Editorial Simplified: Lowering the Cost of Capital | GS – III

Relevance: GS Paper III

Why has this Issue Cropped Up?

The BJP manifesto puts the goal of making India a $5 trillion economy by 2025 and a $10 trillion economy by 2032.

The Requirement of Investment

  • India is currently the fastest-growing major economy in the world.
  • The question is whether the current growth rate is enough to create quality jobs for a growing population.
  • The experience of the two previous economic boom is that a shift in trend growth requires an investment boom led by the private sector.
  • One of the requirements for that is competitive cost of capital.

Ways to Reduce Cost of Capital

  • First, the direct tax system has to be overhauled. The indirect tax system has already been transformed with the introduction of GST. The other leg of the tax reforms agenda i.e. Direct tax has not been pursued.
  • Second, the cost of borrowing in India is too high. Sustained low inflation should help bring down the cost of borrowing. Low inflation should also hopefully put the Indian currency on stable ground, and thus reduce the risks to corporate finances from sudden depreciations.
  • Third, investment activity quickens when the relative cost of intermediate goods falls. In other words, machinery has to be competitively accessed.