In a recent address, the Finance Minister (FM) called upon the Indian private sector to recognize and harness its untapped potential, comparing it to the sleeping Hanuman unaware of its own capabilities. She questioned why, despite foreign investors expressing confidence in India, the domestic private companies were hesitant to invest. The FM emphasized that the government alone couldn't be the motivating force; it was time for the private sector to believe in its strength and contribute significantly to the nation's economic growth.

However, recent trends reveal a cautionary approach from private investors, with fresh manufacturing investment plans contracting by 17.5% year-on-year in the first quarter of 2023-24. A noteworthy article by the RBI urged the corporate sector to take charge of capital expenditure, emphasizing the need for private enterprises to step up and capitalize on the space created in financial markets by the government's reduced borrowing program.

The core issue lies in understanding what impedes the Indian industry and questioning the sustainability of the government continually injecting funds without corresponding revenue generation from private sector investments.

Despite the government's efforts, including historic cut in corporate tax rates and incentives like the Production Linked Incentive (PLI) scheme, private investment has not seen a substantial uptick. Capital expenditure by the government tripled since FY20, yet private sector investment, measured by gross fixed capital formation, has decreased from 37% of GDP to 31%. Goods exports have remained stagnant around 2011-12 levels, with private gross capital formation accounting for only 22% of GDP in 2022, down from 25-26% in FY14 and FY15, according to the World Bank.

Several factors contribute to this stagnation:

1. Policy Interventions: The private sector's confidence is shaken by the unpredictability of government policies, including sudden decisions like demonetization, nationwide lockdowns, and the sudden imposition of regressive taxes on steel exports, the windfall tax on oil refiners and the ad hoc stoppage of rice and wheat exports and many others, but they do not want to speak against a government that has a mammoth majority in parliament. For instance, Narendran CEO of Tata Steel on the issue of taxation of steel exports said "If there is a long-term direction that exports of steel will be discouraged, then we'll have to take a call - then you will only build as much capacity as you need for the domestic market". 
2. China's Manufacturing Monopoly: The allure of cheaper imports from China has historically deterred private sector investments in domestic manufacturing.
3. Low Consumption Levels: Private sector investments heavily rely on demand, which remains low, especially among the rural and middle-class population. It will not be possible for the private sector to display its HANUMANHOOD till the consumers respond.
4. Inflationary Pressures: Factors like the Covid-induced economic challenges and geopolitical tensions ; Russia-Ukraine war and Israel -Palestine tension have exacerbated inflationary pressures, further dampening demand.

Conclusion. India's economic growth imperative necessitates a vibrant manufacturing sector. Despite ambitious initiatives like Make in India and Production Linked Incentives, the manufacturing sector's contribution to GDP has remained below 14% for the past three years. To address this, a holistic approach involving policy stability, boosting domestic demand, and tackling global competition is essential. Only through collaborative efforts of the government and private sector can India achieve sustainable growth, job creation, and increased per capita income, as witnessed in the success stories of other high and middle-income economies like China, Japan, Germany, and Singapore.

The NSSO Data released a few days ago indicates that the structural transformation in the country has almost come to a halt.

Let's first understand as to what structural transformation is all about. There was a time when India had more than 70% of its work force dependent on agriculture and most of them were poor farmers with small land holdings and income. As a result, there was a need to move the surplus work force to manufacturing and services sector like insurance, transport, distribution, IT, Hospitality, tourism etc which comes up as an outcome of growth in manufacturing sector.

However, because of limited private sector investment this structural transformation was slow as most of the investment in manufacturing was done by the government and as a result the people often had to face the challenges of increased inflation and unemployment etc.

The reforms launched in the 90s had a positive impact on various aspects of economy including the manufacturing sector and as a result the surplus agricultural work force moved to other sectors where productivity and average income were higher i.e., manufacturing and modern services – financial, telecommunications and business services. Gradually on year-on-year basis the agricultural work force declined to 46% by 2014-15.

However, the cumulative impact of Demonetisation, GST, Covid and Ukraine war, happening one after the other, have stalled this structural transformation and this is exactly what the recently released data by NSSO (National Sample Survey Office) points out.

The farm sector’s share in the country’s labour market is now pegged at 45.5% which is although lesser than 46.5 % in 2021-22 (COVID year when workers migrated to rural areas) but is still higher than 42.5% in 2018-19. This clearly indicates that the economic disruptions which had caused reverse migration to farm sector and also severely impacted the informal/unorganised manufacturing sector has not fully recovered. This means that more people have got back to agriculture in recent years because they are not finding appropriate employment in manufacturing and in services sector.

So, does that mean that the share of manufacturing in GDP has slowed down?

India’s manufacturing sector as a percentage has always been stagnant; 14-17% of GDP. It touched the zenith i.e., 16-17% during 2006 to 2011 and thereafter went down to 13-15%, and is now barely 13%, whereas in developing economies it should be 20-30%, For instance, China has approx. 40% contribution from manufacturing towards its GDP.

The table below clearly indicates that something severe had hit the manufacturing sector in 2016-17 and since then it has not recovered.

Hence there is truth in what Pollyanna De Lima, Economics Associate Director at S&P Global Market Intelligence stated “The manufacturing Job creation has failed to gain meaningful traction as firms reportedly had sufficient staff to cope with current requirements”.

So, even what Raghuram Rajan has pointed out is not grossly wrong, he said “With subdued private sector investment, high interest rates and slowing global growth, India is “dangerously close” to the Hindu rate of growth. We must do better”.

The data below indicates the broader point of a steady deceleration in quarterly GDP growth rates that Raghuram Rajan has pointed out.

Although data of one Quarter is of little consequence but when the same is seen in totality and the context , then its relevance can not be undermined.

Notwithsatnding the above, Construction has been a saviour showing a growth of 8.4% due to the demand for housing and also due to the government push on infra. However, we need to understand that construction does not provide quality jobs.

While the government has been doing its bit by spending on infra, the private sector investment has been slow to match the same for the last 3-4 years.

Ruchir Sharma in his Book ‘Rise and Fall of Nations’ says that to understand the health of economy one needs to look at the growth of manufacturing sector and so should look at the investments made by private sector.

So, the question arises ;

Why is the Private sector shying away from investments in manufacturing?

Is it that the demand is not growing?

Is it that the credit has become expensive?

Is it that the business environment is not conducive?

Is it that there is an overall lack of skilled manpower?

Is it beneficial to import as manufacturing locally is not cost effective?

Is it that there is lack of innovation?

It is now an accepted fact that if a country has to move to next level of growth and increase the per capita income it needs to improve its manufacturing sector because it is this sector which can provide large scale employment to its work force both skilled as well as semi-skilled. It is this sector which brings boom in technological capabilities and also enhance its exports which in turn reduce the current account deficit. It is this sector which subsequently leads to the growth of Services sector and we have examples of China, Japan, Germany, Singapore etc all high/middle income economies.

However, despite all the hulla gulla of MAKE IN INDIA and then Make for India our manufacturing sector has not contributed more than 14% of GDP and is now stuck below 14 % for last three years. Therefore, no wonder that our young work force is migrating to greener pastures and are contributing to others’ GDP.

Today it is difficult to find a single middle-class family who does not have one of its children studying and working in a foreign country.

In such a situation What Next ?

Becoming a three trillion or a five trillion economy is not the right bench mark that country should set because for a country of India’ size and population this target is no big achievement. The size of the economy does not give the correct picture, for instance Britain whom we have just over taken is of the size of Indian state of UP has its GDP per capita 47,317.57 US dollars almost 25 times more than India’s GDP per capita income which is barely 1900 US dollars.

There is no denying that GDP per capita income has increased over the years, but " The increase in per capita income that it(NSSO) has shown is primarily on GDP based on current prices, and if you account for inflation, the increase in per capita income is much less.” A Senior Economist Jayati Ghosh remarks. She further added, “Most of this increase has accrued to the top 10% of the population and by contrast, median wages are falling, and are possibly even lower in real terms”.

Therefore, " India becoming a USD 5 trillion economy by 2025-26 and USD 7 trillion by 2030 and may even overtake Germany and Japan in years to come" says one senior economist " will not be of much consequence".

What is to be hence seen is - Will it have the per capita income equal to these countries as mentioned above? And Will the cream be pocketed by the top 10% or will there be some equality?

For that to achieve, India will have to grow at a rate almost 8% consistently over a decade and that can happen only when the contribution of manufacturing in GDP increases to 25-30%.

When the Hon’ble PM announced that India will become a Developed Nation by 2047, I was travelling through Ghaziabad. The surroundings did not give me any confidence, that in next 20 years Ghaziabad which is barely 30 kms from Nation’s capital would become like Tokyo or Munich or Geneva or even Rome. I could not understand as to how the Hon’ble PM arrived at this declaration and what was the criteria that he worked on to decide the Year 2047.

Now when Hon’ble PM has said this in a public meeting , it is natural he must have done his home work well. However, in last few years I have become slightly cynical about his promises and assurances and hence do not take them on face value.

So, I decided to do some Home work myself, which perhaps the PM being a Master Politician might have avoided that. Yes, as regards RAJNEETI , he does his home work.

To begin with, I looked for the definition of a Developed Country. As  per one definition ;  A Developed country is one that has a high quality life , has a developed economy and advanced technological infrastructure relative to other less industrialized nations.

This definition appears to be subjective and confusing, it does not convey, particularly those unfortunate ones, who have not travelled abroad to Japan, US, UK or Germany inorder to experience - as to How a Developed Nation looks like.

Usually, the criteria for evaluating the degree of economic development are ;  GDP, GNP and the per capita income, level of industrialization, amount of widespread infrastructure and general standard of living.  

But for a common man, who has not been abroad to any of these countries and seen or experienced How a Developed country is like , these GDP , etc also appear to be vague.

I thought there is a need to bring some clarity on this aspect and make it as objective as possible for the better understanding of a  common man who might have already started dreaming of living in a developed nation, like they dreamt of a country with no Black money, of Smart and clean cities, Efficient Health Care system and so on.   

Hence, the principle I used is based on a simple logic;

If a student is told after the exam that he has been ranked 10^th in a class of 40 students and also informed about the marks he has scored in each subject,  it would then become easy for him to work towards improving his marks in each subject and improving his rank also, in coming years. But, if he is not told about the marks in each subject and also the Rank he has attained , he might think he is one of the Best and as a result – He would never make any efforts to improve.

Therefore,  I decided to go through the various Developmental  Indices that UNO and its agencies release from time to time. These Indices would indicate Not only the Rank but also the Parameters(Subjects) that are considered to calculate the Rank.

The marks obtained on each Parameter and the Ranks so obtained on these Indices will surely help us  to examine ;

Why some nations are termed as Developed Nations, what different these DEVELOPED NATIONS do , which we in India do not do and need to do inorder to achieve those Rankings so as to become a DEVELOPED Nation.

After all, we would become a Developed Nation only when we know what it takes to be there, otherwise, there is no dearth of people in our country who have been shouting their lungs out for years ; MERA BHARAT MAHAN but despite all the shouting, half of their family members are studying and working abroad and do not wish to return.

This will also help to evaluate ourselves objectively and see where do we stand vis a vis the current developed nations

Once we comprehend those parameters, I am sure,  it would become very clear to all ; When would we have the fortune of Living in a  DEVELOPED State.

All the parameters/Indices that I have chosen are related to Governance instead of heights of buildings and statues.  

First is the HDI. This in my opinion is the main Index that would indicate to us where we as a Nation are and How far we have to travel, because it is the human beings who build the Nation.  The Human Development Index (HDI), is released by World bank every year, in which India is languishing year after year around 130s out of 180 Nations  but this year sadly it has slided down one rank. It is a summary measure for assessing long-term progress in three basic dimensions of human development -- a long and healthy life, access to knowledge and a decent standard of living.

The parameters that are used to allot points to each country and calculate the Index are -  health care, per capita income, mortality rates, percentage of skilled population, knowledge, availability of health care facilities, education facilities, how many leave schools at the primary level  and so on.

The countries that occupy the Top positions in this Index are ; Norway, Ireland, Switzerland, Hongkong, Germany, Sweden, Australia, Denmark, USA, UK, Japan, Netherlands , where as India which for many years now languishing at 130s finds itself at this position surrounded by countries like - Bangladesh, Pakistan, Bhutan and few African countries,

Linked to the HDI is another report ; The Human development report on skills. This is also an important indicator  that conveys to us the condition of our work force because the earning capabilities are often associated with the Skills they possess. The Ranking on this report will surely tell us as to how long is the Journey. The report says –

Barely one in five Indians (part of the labour force) is “skilled”, this implies; hardly 29 % people from our work force are skilled. Whereas, whopping 99.99 % people in Japan, that occupies 19^th rank on HDI are skilled. Whereas, USA, Switzerland, UK, Germany, all occupying Top positions on the HDI,  have almost 80-90 % workforce as skilled .

Thereafter, is the Poverty Index. This index is used by planners to assess which countries need the aid and in which sector they need to focus on. Once again we find that the Nations who were at the top of HDI Index are having low poverty index and are richer nations, whereas those at the bottom of HDI are at the higher end of this poverty Index as well.  So, its not surprising to find India being ranked 62 amongst the 107 countries and once again it has the same friends at the bottom of the list. The parameters that are used to calculate the points are ;  

One, Health Care ; Child mortality rates, Nutrition. 

Two. Standard of living ;  Availability of cooking fuel , Sanitation, Housing assets and so on.

Its not difficult to ascertain as to why we are ranked 62 out of 107 Nations - In India approx 32 kids out of 1000 die when they are not even 5 years old, whereas, in France mere 4.4 children out of 1000 die and in China its 7.3  and this happens because our mothers and children do not get sufficient nutrition and do not have access to better medical facilities. So, it should surprise none, despite the Indian Govt as usual blaming the agencies for maligning India – It is ranked 104 on the Global Hunger Index afterall , it is because of the lack of proper Nutrition that our children are dying in such numbers. How many Indices will we keep REJECTING ?

The Next index is the Corruption perception index, which is an indicator of the quality of governance in the country. ; Once again India is languishing at 85^th position whereas the same countries which are at the top of HDI have fared better and are the least corrupt.

Finally we arrive at the World Competitiveness Yearbook (WCY).  India occupies 43^rd rank on the Annual World Competitiveness Index. The World Competitiveness Yearbook is an annual report published by the Swiss –based International Institute for Management Development   (IMD) on the competitiveness of nations since 1989. The World Competitiveness Index is a comprehensive annual report and worldwide reference point on the competitiveness of countries. It provides extensive coverage of 64 economies, measuring different facets of competitiveness. Here we are finding ourselves in the range of 44 to 37^th except in 2007 when we occupied 27^th position . It measures the prosperity and competitiveness of countries by examining four factors that are subdivided into 340 criteria;

• Economic performance
• Government efficiency
• Business efficiency
• Infrastructure

Now lets come down to specifics instead of Indices ; The Per capita Income. The per capita income of a country determines the average income of a person in a country, a state, or a specific region. India’s Per capita income in 2021 was  $2,283  and was Ranked 145th in a list of 193 countries , whereas UK was at 28^th position with $44,117. China is at 75^th position with $17,192.

Although, India has tipped UK and has become the 5^th largest economy by sheer size of GDP but we need to look within. No country can be Governed on the basis of Face Book  and Twitter – “ Likes “. India beating the UK is mathematically correct, but there are many other things that need to be kept in mind.. 

UK’s population in 2021 was 67.3 million whereas India’s population was 1.39 billion. So, If India’s GDP (current prices) during 2021 stood at $3.18 trillion and in comparison, the UK’s GDP was at $3.19 trillion, and this year , India has overtaken UK , it primarily implies that the economic productivity of 1.39 billion Indians is almost equal to 67.3 million Britishers. So, the economy of India might have become bigger than that of the UK in 2022, but the productivity or the average income of an Indian continues to be substantially lower than the average income of a British.

And that is very evident from the Rankings.

Conclusion

These are just a few indicators out of many that I thought of sharing so that we know where we actually stand and how far we have to go.

It is quite likely, that in next 20 years, which is hell of a long time, we may move up the ladder and score better on these parameters. But our optimism must be realistic and we need to ask ourselves;

Is our education system improving for betterment or are we just changing some history books?

Are we doing something towards improving the quality of health care?

Are we doing something to improve the law and order system ?

Are we doing enough to address corruption at the state level ?

Are we doing enough to improve the Skills of our work force ?

Let those who are affected by the Mis Governance take a call ,  and others who have nothing at stake and have already played their INNINGS can always dream for ; ACCHEY DIN by 2047. 

The recent policy decision by the monetary policy committee (MPC) not only resulted in the stock market tumbling down but also made the Indian citizens worry about his/her EMIs.The committee took two decisions:

1. Therepo rate was increased. This is the rate at which RBI lends to commercial banks. It increased it to 4.40% from a multi-decade record low of 4%. Raising the rates makes borrowing money from the central bank more expensive for the commercial banks. The banks then pass on this cost to their customers (that is the Indian citizens or corporations etc.).
2. The cash reserve ratio (CRR) was hiked. This translates into banks to parking more money with the Central bank. This in effect would drain out ₹87,000 crore of liquidity from the banking system.

The impact of these two decisions can be summed up as following:

1. Increase in repo rate would make loans expensive. This will push banks and non-banking financial companies (NBFCs) to hike not only the lending rates but also the deposit rates. Equated monthly installments (EMIs) on home, vehicle, and other personal and corporate loans are likely to rise.
2. The increased CRR would leave the banks with lesser funds to give out as loans, which would mean - taking loans from the banks may become difficult.

Why was this decision taken suddenly?

The RBI Governor Shaktikanta Das said the decision to increase the repo rate was taken keeping in mind the rising inflation, geopolitical tensions, high crude oil prices, and shortage of commodities globally, which have impacted the Indian economy.

“The persistent inflation pressures are becoming more acute, particularly on food”, said Mr Das, he further added that “ there is a risk if prices stay at this level for "too long", so"inflation must be tamed in order to keep the Indian economy resolute on its course to sustained and inclusive growth". Moreover, when inflation in March rose to a 17-month high of 6.95% and might even rise above the RBI’s target band of 2-6 percent in April too, this step was necessary.

However, one needs to ponder on few aspects related to these decisions.

1. If inflation is largely due to external factors – oil prices and supply shortages due to the Russian-Ukraine war and COVID-19 restrictions in China - so, how would raising domestic rates help reducing inflation?
2. The companies particularly the Small and Medium, have still not been able to overcome the adverse impact of Three shocks they got one after the other ; DEMONETISATION, GST and then the pandemic - the fourth quarter (2021) results are an indicator. Therefore, Will the raising borrowing costs further NOT have a negative impact on the Indian businesses.
3. Since the businesses still haven’t recovered fully, there is nothing to feel happy about the record GST collections, because, as many experts state that it can also be an indicator that this amount is largely due to better compliance and increased prices rather than the broader economic growth.
4. Amid relatively high unemployment rate, inadequate quality jobs and shrinking labour force, one needs to ask whether these steps will not impact India’s growth adversely?

Comments of few experts

1. Deloitte India economist Rumki Majumdar said the rate hike was expected in June. “The surprise move by the RBI to raise the policy rates a month earlier suggests that it does not want to wait and watch but act quickly before inflation derails the growth recovery. However, making it costlier to borrow will affect consumers and businesses (especially MSMEs) and impact credit growth, which has been low since 2019.
2. Rupa Rege Nitsure, group chief economist, L&T Financial Holdings told Reutersnews agency that the hike in repo rate and CRR are “the most appropriate steps when the nation is facing galloping inflation and a widening trade deficit”. “These are a kind of emergency measures to control extreme financial outcomes. The central bank has to take these steps to prevent an extreme fall in the value of our currency and protect financial stability”.

Conclusion

In view of the above, it is certain that although the Central Bank’s decision to raise rates was to check inflation, this may also have an adverse impact on India’s growth.

Therefore, the cumulative shock that MSMEs experienced, beginning from demonetization- GST- Pandemic  may now deepen the economic pain experienced by these businesses and the Common man alike.