Former Chief Economic Adviser (CEA) Krishnamurthy V. Subramanian has publicly endorsed Prime Minister Narendra Modi's initiative to encourage greater domestic spending within India, asserting that a robust internal economy is key to sustained growth amidst global uncertainties.
Subramanian, who served as CEA from 2018 to 2021, shared his views following PM Modi's recent appeal to citizens to prioritize local consumption. Modi had urged Indians to minimize leisure travel abroad, avoid overseas weddings, and reduce unnecessary gold purchases, advocating for a stronger emphasis on 'swadeshi' (self-reliance).
Domestic Policy Over Global Shocks
In a recent post, Subramanian highlighted that while global uncertainty is a factor, domestic policy holds greater sway over India's economic trajectory. He referenced Japan's remarkable economic expansion between 1970 and 1995, where its nominal GDP surged from $221.8 billion to $5.64 trillion—a more than 25-fold increase in just 25 years.
"Global uncertainty matters. But domestic policy matters more," Subramanian wrote. "Japan provides powerful inspiration."
He argued that India's substantial domestic market, entrepreneurial spirit, and improving infrastructure provide a strong foundation. By "getting domestic policy right" and implementing structural reforms, India can generate its own growth momentum, regardless of external shocks.
Driving India's Consumption and Investment
Subramanian underscored that the vast majority of India's GDP is driven by internal factors. Consumption accounts for approximately 58-60% of GDP, almost entirely domestically sourced. Investment contributes 28-30%, predominantly from domestic channels, with government expenditure making up another 10-12%.
"In other words, the lion's share of India's GDP is driven by domestic factors," he explained. He believes that increased domestic spending, particularly by high-purchasing-power individuals, can significantly strengthen demand, stimulate investment, and create employment opportunities within the country.
The Next Frontier: Factor-Market Reforms
While emphasizing the importance of consumption, Subramanian cautioned that it alone would not suffice for long-term growth. He identified "factor-market reform" as the next critical step. This includes improving the allocation and efficiency of land, labor, and power for manufacturing, as well as optimizing capital allocation. Such reforms are essential to reduce manufacturing costs and enhance India's global competitiveness.
Many of these reforms, he noted, would fall under the purview of state governments, while the Reserve Bank of India would be responsible for capital-related reforms.
Lessons from Japan's Resilience
Subramanian pointed out that Japan's impressive growth period was not characterized by favorable global conditions. The nation navigated severe challenges, including the oil shocks of the 1970s, rampant global inflation, and exceptionally high U.S. interest rates. Despite these headwinds, Japan continued its economic transformation.
"The lesson is not that global shocks do not matter. The lesson is that good domestic policies matter even more," he concluded.
He reiterated that with a large domestic market, entrepreneurial energy, and ongoing infrastructure development, India possesses significant growth potential. By strengthening these domestic foundations and pursuing the "next generation of reforms," India can maintain high growth rates, transforming potential shocks into opportunities rather than destiny.