There is only a 50 per cent chance India’s gross domestic product (GDP) will average even 6.5 per cent over the next five fiscals, according to a Crisil Research report, and that too, is predicated on a decisive mandate in the ongoing general elections. The report, titled ‘Of growth and missed opportunity’, notes that election outcomes don’t impact the economy beyond improving sentiment. What matters are the policies that follow. A decisive mandate will create an environment for speedy resolution of policy bottlenecks, hasten reforms and crank up investment efficiency.
India’s Incremental Capital Output Ratio or ICOR, which measures investment efficiency, has worsened to almost 8 in the last two fiscals from 4.4 during the high growth period of 2003-04 to 2010-11. Higher the ICOR, lower the efficiency of investment. So the task before the new government is laid out clearly — the focus has to be on improving the efficiency of the economy by debottlenecking it.
However, if there is no clear mandate at the battle of ballot, growth will likely remain in the 5 per cent rut.
The report says that evolving investment dynamics suggest there is a natural limit to the upside beyond 6.5 per cent. Neither a surge in investments nor improvement in efficiency witnessed in fiscals 2004-11 — which led to near-9 per cent GDP growth — would repeat in the next five years.
If the report is to be believed there is only one in five chance of growth being better than 6.5 per cent.
The ramifications for businesses and the economy at large will be huge in terms of social objectives and the opportunity loss for India Inc, the report notes.
Calculating the specific missed opportunities, Crisil Research said some 16.5 million passenger vehicles (cars, utility vehicles and vans) will be sold over the next five years if GDP growth averages 6.5 per cent. This number would have surged to 18.5 million at 9 per cent GDP growth. The missed opportunity, therefore, is 2 million vehicles or approximately sales of the entire passenger vehicles industry for the current fiscal.
A slower economy will also curb demand for steel and cement, which had hit unprecedented highs during fiscals 2004-11 on the back of near-double-digit industrial growth and housing boom.
Growth has more than halved since then. Predictably, therefore, the missed opportunity is greater here — 125 million tonnes of cement and 42 million tonnes of steel, when the economy expands annually at 6.5 per cent instead of 9 per cent.
GDP growth at 6.5 per cent will mean sales of televisions will be fewer by 13 million, refrigerators by 6 million, washing machines by 3 million and air-conditioners by 6 million. At 5 per cent growth, the missed opportunity bloats further — for television and refrigerators it is 17 million and 9 million, respectively.
Crisil calculates that as many as 226 million people will remain below the poverty line at the end of fiscal 2019 if growth averages 6.5 per cent. On the other hand, at 9 per cent growth, the number of destitute will reduce to 177 million, bringing about a sharp decline in India’s poverty ratio to 13.6 per cent from 22 per cent now. Conversely, assuming 5 per cent GDP growth would mean India’s poverty ratio would just moderate to 19.6 per cent.
Not growing fast enough will also mean as many as 15 million less non-farm jobs created, forcing many to remain locked in agriculture, Crisil Research said.
Keywords: India's GDP