Investment-led growth, Pg17

Key Highlights:

• The Narendra Modi government initially pursued an investment-led growth strategy, aligning with the Washington Consensus by emphasizing private sector growth and minimal government intervention.
• Key reforms introduced to enable private business included the Insolvency and Bankruptcy Code (IBC), Goods and Services Tax (GST), and corporate tax rate reductions.
• Despite these measures and incentives like the Production-Linked Incentive (PLI) scheme, private investment as a percentage of GDP declined since 2011-12.
• Weak consumption growth, which hit a 45-year low in 2017-18, was identified as a major impediment to private investment.
• The government's economic approach gradually shifted, acknowledging the need to address weak mass-level demand to incentivize fresh investments.

India's Economic Shift.jpg

Detailed Insights:

• The initial economic philosophy of "maximum governance, minimum government" aimed for a fast-growing private sector to drive job creation and prosperity.
• The IBC was enacted in 2016 to provide a unified, time-bound mechanism for resolving insolvency and bankruptcy, shifting control from debtors to creditors.
• The GST, implemented in 2017, aimed to create a unified national market by subsuming multiple indirect taxes, reducing cascading effects.
• The PLI scheme, launched in 2020, offers incentives on incremental sales to boost domestic manufacturing across 14 key sectors and attract investments.
• Finance Minister Nirmala Sitharaman had urged India Inc. to overcome diffidence and invest more, comparing them to Hanuman.
• The realization that weak consumer demand disincentivizes private investment led to a re-evaluation of the government's purely investment-led strategy.
• Investment as a percentage of GDP has been a concern, indicating that policy measures alone were insufficient to spur private capital formation without robust demand.

Key Concepts Involved:

• Washington Consensus: A set of free-market economic policies promoted by institutions like the IMF and World Bank, advocating deregulation, privatization, and fiscal discipline.
• Insolvency and Bankruptcy Code (IBC): A comprehensive law enacted in 2016 to consolidate and amend laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner.
• Goods and Services Tax (GST): An indirect tax implemented in India from July 1, 2017, that replaced multiple central and state indirect taxes with a single, unified tax system on the supply of goods and services.
• Production-Linked Incentive (PLI) Scheme: A government initiative launched in 2020 to boost domestic manufacturing and exports by offering incentives on incremental sales to companies in specified sectors.