The difference between a 6.5% rate of growth and the 9-9.5% many expect will come back with a Modi government, according to a Crisil report, is 49 million less people below the poverty line — all of this is over a five-year period. That translates into an increase of Rs 2 lakh in the nominal household income, 10 million more two-wheelers sold, 2 million more cars, 96,000 new homes in 10 major cities… (see graphic).
The problem, however, is that, according to Crisil, there is little possibility of 9% growth coming back — Crisil’s view is “there is a natural limit to any upside beyond 6.5%”. And all of this, Crisil points out, assumes there is a stable and decisive government in place — else, “our bets on growth are off”. Even 6.5% growth, of course, won’t help much since, according to Crisil, this will generate at best 37 million new non-farm jobs. Which means around 14 million persons will have to remain either unemployed — the work force will increase by around 51 million over the next five years — or get underemployed in agriculture.
The real problem is that the various factors that caused an upsurge in India’s growth in the FY04-11 period are no longer present, and getting them back will take time, and a lot of effort. In the high-growth phase, the contribution of capital stock rose from 2.1 percentage points (ppt) in FY05-03 to 3.2 ppt in FY04-11, but this is projected to grow by just 2.5 ppt in FY15-19.
Productivity, or what economists call incremental capital output ratio (ICOR), improved the most in the high-growth years, and though this is projected to grow — ICOR will fall from 7.4 right now to 5.5 over the next five years — this will still not be as good as it was during FY04-11.
There are various reasons why capital stock cannot rise as fast as in the high-growth years. There is a large unutilised capacity, India Inc is overleveraged and banks have too many NPAs to be able to grow their lending books fast enough. Crisil expects investment growth to rise from near zero in the last and current fiscal to around 5.5% over the next few years. To put this in context, during the high-growth years of FY04-11, investments grew by around 13% per annum.
The other driver of growth, exports, are also not looking as good as they did a few months ago despite global growth picking up. One reason, of course, is that the rupee is not looking as weak as it was before. The larger structural issue, though, is of India’s failure to address the fundamental flaws in its economic model — that means rising wage costs, poor economies of scale and high domestic inflation.