What will it take to revive growth in India?
Modi government's $5-trillion dream by 2025 is not just aspirational, but the need of the hour for a country that has the world's youngest population
If cultural wealth, tradition, gastronomic delights, and more, defined the idea of India in the 20th century, the turn of the century shifted the global narrative to it being one of the next economic superpowers. This century could be the Indian century, suggested leaders, scholars, corporates and experts in the field.
Institute of Business Value (IBM), in fact, published a paper a few years back suggesting how India could overtake the American and the Chinese economy by 2050 to emerge as the biggest in the world. It had defined a host of issues as well that need to be tackled to avoid the trap of remaining a middle-income economy.
In 2018, Indian Prime Minister Narendra Modi first talked about India being a $5-trillion economy by 2025 at the World Economic Forum in Davos. "We will become the third largest consumer market in the world by 2025. According to the World Bank and IMF our growth rate is going to be steady and high," Modi had said in his speech.
This year, after his party got a thumping victory and mandate to govern the country for another five years, the goal of expanding the economy to $5 trillion found reference in the Indian budget, too, which was tabled in the parliament last month in July.
Now, this would be possible only if India grows at 9 per cent and above in coming years. And looking at the current state of affairs, there are doubts if this is really achievable. Firstly, it is important to understand that a $5-trillion economy and beyond is not just an aspirational goal.
It is the need of the hour in a country that has the youngest population in the world, and persistent poverty that needs to be eradicated. If the economy doesn't expand at a fast pace, it would fail the people of its country, and let go of the demographic dividend that could do wonders.
But what is making this economic goal ambitious and daunting is the slowdown in the core sectors of the Indian economy. During April-June period, the eight sectors, which include coal, fertiliser, steel, crude oil, cement, electricity, natural gas, and refinery products, grew by 3.5 per cent compared to 5.5 per cent in the same period last year.
Growth of these eight core industries dropped mainly due to a contraction in oil-related sectors as well as in cement production. Other important sectors such as the auto, manufacturing, real estate are also experiencing tough times with banks choking the credit outflow in the economy. Sales of passenger vehicles have experienced the biggest slump in 18 years.
There is a distinct slowdown in the economy and is reflected in a lower GDP growth of 6.8 per cent in financial year 2019 (that ended in March this year). It was the lowest in five years. In the most recent quarter, the annual growth rate was just 5.8 per cent, the first time the country's quarterly economic growth trailed China's in two years.
The Reserve Bank of India has revised the growth forecast for the country and expects Indian economy to expand at 6.9 per cent, instead of 7 per cent stated earlier, during the current financial year that ends in March 2020. Even then, industry experts and economists have reservations on such claims. Early results of companies in the April-July quarter is already hitting at a slowdown in sales and profit growth.
There are several factors weighing on the economy. CRISIL, a rating agency, notes that lingering effect of demonetisation, the ongoing trade dispute between the US and China and the credit crunch caused by the debacle of Infrastructure Leasing and Financial Services (IL&FS) last year are collectively hurting India.
The country's central bank in its recent policy meet has cut the key interest rates to revive growth and encourage more lending, but would that be enough to spur the economy is something that needs to be seen.
India, meanwhile, has slipped from its coveted position of being the fifth largest economy in the world. It has been pushed to the seventh place in the global GDP rankings in 2018 with the UK and France forging ahead to the fifth and sixth spots. India's GDP was at $2.7 trillion in 2018, while UK and France were at $2.8 trillion. It is largely due to slowdown in growth and currency fluctuations.
Foreign institutional and domestic investors are losing confidence and exiting the capital markets. In the first two trading sessions in August, the foreign portfolio investors (FPIs) withdrew around Rs28.81 billion from the Indian capital markets.
All of these point at the policy challenges for the Modi government. For the country to achieve the goal of a $5 trillion economy in another six years, it is imperative that it expands at a significantly faster pace than it is doing now. India today is fighting a slowdown and rising unemployment, with the jobless rate rising about two percentage points in July compared to a year earlier, as per data of Centre for Monitoring Indian Economy.
The economy has many fundamental strengths and is capable of taking on these challenges but it requires skilful policy manoeuvres. "We should be prepared to make a measured increase in fiscal deficit for a year or two. This will boost demand for goods and be a much-needed shot-in-the-arm for India's firms and farms.
"If the extra expenditure is directed at the poor and the agriculture sector, that will help those who need it most. Another item on which the government can step up expenditure is on building infrastructure. This can simultaneously boost demand and raise investment," Kaushik Basu, noted economist and a former chief economist of the World Bank, recently wrote in an opinion piece.
After all, it is economic prosperity that can bind the Indians together and ensure a better future for all. Indian government should take notice and do the needful and not let down the prospects of turning this century into an Indian century fall flat on its face.