Watch | Montek Singh Ahluwalia: 'GDP needs consistent growth; red tape hurting investments'

‘Tax relief may not raise demand’

Speaking about the Centre’s announcement of a tax break worth Rs 1 lakh crore, Ahluwalia acknowledged that while tax rationalisation is crucial, its impact on consumption might not be as substantial as expected. “The question really is, what is the marginal propensity to consume out of the additional income that people get?" Ahluwalia remarked.

Also read: With lower income-tax, can RBI's repo rate cut boost urban consumption?

He said that while consumption has slowed, the tax relief might provide some spur, even though it may not be enough to significantly drive demand in the economy.

Roadblocks in investments

Ahluwalia also addressed concerns regarding the sluggish pace of private investments despite a growth in the country’s economy. Referring to the current capacity utilisation at mid-70s, he emphasised the need for it to cross the 80 per cent-mark for private companies to begin investing. "If the economy continues to grow – and the faster it grows, the better – then this excess capacity will be quickly used up," he stated.

Also read: Tax relief or economic mirage? The middle-class dilemma

Ahluwalia, however, underscored a critical issue hindering investment in India: bureaucratic hurdles. He noted that many entrepreneurs, particularly from smaller companies, face significant obstacles in the investment process, including excessive permissions and red tape.

Why Indians prefer foreign destinations

He also pointed out the growing trend of skilled Indian professionals opting to set up businesses abroad, citing Dubai and Singapore as popular alternatives due to more efficient procedures. Ahluwalia urged Indian states, including Karnataka, to introduce policies that simplify these processes and make investing in India more attractive.

Also read: New tax Bill: No-deductions, low-rate regime should ease compliance

Ahluwalia also weighed in on the fiscal deficit target of 4.4 per cent and India's forecasted GDP growth rate of 6.3 to 6.8 per cent for FY26 which remains below the 8 per cent threshold needed for India to become a "Viksit Bharat" (developed nation) by 2047, the year marking the centenary of India’s independence.

Tip to achieve ‘Viksit Bharat’ goal

He said, to achieve long-term economic growth, India needs to target 8 per cent annual growth. "In the transition to developed nation status, you cannot maintain 8 per cent growth throughout," he explained. Instead, an average of 9 per cent growth in the early years, followed by a gradual slowdown, will be essential to reaching the 8 per cent target over the next 25 years.

Also read: Income-tax break unlikely to boost consumption: Ex-IMF India Rep

“What we really need to zero in on is, what is the rate in the next five-year period which is consistent with 8 per cent growth?” Ahluwalia concluded.

For now, India's policymakers will need to focus on the medium-term trajectory of economic growth, while tackling the investment hurdles that continue to stymie progress. With an ambitious target ahead, India's path to becoming a developed nation remains fraught with challenges but holds immense potential for growth.

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