By-Syed Zahid Ahmad :Despite all due respects to ministers and other managers of economic policies of our great country, It is disappointing to read statements where it is repeatedly stated that the next year may be economically tougher, GDP growth rate may further decline, fiscal deficit may increase over the revised budget estimates and Indian economy may not turn around unless the global economy recovers. However, once the global economy shows the signs of recovery, India’s turn around will be sharper and swifter; backed by our strong fundamentals and the untapped growth potential.
Challenges might be viewed as opportunities:
We do believe that our fiscal and monetary authorities are sincerely doing the jobs at their best. Since no one can be perfect, chances of error and omissions might be there in assessment and visualization; and just possible that something might be missing in evaluation and analysis of data and plans. Thus it is desirable that instead of mentally preparing common Indians to face hard times ahead, they should better find and remove the regulatory hurdles for growth, announce alternative measures after reviewing the strategic plans and impacts of adopted measures. Of course, Indian economy, like many other economies around the world is facing hard time due to global recession, but it could also be an opportunity for India to pick up higher growth rate again. If India succeeds in doing it, many other nations may like to follow her. Thus, India may have an opportunity here to become a global economic leader.
Overweighing GDCF ratio to GDP:
It is rather unfortunate that the strategy for financing 11th five year plan is not accordance with the fundamental principles of economics of development and planning. How can we resolve a plan with continuous fall in the ratio of consumption expenditure to GDP? Somewhere we have overemphasized Gross Domestic Capital Formation (GDCP) to boost GDP growth. The balance between consumption expenditure and investment should be well maintained in our plans. No economy can achieve sustainable higher economic growth if consumption expenditure ratio to GDP is allowed to fall below 70 percent. Since 11th five year plan was finalized, economic environment in India as well as around the world has changed drastically. It might be reasonable to think of a possible review of the plan to find the odds. The proposal to finance the plan was based on higher saving and investment growth rates which was going right to the plan till inflow of capital from international market was increasing, but after reversal of capital account status, the falling consumption expenditure ratio to GDP accompanied by fall in international demand revealed the truth that an economy cannot grow at higher rate if its consumption expenditure ratio to GDP keep on reducing and the GDCF ratio to GDP keep on increasing.
Continuous falling TCE ratio to GDP should be arrested:
After liberalization of capital account, our GDP growth rates in India have been more than impressive, but proportionate share of Total Consumption Expenditure (TCE) to GDP has declined from 73.2% in 2003-04 to 67.8% in 2007-08. Even with higher GDP growth, our consumption power has weakened during these years. The GDCF ratio to GDP has increased from 27.7% in 2003-04 to 31.9% in 2007-08. There is a limit to stretch the GDCF ratio to GDP. At present India need to focus more on boost consumption expenditure compared to investments expenditures. To boost demand, funds need to flow more towards unorganized sector where workers have higher Marginal Propensity to Consume (MPC) as compared to workers in organized sector. But after analyzing the scope of increase in consumption expenditure with increased liquidity through monetary and fiscal measures, it may be found that funds are not really reaching to bottom level and financial adjustments are more composite in these measures.
Uneven distribution of financial resources:
The fall in consumption expenditure and increase in saving and investment does not indicate inclusive growth because data may prove that after liberalization of capital account, capital inflow through stock market or in terms of External Commercial Borrowings (ECBs) has relatively benefited the corporate sector and the financial enterprises more than other sectors ; but the domestic unorganized sector enterprises have been somehow remained neglected and suffered due to lack of sufficient financial support required for growth. The uneven distribution of financial resources within the economy may have put the corporate sector on higher growth trajectory at the cost of unorganized sector. As a result the rich became richer and poor became poorer.
Corporate Sector might be exploiting financial regulations:
At this stage, one may advance the hypothesis that the corporate sector has exploited the financial regulations framed with regard to fuller convertibility of capital account. Corporate sector have seen investing locally raised equities into Mutual Funds, while enjoying ECBs to expand their businesses because ECBs have been cheaper than domestic credit sources. It has pulled the equity funds to corporate sector and the unorganized sector enterprises were under mercy of local banks with high interest rate which were enough to discourage the entrepreneurship.
Flow of Funds for inclusive growth:
Study might reveal that the financial sector enjoyed liberalization of capital account and thus the financial sector growth rate surpasses GDP growth and rates of growth for many primary and secondary sector industries and trades. The data on growth rate for unorganized and organized sector during last five years and fund flow ratio to these sectors would reveal the script of high growth trajectory for India. It would help us assess the role of financial sector enterprises to help the economic enterprises grow. We have to assure that funds are guided to flow according to sustainable and real inclusive growth plan.
Appropriate flow of equity funds may reduce fiscal deficit:
As an emerging economy, India has high potential for investment expenditures, but when GDCF ratio to GDP crosses 25%, this potential was bound to become somewhat moderate. The continuous fall in consumption expenditure ratio to GDP for last ten years could not hold the high economic growth and it became faster when global recession further weakened the external demand. Since October 2008 after feeling financial pressure, Indian authorities provided excess liquidity worth around 10% of GDP through monetary and fiscal measures in domestic market; but even 2% increase in domestic consumption expenditure has not been achieved. It is critical to review whether the measures are appropriate enough to divert the liquidity to the group with higher Marginal Propensity to Consume (MPC). It is inappropriate to increase the fiscal deficit any more to increase the consumption expenditure when central and state government combined debt is more than 70% of GDP. Domestic consumption expenditure may be increased at even higher rate with entrepreneurship development as well if equity funds are extended to the unorganized sector where workers have higher MPC instead of corporate sector where workers have higher Marginal Propensity to Save (MPS). If we appropriately priorities the flow of equity funds there it may work more effectively to boost demand compared to increasing public expenditures and making fiscal deficit beyond revised budget estimates.
Workers with higher MPC do not get Equity Funds:
A study may reveal that we need to track the fund flow guided through monetary and fiscal measures to boost domestic consumption. Around 95% Poor and vulnerable workers engaged in the unorganized sector enterprises with higher MPC still find difficult to access equity funds while corporate sector with higher MPS enjoys all equity funds. There is no doubt that equity funds encourage entrepreneurial expenses whereas high risk mitigating capacity is needed to afford debt based credits. Since poor entrepreneurs in unorganized sector have low risk mitigating capacity, they deserve more of equity funds as compared to corporate sector. The nature of work at enterprises engaged in unorganized sector does not allow stock market to provide equity funds so they are deprived of equity funds.
Banks should be allowed to deal in small equity funds:
India need to invent small banks dealing in small equity deposits and credits at local level so that small enterprises working in the unorganized sector could be monitored through banks that are otherwise out of reach of stock markets. It might be appropriate to allow local banks deal in equity funds with limit of Rs. 3,00,00,000 which is entry limit for an enterprise to register in stock market. Considering the composite structure of huge unorganized sector, banks may be allowed to extend equity funds with limit of Rs. 3,00,00,00 from their equity fund stocks. Small equity fund may be maintained by banks which could be easily monitored at local levels.
Huge domestic consumerism is main strength of Indian economy:
Such initiatives may increase flow of equity funds to the unorganized sector enterprises whose factor cost would certainly boost expenditure capacity of workers. Since such workers are around 95% of total Indian work force, it may increase the consumption expenditure to considerable level because their MPC is much higher compared to workers in the organized sector. It would also boost the demand forces pushing India out of recession. The investment through equity funds at unorganized sector enterprises will help them grow and raise output whose consumers are local. Increased output of unorganized sector enterprises is supposed to be immediately consumed by huge domestic consumerism where MPC is much higher.
Equity Funds to unorganized sector is the key:
If we succeed to provide equity funds to 95% unorganized sector workers who have higher MPC, India may be on higher growth trajectory again with much inclusive and sustainable growth in nature because it would not depend on international demand or supply, but on domestic demand and supply which is much strong at present as indicative through the difference in wholesale and retail price indices. Equity funds to the unorganized sector will help 95% Indian workers make more expenditure on consumption and investment allowing India grow faster than ever before with really inclusive in nature as well.
Let’s guide the global economy:
Once Indian economy comes out from recession, it will certainly guide other nations to follow this pattern. India will lead the international economic growth strategy. So, it is better that India should stop waiting for recovery of global recession, and set guideline for faster and inclusive economic growth strategy for all nations.
About Author : Asst. Secretary General
1st Floor, Vazir Building, 179, I. R. Road, Mumbai – 400003, Maharashtra, India
Tel. – (+91 22) 2347 6497 / 8329