The economic slowdown in India has bottomed out and measures taken by the government in the Union Budget will boost economic growth going forward, State Bank of India (SBI) managing director Dinesh Khara has said. These steps are aimed at improving rural spending, aiding infrastructure growth and attracting foreign investments, he said. The country requires an economic growth rate of 10-11 per cent in order to achieve the $5-trillion target set by the government, Mr Khara told news agency Press Trust of India.
India’s economic growth slipped to a more than six-year low of 4.5 per cent in July-September 2019.
Mr Khara underlined that several initiatives and measures have been taken by the government to attract investment into the economy are a “landmark decision” which will go a long way.
Mr Khara earlier addressed students at Columbia Business School on ‘SME Lending in India’, an event organised by SBI in association with the business school, its student-run organisation South Asia Business Association (SABA) and School of International and Public Affairs (SIPA).
Highlighting that there is a need for much higher savings and investments in order to achieve high growth, he said that currently, the investment rate is about 32 per cent to the GDP and the savings rate about 27 per cent. “There is a gap,” he pointed out, adding that if the economy has to grow at 10-11 per cent, and the investment rate has to be about 40 per cent.
“For that, there is a felt need for attracting investment from overseas. The infrastructure sector is another area where there is a whole lot of opportunity and there is a felt need in the economy to encourage this sector,” Mr Khara said.
He noted that in the Budget 2020-21, the government announced various measures to support the infrastructure sector and a major one among them was to invite investments from the sovereign wealth funds and interest income of these funds will be tax exempt. “This is a very major step which has been taken to attract investment,” he said.
“These kinds of measures which have been taken will go a long way in terms of supporting the government’s effort for building up infrastructure and revving up growth of the economy,” Mr Khara said, adding that such measures have a very significant multiplier effect.
“In the recent Budget, there has been very clear focus on improving the capacity to spend for the rural sector, on infrastructure creation and inviting foreign investment. I think it’s a very well-directed budget for achieving the outcomes which are intended,” he said.
Asked whether the economic slowdown it has bottomed out, Mr Khara referred to the Purchasing Managers’ Index (PMI) for India which shot up to 55.3 in January from 52.7 in December.
“So, that itself is a reflection that it has already bottomed out and we are on the upside. And apart from that the kind of initiatives which have been taken by the government in the recent budget will go a long way in terms of supporting the economy,” he said.
Outlining the reasons behind the slowdown in the economy, Mr Khara said it was the consumption engine that had slowed down.
“My assessment is that demand from the rural sector is quite muted. That is one of the major reasons for the kind of slowdown which we are witnessing.”
The rural economy is supported by the money order economy – remittances which flow from the urban sector to the rural sector, he said , adding that the real estate and auto are two major sectors which used to offer opportunities for people from rural areas. “I would say that the money order economy almost collapsed. That is another reason for this kind of muted demand seen from the rural sector.”
The government’s focus on recreating and repairing the real estate sector by introducing the Special Window for Affordable and Mid-Income Housing (SWAMIH) Investment Fund is a major step, he said, adding that the focus on infrastructure will also go a long way in creating employment.
The PM Kisan scheme, under which an income support of Rs 6,000 per year will be provided to all farmer families across the country, will also bring in enough liquidity in the rural sector, Mr Khara said.
“Liquidity in the rural sector is more important than anywhere else because the marginal propensity to consume is significantly higher in the rural sector than elsewhere. These are some other measures which have been taken which will go a long way in terms of supporting the build-up of the economy once again,” he said.
He said that once demand-related issues were addressed, it will help in boosting growth.
Mr Khara also pointed out that looking into data for past 30 years, it had been observed that in every cycle of 10 years, there has been a slowdown or single digit growth for at least two to three years.”So, from that point of view this 4.5 per cent growth which we have seen in this current cycle of 10 years is one in line with the trend seen in the past two,” he said.
Asked whether the country can become an economic success without manufacturing, Mr Khara said that auto and auto-ancillaries, and pharma were the two manufacturing sectors which could integrate with the global supply chains and will continue to be the future sectors of growth.