In Retrospect

Not Ticking the right boxes

At a time when recession looms large across the world, India should turn inwards — increase public expenditure to boost demand, incentivise household savings to generate investments and harness its rich domestic market to the economy’s advantage

Not Ticking the right boxes

India’s gross domestic product (GDP) growth rate fell for the second straight quarter in the October-December period, coming in at 4.4 per cent, the Ministry of Statistics and Programme Implementation said. At 4.4 per cent, the latest quarterly growth number is lower than the 6.3 per cent growth that was recorded in the second quarter of 2022-23, which itself was less than half the 13.2 per cent increase posted in April-June 2022. The second advance estimate released by the government on February 28 has retained India’s full-year GDP growth estimate of 7 per cent for 2022-23. The ministry also released the revised estimate of economic growth for the financial year 2021-22, at 9.1 per cent. It was estimated at 8.7 per cent in May last year. 9.1 per cent growth in GDP during 2021-22 in real terms would be around 1.9 per cent growth if compared to the pre-pandemic (FY 2019-20) GDP of India. Nonetheless, the economic turnaround would look noteworthy if we recall that two years ago, during the pandemic, the Indian economy had contracted 6.6 per cent in 2020-21. Thus, output recovery from the pandemic has been sharp.

Key to recovery

According to R Nagaraj (February 21, 2023), the sharp recovery of the economy has been made possible through increased public expenditure. Public expenditure on both consumption and investment as a proportion of GDP was higher during the pandemic years compared to 2019-20. An increase in public consumption expenditure partly made up for the decline in private expenditure. The rise in public investment was mostly on road construction – a labour-intensive activity that created much-needed unskilled employment.

Public consumption was raised largely by expanding the distribution of free food grains to the poor under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY). The offtake (under all schemes) from the Public Distribution System (PDS) peaked at 109.3 million tonnes in April 2020, 90.8 million tonnes in August 2021, and 67.8 million tonnes in November 2022. Boosting expenditure on the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) — a national, legally mandated, food-for-work programme — to meet the growing demand during the pandemic helped mitigate the fall in private employment. Nataraj’s study suggests that these public expenditures during the pandemic helped the economy cushion the crisis of hunger.

But in the 2023-24 Budget statement, a reversal in policy has been witnessed. PMGKAY has been discontinued and budgetary allocation for most of the welfare schemes has been curtailed.

* The Budget allocated Rs 60,000 crore for the MGNREGS, which is 21.66 per cent lower than the budgetary estimate of Rs 73,000 crore in the 2022-’23 financial year. The reduction is sharper when compared with the revised MNREGS estimate of Rs 89,400 crore in the previous financial year, reported The Indian Express.

* The overall allocation for the agriculture sector saw a marginal increase of 4.7 per cent – from Rs 11,02,54.53 crore in the Revised Estimate (RE) of the financial year (FY) 2022-23 to Rs 11,55,31.79 crore in 2023-24. Including the department of agricultural research and education, the overall allocation to the sector was Rs 12,50,35.79 crore in 2022-23 against the revised estimate of Rs 11,89,13.42 crore. But the allocation has been reduced by almost 7 per cent compared to what was proposed in the 2022-23 budget. The share of agriculture in the overall budget has also fallen sharply in the budget for FY 2023-24. While the sector got 3.36 per cent of the total allocation last year, this time it was just 2.7 per cent of the total budget, reported DownToEarth. It needs to be flagged that the agriculture sector is the major employer of the nation. According to the World Bank, employment in agriculture (percentage of total employment) (modelled ILO estimate) in India was reported at 41.49 per cent in 2020.

* The planned allocation for rural development for 2023-24 is Rs 2,38,204 crore, down from last year’s revised estimate of Rs 2,43,417 crore.

* The planned expenditure on food subsidies too has reduced – a pattern that has been seen over the last few years. The budget estimate for this year (Rs 1,97,350 crore) is much lower than the revised estimate for last year (Rs 2,87,194 crore).

* Though the planned expenditure on PM Poshan, which covers the midday meal scheme in government schools, has increased (Rs 11,600 crore) compared to last year’s budget estimate (Rs 10,234 crore), it is in fact more than Rs 1,000 crore lower than last year’s revised estimate of Rs 12,800 crore.

* The allocation for PM Kisan has broadly remained the same, largely because the scheme involves the disbursal of a fixed amount of money to a mostly unchanging number of farmers. This year’s budget estimate matches last year’s revised estimate exactly, at Rs 60,000 crore, but is Rs 8,000 crore less than last year’s budget estimate.

Areas of concern

The decline in consumption and capital formation growth in the 3rd quarter of the current fiscal are major areas of concern. The consumption growth for the October-December period came in at 2.1 per cent, which is lower than 8.8 per cent in the July-September period. As per a Moneycontrol report, the capital formation growth also slipped to 8.3 per cent in the third quarter, as against 9.7 per cent in the second quarter of the current fiscal. Reuters reported that India’s manufacturing sector shrank by 1.1 per cent year-on-year in the third quarter, a second straight contraction reflecting lower profit margins and weaker exports.

As central banks globally continue monetary tightening to tame inflation, external demand remains sluggish. If domestic consumption demand continues to decline, which is very likely, the projected 7 per cent growth in 2022-23 will be difficult to achieve. It is feared that with subdued private sector investment, high-interest rates and slowing global growth, the Indian economy may end up at around a 4 per cent rate of growth in 2023-24, reported The Wire.

Nonetheless, a London-based consultancy firm, the Center for Economics and Business Research (CEBR), has predicted that India will leapfrog to the top three nations, assuming it grows about 6.5 per cent annually over the next decade. CEBR argues that the growth trajectory will see India rise from fifth place on the World Economic League Table in 2022 to third in the global rankings by 2037. And as early as 2035, they forecast that India will become the third USD 10-trillion economy. The World Bank data says, in 2021, the size of the Indian economy was USD 3.18 trillion. It is needless to say that India needs proper planning to achieve the target of becoming a USD 10 trillion economy in another twelve years. However, it is alleged that the Indian Prime Minister Narendra Modi, during the eight-plus years of his tenure, has failed to formulate any coherent plan to increase economic efficiency, cut red tape, increase productivity, and invest in improved education and training, reported Frobes.

In addition to agriculture, which suffers from chronic neglect from the policymakers and the government, two other important sectors that are very badly managed are manufacturing and banking.


It may be mentioned that India’s annual average GDP growth rate increased from about 3.5 per cent between the 1950s and 1970s to 5.5 per cent during the 1980s and 1990s. India was one of the very few ‘growth accelerators’ in the 20th century. Growth further increased to more than 7 per cent per year in the 2000s, coinciding with a global boom in trade, output, and capital flows. Noted economist R Nagaraj (2013) had termed this to be “India’s Dream Run”, and it lasted till the global financial crisis in 2008. India went off the rails in the 2010s as the growth momentum petered out. The annual GDP growth rate slowed to 3.5-4 per cent by 2019-20 from 7-8 per cent until 2010-11. Compared to 2019-20, the real growth of GDP, in 2021-22, was 1.9 per cent. According to him, falling investment rates and declining manufacturing growth rates have marked the Indian GDP growth reversal since the mid-2010s. These structural defects have not yet been addressed. A notable manifestation of the decade of declining growth rates is premature deindustrialization which is defined as a sustained decline in the share of output and employment in the manufacturing sector before attaining industrial maturity as the developed nations did. India’s manufacturing sector output growth rate had fallen to a negative 0.4 per cent in 2019-20 from 13.1 per cent per year in 2015–16.

It may be noted that the Gross Value Added (GVA) share of agriculture to GDP in 2016-17, at the 2011-12 constant price, was 15.26 per cent. In 2020-21 its share increased to 16.38 per cent. But the corresponding share of the manufacturing sector has declined to 16.92 per cent from 18.21 per cent. Deindustrialisation has been accompanied by India turning into an import-dependent economy. Between 2005-06 and 2021-22, India’s imports from China, in nominal dollar terms, rose seven times, while its exports increased by just two times.

As the manufacturing sector failed to create new jobs, unemployed persons increasingly enrolled themselves in the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). In 2019-20, a total of 30.1 crore persons demanded employment under MGNREGA, and in 2021-22, the numbers increased to 40 crores. In the first eight months of the current fiscal, the number of job seekers has reached 22.5 crores.

Banking sector

Poor health of the Indian banking sector is a major area of concern, though RBI’s Financial Stability Report claims that the resilience of the banking system is evident from the stress tests conducted by them. The tests showed that banks are fully capable of absorbing macroeconomic shocks, even without any infusion of capital by stakeholders. The report informs that the rise in profitability aided the banks to improve their provisions, resulting in the net non-performing assets (NPAs) to net advances ratio falling to 1.3 per cent in September 2022 — the lowest in 10 years. However, this was achieved on the back of an increase in write-offs. During the last five years, Rs 10 lakh crore in write-offs has helped banks (Scheduled Commercial Banks) to halve their NPAs. Banks recovered only Rs 1.32 lakh crore from write-offs in five years ending March 2022, reports Millennium Post. In addition to high NPA and poor recovery rate, the share of large borrowers in the scheduled commercial bank loan portfolio was unusually high at 83.4 per cent pre-covid in 2017. The dominance of big borrowers makes the banking sector extremely vulnerable to bad loans/debt, reported The Wire.

Misguided strategies

During the last few years, at least two high-decibel strategies — ‘Make in India’ and Production Linked Incentive (PLI) Schemes — have failed, mainly due to a lack of focus. These strategies have

failed to generate enough employment to boost economic demand in the domestic market.

* PLI Scheme: To enhance India’s manufacturing capabilities and exports, Union Budget 2021-22 announced the Production Linked Incentive (PLI) scheme for 13 key sectors for a five-year period. So far, the PLI scheme for large-scale manufacturing of laptops, tablets, servers, and other IT hardware has generated little interest from both domestic and foreign companies. Despite the government allowing over a dozen companies to participate in the PLI scheme, the total investment was only about Rs 1,230 million in June 2022, well below the projected investment of Rs 25,000 million. The government has unveiled a USD 10-billion subsidy scheme designed to lure semiconductor and display manufacturers to its shores, as part of the India Semiconductor Mission.

While PLI has provided the much-needed catalyst for electronics manufacturing, there is still a long way to go to create Indian brands and manufacturing from the ground up. What qualifies as manufacturing is mostly the assembly of kits imported from China and the ASEAN region. A majority of the components used in electronic items are not manufactured locally in India. PLI helps India with assembly-line manufacturing. Mere assembling of imported components for multinationals would not help develop a global Indian brand. The next phase of the PLI should focus on making components locally.

According to the Ministry of Electronics and Information Technology, the domestic hardware electronics manufacturing sector faces a lack of a level playing field with competing nations. The sector suffers from 8.5 per cent to 11 per cent disability. These disabilities are not going away anytime soon. The lack of a component ecosystem is a major challenge for electronics manufacturing.

Industry experts believe that for India to have a chip manufacturing facility, the ecosystem must first emerge. In their opinion, semiconductors are highly complex products to design and manufacture, and therefore a lot of knowledge transfer and hand-holding needs to take place.

In November 2022, Chief Economic Adviser V Anantha Nageswaran said that barring pharmaceuticals and mobile phone manufacturing, PLI Schemes did not pick up across other sectors. The DPITT (Department for Promotion of Industry and Internal Trade) data (September 22) reveals, in the pharma sector, though the actual investment has achieved 107 per cent of the targeted investment, only 13 per cent of the targeted employment was generated. And in the case of the mobile sector, though 38 per cent of the targeted investment was achieved, only 4 per cent of the targeted employment was generated, reported The Quint.

* Make in India: ‘Make in India’ initiative began in September 2014. The initiative aims to encourage businesses all over the world to invest and manufacture their products in India. The main goal of the initiative is to turn India into a manufacturing powerhouse similar to China. Under this initiative, the manufacturing sector was estimated to contribute 25 per cent of the national GDP by 2022 from barely 15 per cent in 2014.

In late July 2022, a group of 18 economies, including India, the US, and the European Union, unveiled a roadmap for establishing collective supply chains that would be resilient in the long term. The roadmap also included steps to counter supply chain dependencies and vulnerabilities. This can also be viewed as a part of overall China plus one strategy — a global business strategy in which companies avoid investing only in China and diversify their businesses to alternative destinations. India’s China plus one strategy can be seen as an extension of its ‘Make in India’ initiative.

Recent data suggest that this initiative has failed to attract substantial investment to revive the manufacturing sector in India. Speaking at the closing session of the Department for Promotion of Industry and Internal Trade’s (DPIIT) webinar on ‘Make in India for the World’, held in March 2022, Piyush Goyal, Minister of Commerce and Industry, expressed his disappointment with the programme and asked the industry to explore opportunities to increase the contribution of the manufacturing sector to 25 per cent of GDP and set up 10 R&D labs or innovation centres to become a global leader in technology. The National Manufacturing Policy now aims to increase manufacturing’s share of GDP to 25 per cent by 2025, instead of 2022 as previously envisaged.

In order to attract foreign direct investment, most developing countries (including India) adopt a strategy called the ‘race-to-the-bottom’ approach, where they offer various incentives (such as tax rebates and direct subsidies) to foreign companies. As a result, foreign companies appropriate most of the benefits associated with their investment.

As an alternative strategy to attract foreign direct investment, Charles P Oman suggested the ‘beauty contest’ approach. Rather than offering incentives, this strategy advises the host country to make itself more attractive by educating its labour force, upgrading infrastructure, strengthening macroeconomic fundamentals, and ensuring the rule of law.

To attract and retain quality foreign capital, India needs to shift away from incentive-based policies and must invest in education, health care, and basic infrastructure. It is well known that educated and skilled workers will attract quality capital in the high-end sector where knowledge spillover would be higher, writes Dipankar Dey in Madhyam (January 2023).


In 2014, Raghuram Rajan, the then Governor of the Reserve Bank of India, proposed a ‘Make for India’ approach that would produce for the domestic market. He also proposed offering budgetary incentives for household savings to ensure that the country’s investments are largely financed from domestic savings. Needless to say, large-scale production for India’s vast domestic market will help local companies achieve economies of scale and overcome the current cost disadvantage of around 10 per cent compared to their global peers.

The ill-focused ‘Make in India’ programme and PLI schemes have failed to rejuvenate the industries and generate employment. As the global economy is passing through a prolonged phase of recession, it will be prudent if the government focuses on ‘Making for India’ instead of ‘Making for the World’. And to boost domestic demand, the Union government must increase the budgetary allocation of all major welfare schemes. Increased public expenditure is the key to inclusive growth, especially during a recession.

Views expressed are personal

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