7 PM | Not by wishful thinking – How to make India a $5 trillion economy | 3rd July, 2019

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Context:  Goal to make India a 5 trillion dollar economy by 2024.

What is $5 trillion Economy?

• $1 trillion economy means Rs. 70 Lakh crores ($1=Rs.70). So $5 trillion is approximately Rs. 350 Lakh Crore at the present exchange rate.
• At present, India’s Gross Domestic Product (GDP) in 2018-19 at current prices is about $2.7 trillion, which is about Rs. 190 Lakh Crore.
• To achieve this target Indian economy needs to grow at 13% of compound annual growth rate (CAGR). Since the inflation target of India is 4% (±2), so the required growth rate in real (inflation adjusted) is 9% per year.

Is 9% of growth rate achievable?

There are some historical examples in Asia. Let’s see a few of them:

• China: Between 2003 and 2007, China’s economy grew at 11.7% growth rate.
• South Korea: Between 1983 and 1987, South Korea’s Economy grew at 11%.
• India: Between 2003 and 2008, Indian economy grew at nearly 9%.

The past experience shows that the target of 9% growth rate is achievable. India in 2003-08, grew at 9% because the Savings rate and fixed capital rate were high.

Present status of savings, investment and growth?

• For the growth of an economy, the economy needs savings and investment. The investment may be domestic or foreign (in the form of FDI). The saving rate in 2007-08 was 36.8% and the investment rate was 35.6%. These rates of savings and investment led to high growth rate of 9%.
• In last 5 years, on average the domestic saving rate was 30.8% of GDP and investment rate (Gross Fixed Capital Formation) was 32.5%, which accounted for a growth rate of average 7.2% (2018-19). If we assume Incremental Capital Output ratio (ICOR) as constant, to grow at 9% growth annually, we need 39% of domestic saving rate and investment rate of 41.2%.
• With the decreasing savings rate, NITI Aayog is relying more on FDI inflow. However, the Gross FDI flow into India has peaked in 2008-09 at 2.7% of GDP decelerating thereafter. The present net FDI inflows stand at 1.5% of GDP in 2017-18.

Steps taken by the government to move the economy towards $ 5 trillion economy:

• Make in India initiative: under which thrust sectors have been identified to provide a push to manufacturing production in India. Under this government promoting indigenous defence manufacturing.
• Start up India: the objective is to support entrepreneurs, building a robust ecosystem and transforming India into a country of creators instead of job seekers. To fund the start-ups government launched “fund of funds for start-ups” with 10,000crore corpus.
• Ease of doing business (EoDB): the performance of India in EoDB is remarkable. India improved its ranking from 130 in 2016 to 77 in 2018.
• Streamlining regulations in Logistics sector:  The ‘India Customs Single Window’ allows importers and exporters facilitating to lodge their clearance documents at a single point only. Required permissions, if any, from other regulatory agencies would be obtained online without the trader having to approach these agencies.
• Goods and service tax: The introduction of the Goods and Services Tax (GST) has provided a significant opportunity to improve growth momentum by reducing barriers to trade, business and related economic activities.
• Inflation targeting:under inflation targeting regime inflation controlled within the bandwidth of 4   which creates policy certainty and promotes savings and investment indirectly.
• Foreign direct investment (FDI) reforms: abolition of foreign investment promotion board led to more than 90% of FDI comes through automatic route.

Challenges facing by the economy: from both external and internal factors.

External sector:

• Rising trade protectionism: the US imposed three rounds of tariffs on more than $250bn worth of Chinese goods. The duties of up to 25% cover a wide range of products, from handbags to railway equipment. China hit back by imposing tariffs ranging from 5% to 25% on $110bn of US products including chemicals, coal and medical equipment. On the same lines USA imposed tariffs on steel and aluminum imports and recently withdrawn generalized system preference (GSP).
• Rising right wing philosophies in European countries: like Brexit and right wing leaders elected in Italy, Poland and Hungary nations will lead to rising protectionism.
• Ineffectiveness of World trade organization (WTO): WTO failed to control the rising tariff war between USA, china and India. WTO launched Doha round negotiations in 2001 but still negotiations are in limbo.
• Conflict in west Asia (Syria war, Saudi Arabia-Oman war) along with USA withdraw from Iran nuclear deal led to rising crude oil prices. With the $10 per barrel increase in oil price, the GDP is expected to come down by 0.2-0.3 per cent which will further worsen the Current Account Deficit by $9-10 billion dollars.

Internal factors:

• India’s agrarian crisis: increasing protest from farming community due to lack of just price for agricultural produce; increasing debt and loan waivers; effects of climate change (like monsoon breaks, increasing unseasonal rains etc.) will effect on the agricultural productivity and on Indian food security.
• Twin balance sheet syndrome (TBS): Twin balance sheet problem refers to the stress on balance sheets of banks due to non-performing assets (NPAs) or bad loans on the one hand, and heavily indebted corporate on the other. Because of rising NPA’s led to decline in credit growth.
• Rising state Debt’s: according to N K Singh committee report, Outstanding liabilities of States have increased sharply during 2015-16 and 2016-17, following the issuance of UDAY bonds in these two years, which was reflected in an increase in liability-GDP ratio from 21.7% at end-March 2015 to 23.4% at end-March 2016 and further to 23.8% at end-March 2017.this will also not give enough space for productivity investment.
• Savings and Investment: The domestic saving rate has declined from 31.4% in 2013-14 to 29.6% in 2016-17.The gross capital formation rate has declined from 33.8% to 30.6% during same period. For any country’s growth consistent rise in savings and investment should be needed.
• Declining Export to GDP ratio- from 25.43% in 2013 to 19.05 in 2017 due to rising labour costs and policy effects (Demonetisation and GST implementation).

Steps needed to be taken:

• Bank recapitalisation: government announced RS 2.11 trillion for capitalisation of banks in 2017 but till now only 1 lakh crore infused by the government. So the government should speed up infusing the needed money to revival of credit cycle in the economy.
• FDI reforms: increase the limit of FDI in insurance and pension and Mutual fund sector.
• Increase in public expenditure: At the most basic level, GDP of an economy is the sum of private consumption expenditure, investment, government expenditure and net exports (exports minus imports). An increase in any of these pushes up GDP. The government expenditure for this fiscal is expected to grow at 8.87%, whereas GDP is likely to grow at 6.98%. In 2017-18, government expenditure grew at 14.97%, while GDP grew at 7.17%. So, an increase in government expenditure basically pumped up GDP growth to a large extent in 2017-18 and to some extent in 2018-19.
• Export promotion: with increase in protectionism in several countries, domestic exporters need incentives to increase shipments. So, exporters body Federation of Indian export Organisation (FIEO), suggested a series of measures including outright exemption from GST, interest subsidy for agriculture sector, more funds for MSME.
• Implementation of agriculture reforms: like e-NAM to just price discovery for agricultural produce; mega food parks to control food wastages; and to protect the farmers from climate vagaries, Pradhan mantri fasal bima yojana should be implemented strictly.

Way Forward:

In the present scenario, the $5 trillion target appears to be a mammoth. However, it may yet be doable, provided policy makers begins with realistic assessments and willing to step up domestic saving and investment, along with promotion of FDI.

Source: https://www.thehindu.com/opinion/op-ed/not-by-wishful-thinking/article28264404.ece