By A Special Correspondent
First publised on 2023-03-10 09:58:13
Is the Indian economy headed towards the so-called Hindu rate of growth? Noted economist and former RBI governor Raghuram Rajan has warned that various factors indicate that. He has been severely criticized for putting forward an alarmist view. But the slump in quarterly growth, when taken together with the global slowdown, the rise in commodity prices, the disruption in supply chains due to the Ukraine war and other geo-political situations, does indicate that growth will slow down although it is not prudent yet to predict that it will slow down to the extent of 3.5 to 4% from the level of 5.5 to 6.5% expected in FY23 and FY24.
The Centre for Monitoring Indian Economy (CMIE) has reported that bank credit to large industries has shown a decline (although credit to MSMEs has increased) between November 22 and January 23 after showing robust increase in the preceding four months. It has said that "expectations that the earlier increase in credit offtake by industry was a sign of a revival of the capex cycle in India seem to have been a case of misplaced optimism" (report by Janaki Samant published on March 7). It also said that "decline in outstanding credit implies that repayments of past loans exceeded fresh borrowings" and "that the earlier increase in credit was not a sign of a revival of the capex cycle in India. It was more likely the result of an increase in the working capital requirement of industry because of the sharp increase in commodity prices."
If the revival of capex cycle does not take place, growth will remain subdued. Sources in the State Bank of India (SBI) have claimed a decline in the incremental capital-output ratio which, according to them, means that one additional unit of output will be produced through lower doses of additional capital. Hence, even lower private capital investment would be able to produce more output. But this in turn means that capital cost of production will decline. There is no evidence of that. If we ignore the SBI claim for lack of evidence, lower credit offtake means capex is not reviving and large industries are not expanding or adding new capacity, which is a sign of worry for the economy and which will pull growth down.
The only positive angle that can keep growth on track is the massive investment in infrastructure projects that the government had promised in this year's Budget. The Budget had increased capital investment outlay by 33% to Rs 10 lakh crore. This investment will bring orders for core industries and will help in crowding-in private investment. When the wheels of the economy will start turning fast, it will benefit all industries and is likely to give a huge push to demand. That remains our best bet to avoid slumping down to the Hindu rate of growth.