CONTEXT

In early June, at a NITI Aayog meeting, Prime Minister Narendra Modi set a clear and bold economic target — to grow India into a $5 trillion economy by 2024. It is now for ‘Team India’, as the meeting was bannered, to translate this target into a plan and policies and programmes.

What does a $5-trillion economy mean?

• $5-trillion economy refers to the size of an economy as measured by the annual gross domestic product (GDP). GDP is the total monetary value of all final goods and services produced in an economy within a year.
• Currently, India is the sixth-largest economy in the world with a GDP of $2.7 trillion. But it has to be understood that India being the sixth-largest economy doesn’t corroborate Indians being sixth-richest people since GDP per capita of India is much lower when compared to many developed countries and developing countries.

How realistic is this dream?

• It is Rs350,00,000 crore of gross domestic product (GDP) at current prices, at ₹70 to a U.S. dollar exchange rate. India’s (provisional) GDP in 2018-19 at current prices is ₹190,10,164 crore (or $2.7 trillion), which means the annual per capita income is ₹1,42,719, or about ₹11,900 per month.
• The target implies an output expansion by 84% in five years, or at 13% compound annual growth rate. Assuming an annual price rise of 4%, in line with the Reserve Bank of India’s inflation target, the required growth rate in real, or inflation-adjusted, terms is 9% per year.
• To get a perspective, India officially grew at 7.1% per year over the last five years, but the annual growth rate never touched 9%.

Comparison with Asian Countries

China – China, with a historically unprecedented growth record in its best five years, during 2003-07, grew at 11.7%;.

South Korea – South Korea, between 1983 and 1987, grew at 11%.

How to grow at such a fast pace

No country grew at such a pace without mobilising domestic saving and raising fixed investment rates.

1.Savings and investment rates required

• In the last five years, on average, the domestic saving rate was 30.8% of gross national domestic income (GNDI), and the investment rate (gross capital formation to GDP ratio) was 32.5%.
• Assuming the underlying technical coefficients remain constant, a 9% annual growth rate calls for 39% of domestic saving rate and 41.2% of investment rate.
• Correspondingly, shares of private consumption need to shrink to about 50% of GDP from the current level of 59% of GDP at current prices, assuming foreign capital inflow remains at 1.7% of GDP.
• In other words, India will have to turn into an investment-led economy as it happened during the boom last decade (2003-08) before the financial crisis, or like China since the 1980s.
• Granting that rapid technical progress or changes in output composition could reduce the required incremental capital-output ratio (ICOR), it nevertheless will call for a nearly 8-9 percentage point boost to saving and investment rates.

The low domestic saving rate

History shows that no country has succeeded in accelerating its growth rate without raising the domestic saving rate to close to 40% of GDP.

FDI is not an alternative – Foreign capital can fill in some vital gaps but is not a substitute for domestic resources.

A decline in savings – The domestic saving rate has declined from 31.4% in 2013-14 to 29.6% in 2016-17; and gross capital formation rate from 33.8% to 30.6% during the same period.

NPA Crisis – The banking sector’s ability to boost credit growth is limited by non-performing assets (NPAs) and the governance crisis in the financial sector.

Baltic Dry Index indications –

• Export to GDP ratio has declined rapidly, with a looming global trade war on the horizon, as has been indicated by the Baltic Dry Index.
• The highly regarded leading indicator of global trade, currently trading at 1354 is forecasted to decline to less than 1,000 index points by the year-end (a decline from its historic high of 11,793 points in May 2008, just before the financial crisis set in).

Challenges facing by the economy

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.

How can India become a 5 trillion economy?

1) Investment: According to the Economic Survey 2019, private Investment is the key driver of growth, jobs, exports and demand. The government expects investment rate to pick up in FY20 on higher credit growth and improved demand rebound in investment cycle. Growth in investment, which had slowed in many years, has bottomed out and has started to recover since 2017-18. Growth in fixed investments picked up from 8.3 per cent in 2016-17 to 9.3 per cent in 2017-18 and further 10 per cent in 2018-19, the survey said.

2) Jobs: The survey says job creation is mandatory to achieve the $5 trillion economy status. It says that unshackling MSMEs could help to achieve greater profits, job creation and enhanced productivity. This can be done via: sunset clause of less than 10 years, with necessary grand-fathering, for all size-based incentives; and deregulating labor law restrictions to create significantly more jobs, it adds.

Job creation in India suffers from policies that foster dwarfs, that is small firms that never grow, instead of infant firms that have the potential to grow and become giants rapidly,” the survey said, categorising small firms as those employing less than 100 workers. Dwarfs were defined as small firms in operations since more than 10 years and “infants” as newer companies that are small in size in terms of workforce, according to the survey.

Analysing the Annual Survey of Industries (ASI) data, the survey said dwarfs accounted for more than half of all organised firms in the manufacturing sector, but contribute only 14 per cent in employment generation and a “mere” 8 per cent to productivity.

“In contrast, large firms (more than 100 employees) account for three quarters of such employment and close to 90 per cent of productivity, despite accounting for about 15 per cent,” the survey said, emphasising that it is a misconceived notion that small firms are significant job creators as they are also responsible for job destructions because they “find it difficult to sustain the jobs they create”.

3) Savings: Exports and manufacturing must ideally be focused as part of the growth model to sustain GDP at 8 per cent rate. “Because higher savings preclude domestic consumption as the driver of final demand,” said the survey.

4) Demographic phase: The Economic Survey 2019 has predicted a slowdown in population growth in the next two decade. “Working age population would grow by roughly 9.7 million (97 lakh) per year during 2021-31 and 4.2 (42 lakh) million per year during 2031-41. This could be an ideal for India to propel its economy.

5) Energy conservation: Enabling inclusive growth through affordable, reliable and sustainable energy is another step to make India a $5-trillion economy. The survey has suggested that 2.5 times increase in per capita energy consumption is needed for India to increase its real per capita GDP by $5000 (at 2010 prices), and enter the upper-middle income group. And, four times increase in per capita energy consumption can achieve 0.8 Human Development Index score.

Conclusion

Given the foregoing, the $5 trillion target appears daunting. It may yet be doable, provided policymakers begin with a realistic assessment, by willing to step up domestic saving and investment, and not by the wishful thinking of FDI-led growth accelerations in uncertain economic times.