An opening for Indian gains

Many aspects of Indian macro policy are now clarifying

- AJAY SHAH

The overall context of macroeconomic policy comprises two main issues. The first issue is the sustained problem of weak private investment over a long period. The second is the remarkable developments in the global economy and a glimmer of possibility for a better position for India. The recent moves by the monetary policy committee, of cutting rates, are in the right direction, and should be seen in the larger context of macro policy.

The most important element of India's growth is the emergence of large, high-productivity private firms which control greater resources of labour and capital. Hence, watching the growth of these firms is of the essence in understanding the Indian journey. In the Annual Reports of large private non-financial firms, a good measure of investment is the year-on-year growth of the net fixed assets. This has averaged 6.6 per cent from 2016-17 to 2023-24 (a period of eight years). If we think of the inflation target as 4 per cent, this is a real growth rate of 2.6 per cent a year, which is not consistent with Indian success.

Why did private Indian firms reduce the intensity of their investment? Largely speaking, this has to do with the problems of central planning and rule of law. Building a business requires immense commitments of emotional energy, time, effort, capital, and children. When the external environment imposes unreasonable levels of policy risk and expropriation risk, private persons feel inclined to pull back. This is the essence of how the socialist pattern of society—of government control of products and processes inside private firms, coupled with arbitrary power in picking winners—induces stagnation.