Structural transformation needed for higher growth

The policy focus has been to increase the quality of employment by raising the share of formal sector jobs, and simultaneously improving the productivity of the informal sector, says S Mahendra Dev, chairman, Economic Advisory Council to the Prime Minister.

- S Mahendra Dev, Chairman, Economic Advisory Council to Prime Minister

Structural transformation from agriculture to industry and services over time will further increase the quality of employment, he tells Prasanta Sahu in an interview. The noted economist also expressed the hope that credit growth would further improve due to rise in rural and urban demands. Monetary transmission seems to be taking place, he says. Excerpts:

Incremental capital output ratio (ICOR) is hovering around 5. Gross fixed capital formation at current prices has slipped to below 30% in FY25. Aren't these raising serious concerns about the productive capacity of the economy?

The trend in the ratio of nominal gross fixed capital formation (GFCF) to GDP shows that it was around 29-30% in current prices from FY14 to FY25. So, there was no decline in the ratio. The real GFCF/GDP ratio is at 33.4% in FY25. It is expected to increase further with increase in both government and private investment which will increase productive capacity. Regarding ICOR, there is a technological relationship between GFCF and Growth. But we do not have this direct measure, and therefore, ICOR is empirically estimated as investment rate divided by the percentage change in real GDP. The trend shows ICOR is volatile and should improve with technological progress.

Are we settling for a medium-term growth rate of around 6%? How feasible is to move into a higher growth trajectory?