Structural issues with the Indian economy - deficient financial capital

I have blogged on several occasions about fundamental structural problems with the Indian economy. In Can India Grow, we had highlighted India's chronic human, financial, physical, and institutional capital deficiencies which holds the country back from realising sustained high growth rates.

On the financial side, there are perhaps three critical ingredients relating to financial capital formation, intermediation, and public expenditures. Let's examine each in terms of their critical drivers.

The first relates to total investible financial savings (sum of public, private corporate, and household financial savings). It has been stagnant since the blip of 2007-08.

The most important signature of the depth of financial intermediation is credit to GDP ratio. Here is the trend on credit to private non-financial sector as a percentage of GDP. It has been stagnant since 2007-08.

On the public expenditure side, we need to focus on tax to GDP ratio. Here too, the direct tax as a percentage of revenues has been stagnant since 2007-08.

In a recent article, Rathin Roy wrote,

The central government has consistently failed to raise its revenue-GDP ratio. This was 9.37 per cent in 1990-91. It is 8.18 per cent now. The tax-GDP ratio peaked at 8.8 per cent in 2007-08. It is now 7.82 per cent.

In other words, in all these three, Indian economy has made little progress since 2007-08. In fact, it is clear that it did not recover from the crisis. The subsequent growth was not built on any sustainable foundation. In contrast, the growth spurt till 2007-08 appears to have been built on some solid financial capital foundations. A structural break appears to have occurred at the turn of the millennium, which moved the country into a high potential growth trajectory. The reforms undertaken by the government in 1999-2004 are an under-appreciated factor. 

So we have these stylised facts of stagnation or non-recovery since the GFC. Besides, globally tailwinds have disappeared and headwinds have emerged. We also lost the opportunity to undertake structural reforms, both during the growth era and the period of stagnation. Further, the banking sector problems too have been allowed to fester. Now we are into Covid, carrying all these legacies. 

Notwithstanding the unfavourable global conditions - globalisation and trade liberalisation on the rewind, and geo-political tensions soaring and distracting energies - a country of India's size, favourable demographics, and economic base has most of the required factors within its control to sustain a 5-6% growth rate for the foreseeable future. That, however, will not come automatically. It requires undertaking some of the reforms that have all been widely discussed, and implementing them with painstaking effort and honest appraisal.