Short term goals often lead to short term solutions.Rate cut or increasing leverage in the economy to boost consumption is one such solution.There is a relentless narrative in the market that reducing rates will boost consumption but that is ill founded belief far away from economic theory and belief.Leverage can only increase the consumption up to a point but after that point it starts having diminishing returns.The graph below shows that how leverage increases the demand initially but after that it plateaus out and starts falling.This is ‘short-termism’ and gives a coverage to actual problem India is facing.

Leverage can be related to aggregate demand mathematically involving leverage and income in a quadratic equation like Agg Demand= a + b(Income) + c(Leverage)-d(Leverage)2 .This illustrates why RBI cutting repo rates won’t pump in much growth and there is need to work on other factors that effect the economy.While Capital is today abundantly available but where India should focus is the labour and technology component of the economy.

Indian Labour productivity needs serious attention.Niti Aayog recently stated that India’s productivity is lowest among the G20 nations this is even when India is consistently growing at growth rate of above 6 percent which much above the world average of 2.8.Not only Indian labour is unskilled but it is also erratic and status conscious.There is a lack of concerted effort on part of government to break social consciousness of work and to increase capitalist mindset of the public in general.This is very well reflected in lack of involvement of locals in urban sanitation and housekeeping services.India is in a classic situation with overflowing people and under-supply of workers.In a country with such a huge supply of people , shortage of plumbers, electricians and sanitation workers shows serious policy deficit in addressing these issues.

With Tariffs round the corner, it is important that re-skilling is done at warfooting through bridge courses even if it involves relaxing rules to allow experts to deliver such skills.Experts should be given freedom to deliver sessions to such candidates and candidates should be motivated to attend sessions by giving certification that can be used in giving jobs. Indian Corporates can’t compete with world if they have to deal with such under-skilled and over-demanding labour.The focus on ‘workmanship’ has to increase and status-marking of work has to break.The work itself should be promoted as the best human act.There is a pressing case for India to do this otherwise there is no respite for unemployment in India.

Lastly, there is a need for cutting edge technology manufacturing to happen in India.India is still one of the largest importer of Industrial machinery(Construction as well electrical) and the biggest factor here is established base in other countries like China and Europe which makes manufacturing of such equipments difficult in India.India needs to throw cheap capital and permanent order book on Indian players who can take this up.If need be, corporatisation / privatisation should also be taken of such governmental units which are involved in such work.This is the next level reform which needs to be front loaded to drastically increase Industrial base of India.

In the end, it is wise to say that government should stop relying on RBI to boost economy because repo rate cuts don’t work until unless demand and asset prices align in the economy.Right now, demand is low and asset prices are high ,which do not make repo rate cut a very workable option.Instead, it is time to liberate talent within government and outside government to jack up productivity in the economy and get ready for a more competitive world.