per cent
between 2017 and 2032. Even at this pace, exports of goods and services
would increase from the current level of about 25 per cent of GDP to
about 30per cent of GDP in 2017-2022 and 38 per cent in 2027-2032.
By way of comparison, the current level of exports of goods and services
of China amounts to about 31-32 per cent of its GDP. Imports of goods
and services are projected to grow correspondingly while keeping a
sustainable level of CAD at about 2.5 per cent of GDP. Such projections
of exports and imports will not be feasible without the corresponding
growth in all aspects of investment in transport, logistics, ports and
airports.
As India's external account expands in the manner projected, and
as India's economy and its financial markets become more open, it will
be necessary to build foreign exchange reserves in a prudent manner,
so that financial stability can be maintained even in the face of the
inevitable capital flow volatility. Foreign exchange reserves have been
posited to be maintained at alevel of about 6months of imports of goods
and services on a consistent basis. The projections suggest that this
would imply an increase in foreign exchange reserves from the current
 INDIAN BCONOMY SINCE INDEPENDENCE " UMA KAPILA (BD.)
334

16 per cent of GDP to about 19-20 per cent in 2017-2022 and rising
to
22 per cent in 2027-2032 (At present, Chinese torex reserves amount
to about 18 months of imports and 41% of GDP). Such an expansion of
reserves would also be consistent with the required expansion of base
monev, the RBIs balance sheet, which is necessary to fuel the monetary
expansion consistent with GDP growth. Thus, the consistent need for
accretion to forex reserves implies that net capital flows will need to he
in the region of about 4.5 per cent of GDP during 2017-2032, if the CAD
is kept at a level of about 2.5 per cent of GDP. This would allow annual
reserve accretion amounting to about 2 per cent of GDP over the period
In absolute terms, the implications of such a scenario are that net
annual
capital Aows will need to be about $135 billion in 2017-2022, rising to
about $330 billion in 2027-2032 (at 2012-13 prices). From an
extemal
sustainability point of view, and given the more volatile nature of debt
flows, the projections assume that the equity component will dominate,
at 60-65 per cent of net capital flows, with debt flows (35-40%) being
the residual. These proportions are also broadly consistent with the
prevailing debt equity ratios in the Indian corporate sector.
The key lesson from this exercise is that even if the CAD is kept at
a modest range of around 2.5 per cent of GDP, total net capital flows
that will be needed amount to large and growing
magnitudes over the
medium-term. There will, therefore, be a need to ensure high external
confidence in the Indian economy so that such external capital flows are
forthcoming.
Infrastructure Investmnent
Achieving a high sustained rate of economic growth requires
corresponding investments in infrastructure, including all aspects of
transportation. If industrial growth is to be ratcheted up to growth rates
of around 10 per cent, and if there is to be the kind of trade growth
projected, the demands for the provision of power, transportation and
logistics will also grow commensurately. The continued expansion of
trade requires corresponding investments in ports, airports, and in all
forms of domestic transport linkages.
With this perspective in view, infrastructure investment will need
to pick-up significantly in the coming years for stable and sustainable
growth. NTDPC (2014) projects that overall infrastructure investment
will need to increase substantially from around 5.4 per cent of GDP
in 2011-12 to around 8per cent during the 2020s and beyondlevels
consistent with the economic growth and transformation experiences
of South East and East Asian countries (Tables 11.4 and 11.5). It had
PRESSING THE INDIAN GROWTH... " RAKESH MOHAN and MUNEBSH KAPUR
335

Table 11.4
Infrastructure Spending: 2006-2012
2006-07 2007-08 2010-11 2011-12
2008-09 2009-10
Infrastructure (Rupees billion -current prices)
Total 2149 2586 3574 4031 4516 4891
Public Sector 1588 1910 2292 2544 2680 2890
Private Sector 560 676 1282 1486 1836 2001
Infrastructure (USD billion)
Total 47 64 78 85 99 102
Public Sector 35 47 50 54 59 60
Private Sector 12 17 28 31 40 42

Infrastructure (per cent to GDP)

Total 5.0 5.2 6.3 6.2 5.8 5.4
Public Sector 3.7 3.8 4.1 3.9 3.4 3.2
Private Sector 1.3 1.4 2.3 2.3 2.4 2.2

Infrastructure (per cent to GDCF)

Total 14.0 13.6 18.5 17.1 15.9 15.3

Public Sector 10.4 10.0 11.9 10.8 9.4 9.0

Private Sector 3.7 3.6 6.6 6.3 6.5 6.3

Infrastructure (per cent to total)

Total 100.0 100.0 100.0 100.0 100.0 100.0

Public Sector 73.9 73.9 64.1 63.1 59.3 59.1

Private Sector 26.1 26.1 35.9 36.9 40.7 40.9

Memo:
Infrastructure (Rupees billion-constant 2004-05 prices)
Total 1980 2286 3005 3239 3472 3585

Public Sector 1459 1682 1914 2027 2105 2098

Private Sector 521 604 1091 1239 1514 1656

Source: National Transport Development Policy Committee (2014).

indeed reached 6.2-6.3 per cent in 2008-2010. So, aiming for 7 per cent in
the medium-term and ascending to 8 per cent later is realistic. While an
increasingproportion of infrastructure investment could be undertaken
by the private sector, the public sector will have to continue to play the
predominant role, The share of public sector in infrastructure investment
isprojected to be around 57 per cent of the total infrastructure spending
cent.
in 2017-2022, somewhat lower than the current estimate of 60 per
In view of the difficulties that have now emerged with regard to the
 INDIAN BCONOMY SINCE INDEPENDENCE UMA KAPILA (ED.)
336

implementation of PPP projects, and their financing, it is possible that

the role of public investment in infrastructure may need to be higher
than what is projected here." Even if that happens, it is important that
such investments are made remunerative with high economic returns
(Lall, 2015).
Table 11.5
Infrastructure Investment: Projections
Per cent to GDP
Sector 2007-08 2011-12 2017-18 to 2022-23 to 2027-28 to
2021-22 2026-27 2031-32
Actuals
Projections
Infrastructure - Total 5.2 5.4 8.1 8.1 8.1
Electricity, Gas, Water 2.0 2.1 2.8 2.8 2.8
Supply
Railways 0.4 0.3 1.1 1.2 1.2
Other Transport 1.0 1.1 1.3 1.3 1.3
Roads and Bridges 1.1 1.2 1.3 1.2 1.2
Storage 0.0 0.0 0.0 0.0 0.0
Communications 0.7 0.7 1.6 1.6 1.6
Infrastructure- Public 3.8 3.2 4.5 4.4 4.3
Sector
Electricity, Gas, Water 1.7 .1.6 2.0 2.0 2.0
Supply
Railways 0.4 0.3 1.0 1.0 1.0
Other Transport 0.4 0.1 0.3 0.3 0.3
Roads and Bridges 1.1 1.0 0.9 0.8 0.8

Storage 0.0 0.0 0.0 0.0 0.0

Communications 0.2 0.0 0.3 0.3 0.3
Infrastructure - Private 1.4 2.2 3.7 3.8 3.8
Sector

Electricity, Gas, Water 0.2 0.5 0.8 0.8 0.8

Supply
Railways 0.0 0.0 0.1 0.2 0.2
Other Transport 0.6 1.0 1.0 1.0 1.0
Roads and Bridges 0.0 0.1 0.4 0.4 0.4
Storage 0.0 0.0 0.0 0.0 0.0
Communications 0.5 0.6 1.3 1.3 1.3
Source: National Transport Development Policy Committee (2014).
PRESSING THE INDIAN GROWTH... RAKESH MOHAN and MUNEESH KAPUR
337

Sector-wise, the public sector is expected to continue to be the

and roads and
leading investor in sectors such as electricity, railways,
bridges, while the private sector would be the driving force in the
'communications' sector, and in ports and airports. For the public sector
indicated earlier,
to carry out the enhanced role, fiscal consolidation. as
assumes importance.
Significant success has been achieved in ramping up investment in
2000.
roads over the past two decades, and particularly since the year
The joint initiation of the National Highways Development Project
(NHDP) and the Prime Minister's Gram Sadak Yojana (PMGSY) has
on the
since 2000 improved road connectivity between major cities
contributing to
one hand, and within rural areas, on the other, thereby
economy as a
the productivity enhancements that have benefitted the
of GDP in
whole. Overall investments in roads tripled from 0.4 per cent
the late 1990s to around 1.2 per cent by the late 2000s.
Indian railways in
There is now aclear need for raising the share of the current
manner from
total infrastructure investment in a similar
and above by 2017
level of about 0.4 per cent of GDP to 1 per cent next decade and a
least the
2022 and continuing at similar levels for at
the manufacturing
half. This is essential for improving productivitytoofports to aid in the
sector overall and for linking inland nodes
sustained growth required in trade, both exports and imports. Aspecific
is to enable the
requirement for the expansion of railways capacity
iron ore and steel in the
transportation of bulk freight like coal and
economic growth. With
volumes that will be necessary to fuel overall
GDP being about unity, the
power demand elasticity with respect to four fold, along with the
generation of power will need to increase composition
Given the
projected GDP over the next couple of decades. significant substitution
allowing for
of India's energy sources, and even generation will imply an increase
away from coal, such growth in power by at least a factor of three. With
coal
in the corresponding demand for utilised already, it is clear
railways freight capacity being almost fully
enhancements are needed in the carrying capacity of Indian
that major has transformed the Indian road
railways. Thus, just like the NHDP
programme for DFCs (dedicated freight corridors) needs
system, the programme. Corresponding investments
a similar focused investment infrastructure significantly for the
will also be needed to expand port
commodities, both oil and coal, along with
enhanced import of energy
containerised freight. between efficient transport
symbiotic relationship
There is a of growth projected
kind
provision and industrial growth. Thås, the
 INDIAN ECONOMY SINCE INDEPENDENCE " UMA KAPILA (ED.)
338

willnot be possible without enhanced infrastructure spending, and the

enhanced infrastructure spending will be infructuous if manufacturing
growth does not accelerate significantly. Total investment in transport,
both public and private, would need to increase from about 2.6 per cent
during the 11th Five Year Plan to about 3.3 per cent of GDP during the
2030s, with public sector component being 2.1- 2.2 per of GDP and the
private sector investment component at around 1.5-1.6 per cent of GDP.
The much enhanced level of investment in roads over the past decade or
so relative to previous periods demonstrates that it is possible to achieve
such an accelerated growth in a short period of time.
Policy Imperatives for Getting Back to the High Growth Path
The objective of taking growth back to around 9 per cent and
the required increase in savings and investment rates
will need very
significant policy reform in a range of different activities. That such
reform has been carried out on a relatively
the early 1980s, intensifying in the 1990s and
continuous basis since
infrastructure sector since the mid-1990s, givesaccentuated
in the
confidence in the
potential ability of the country's policymaking system to rise to the
challenges of the future. In principle, Indian institutional capacity for
governance and reform has exhibited considerable resilience, although
the institutional development and
reform needed to get to the next
steps in the ladder towards achieving middle
much higher order than that achieved in the past.income status will be of a
We focus on five key areas of policy
finances have to be brought back to an evenaction.
keel so
First, Indian public
becoming available for increased public investmentthat in
resources start
Most attention in this area is typically
devoted
infrastructure.
to containment of the
fiscal deficit through expenditure
current expenditures, particularly containment.
We argue that, while
those on subsidies, do need to be
contained, it is now time to give as much attention to
through enhancement of the tax-GDP ratio. Second,increase revenues
both household and corporate, need to be private savings,
brought
levels. A sustained reduction in inflation that back to their earlier
of low nominal interest rates, but leads to the maintenance
positive real interest rates, will help in
restoring corporate profitability, while encouraging household
towards financial instruments. savings
Third, the external account has to be managed on a
so that external savings can be attracted in continuous basis
adequate magnitudes, while
ensuring external stability, and maintaining a competitive real exchange
rate. Fourth, recognising that there has been a significant
slowdown
 GROWTH...
PRES.ING THE INDIAN RAKESH MOHAN and MUNEESH KAPUR 339

in manufacturing growth, specific measures need to be taken to revive

manufacturing and then accelerate competitive manufacturing activity.
There has to be a much greater focus on labour using
manufacturing
to take advantage of the expected shift of such manufacturing away
from China in the coming years. Finally, it must be recognised that
the achievement of high sustained economic growth, particularly in
manufacturing, is not feasible without a step up in infrastructure
investment, particularly in transport with an emphasis on the railways.
We now turn to elaboration of each of these areas.

Public Savings and Fiscal Policy

Fiscal consolidation is necessary for sustained growth in an
environment of macroeconomic and financial stability. A key factor that
bas led to adecline in the domestic savings rate since the NAFC has been
the increased revenue deficit of the Central government (Table 11.6).
Table 11.6
Fiscal Position of the Central Government
(Per cent to GDP)
Item 2007- 2008- 2009 2012 2013 2014- 2015
08 09 10 13 14 15 16

1. Gross Fiscal Defcit 2.5 6.0 6.5 4.8 4.4 4.1 3.9

2. Gross Primary Deficit -0.9 2.6 3.2 1.8 1,1 0.8 0.7

3 Revenue Deficit 1.1 4.5 5.2 3.6 3.1 2.9 2.8

4 Revenue Receipts 10.9 9.6 8.8 8.7 8.9 8.9 8.1
a) Gross Tax 11.9 10.8 9.6 10.2 10.0 9.9 10.3
b) Non-Tax Revenue 2.1 1.7 1.8 1.4 1.8 1.7 1.6
5. Capital Receipts 3.4 6.1 7.0 5.8 5.0 4.5 4.4
6 Total Receipts 14.3 15.7 15.8 14.5 13.9 13.4 12.5
7 Revenue Expenditure 11.9 14.1 14.1 12.3 12.1 11.8 10.9
a)
Interest Payments 3.4 3.4 3.3 3.1 3.3 3.3 3.2
b) Subsidies 1.4 2.3 2.2 2.5 2.2 2.1 1,7
8. Capital Expenditure 2.4 1.6 1.7 1.6 1.7 1.5 1.7
a) Capital Outlay 2.1 1.4 1.5 1.4 1.5 1.3 1.5
9. Total Expenditure 14.3 15.7 15.8 13.9 13.7 13.3 12.6
Note: Data for 2014-15 and2015-16 are revised estimates and budget estimates, respectively.
Ratios with respect to GDP for 2007-08 to 2009-10 are based on the 2004-05 base GDP seriee
while those for 2012-13 to 2015-16 are based on the new GDP series (2011-12 base)
Source: RBI and Union Budget documents.
 INDIAN BCONOMY SINCE INDE PENDENCE UMA KAPILA (ED.)
340

The government reaffirmed its commitment, in the

2015-16, to pursue fiscal consolidation, by reducing the Union Budget
fiscal defc's
to 3.0 per cent of GDP by 2017-18. The aim must be to eliminate the
revenue deficit completely and then mnove towards a small surplus Ie
would then be possible to limit government borrowing exclusively for
public investment purposes in both social and physical infrastructure
This would be critical to enable domestic savings to finance
growth of 9
per cent and above in asustainable manner.
The increase in subsidies, from 1.4 per cent of GDP in 2007-08 to 2.5
per cent in 2012-13 has been a key component of the increased revenue
deficit (Table 11.6). Enhanced fuel subsidies to kerosene, diesel and LPG
constituted the main component of this increase. The policy objective
must be to bring back overall subsidies to be in the region of about one
per cent as has been achieved earlier. Such a move would free up around
1to 1.5 per cent of GDP for public investment in infrastructure.
The government completed the process of eliminating diesel
subsidies in an incrementalmanner and announced deregulation of diesel
prices in October 2014; a similar process could be followed for reducing
or eliminating LPG subsidies. The sharp drop in the international crude
oil prices in late 2014, if sustained, should facilitate an accelerated
adjustment in this direction. The phased elimination of such subsidies
would also allow for a more efficient use of petroleum products. The
challenge will be the maintenace of deregulated prices when oil prices
rise again. The demand for petroleum products is generally adjudged to
be relatively price inelastic. In the Indian context, the problem has been
compounded by the relatively sticky administered prices. However, the
empirical evidence in Kapur and Mohan (2014) shows that demand for
oil in India does respond to prices in a significant manner: the estimated
price elasticity of demand for petrol is ( 0.66, for diesel is (-) 0.36 and
for kerosene oil is () 0.54. Thus, the elimination of fuel subsidies will be
beneficial for growth in a number of different ways:
Reduction in revenue deficit, leading to increase in government
savings, and reduction in the crowding out of the private sector;
Sustained reduction in the CAD as a result of reduced demand
for fuel;
Higher overall efficiency in the use of energy, and hence in
overall economic activity; and;
Provide more resources for growth-enhancing public
investment in infrastructure. In this context, the decision of the
government in January 2015 to increase the basic excise duty
PRESSING THE INDIAN GROWTH... RAKESH MOHAN and MUNEESH KAPUR
341

by {2 per litre on both petrol and diesel to fund infrastructure

projects, especially roads, is also a welcome step.
The second issue with respect to fiscal policy is that the recent
fscal consolidation efforts have been focused excessively on reduction
in expenditure, and particularly in capital expenditure. Consequently,
revenueexpenditure has increased. This needs to be reversed.
Improving Tax/GDP Ratio
On the revenue side, the gross tax/GDP ratio of the Centre has
recordeda significant fall from its peak of 2007-08 of 12 per cent, to 10
per cent in 2013-14 reflecting the stimulus measures and weakening of
economic activity. The revenue receipts (net)/GDP ratio of the Central
government is now below the levels prevailing in the late 198Os
reflecting the lower tax revenues as also perhaps more devolution to
States (Figure 11.3).
Figure 11.3
Central Government Revenues
13

12

A 11
10

12010-11 J2014-15
1996-97
1994-95 1998-99 2002-03
2000-01 2004-05 2008-09 2012-13
2006-07
6

swwKASEKKYOSs taxes Revenue receipts, net

Cross-country analysis indicates that the general government

its per
revenue/GDP ratio in India is quite low, even taking into accountdeclined
ratio in Indiahas
capita income (Figure 11.4). The revenue/GDP EME
in other major
since the NAFC, even as this ratio has increased
regions.