Just Raising GDP Growth Rate Is Not Enough

By Ashok B Sharma

World is watching with curiosity as Prime Minister Modi pledged to make India a $5 trillion economy by the fiscal year 2024-25. It is always good to have a target and do the necessary to achieve the goal. If the prime minister really means what he says he should sincerely implement the programme put in place with the intent of catching up the target. At present the global headwinds are challenging. World economy remained subdued in 2018 with growth rate falling to 3.6 per cent from 3.8 per cent in 2017. It is projected to fall further to 3.3 per cent in 2019. Also Indian economy moderated in 2018-19 with a growth of 6.8 per cent which is lower than 7.2 per cent in 2017-18.

According to estimates, India needs to sustain a real GDP growth rate of 8 per cent to achieve the goal of $5 trillion economy. Analysing the current situation the Government’s think tank report – Economic Survey 2018-19 has, however, admitted “both downside risks and upside prospects persists in 2019-20” But in the same breath the Survey dismisses the traditional Anglo-Saxon concept that an economy can be in either in a vicious or in a virtuous cycle. It has termed the present Indian economy to be stable and in a state of equilibrium. The macroeconomic stability is due to containing price inflation within four per cent and by maintaining a manageable current account deficit to GDP ratio (2.4 per cent of GDP), despite the initial rise in crude oil prices. Added to this is the political stability. Despite the growth being subdued at 6.8 per cent, India continues to be the fastest growing major economy in the world. The GDP is project to be at 7 per cent in 2019-20.

The ruling party, Bharatiya Janata Party (BJP) which bounced back to power with a brute majority in 2019 General Election, in its poll manifesto, Sankalp Patra said if voted back to power it would make India a $5 trillion economy by 2025 and $10 trillion economy by 2032. India, which is now the sixth largest economy, will be the third largest economy by 2030.

Toeing the line of the party’s poll manifesto, the finance minister of Modi 2.0 government, Nirmala Sitharaman while presenting her annual budget for the country said India, which is now a $2.7 trillion economy, will grow to become a $3 trillion economy in the current year and to $5 trillion economy in next few years Drawing confidence from India graduating to a $2.7 trillion economy in a span of five years from the level of $1.85 trillion economy, she said the goal is achievable. Within a span of five years India became the sixth largest economy from its past 11th position. In purchasing power parity, India is the third largest economy, only next to China and the US. However in post-budget media briefing, Sitharaman said her budget has laid the blueprint for next 10 years.

The International Monetary Fund (IMF) has projected that India’s GDP will touch $4.7 trillion in 2024. But who stands to benefit if India becomes a $5 trillion economy? It may bring us a sense of pride, but to benefit the common man it is the GDP per capita that matters. GDP be it in dollars or rupee has to be divided by the total population to arrive at GDP per capita. India with $2.7 trillion economy has GDP per capita at $2,015 only as per 2018 World Bank data. It is behind Indonesia which has GDP per capita at $3,893 and China at GDP per capita at $9,770. Of course it is ahead of neighbouring Bangladesh which has GDP per capita at $1,698. Therefore aiming at $5 trillion economy is not sufficient. The country needs to have inclusive growth and more of financial inclusion.

Key to fostering economic growth is investment, liquidity in the market, rise in savings and consumption, creation of jobs, increase in both merchandise and services exports and overall keeping price inflation at a manageable level.

Investment growth should pick up in the private sector. Liquidity situation has remained tight since September 2018. Financial flows to the economy remained constrained due to decline in the amount of equity finance raised from capital markets and stress in the non-banking financial companies (NBFCs). However there is a silver lining as banks have started reducing their non-performing assets (NPAs) and there is a hope for credit flow to rise. The micro, small and medium enterprises (MSMEs) that are responsible for creation of jobs need hand holding which the Union Budget has tried to address. Some MSMEs need to graduate to large enterprises. The Budget has also tried to address some problems of NBFCs. The central bank RBI has a critical role to play in creating liquidity and balancing inflation and increasing consumption and savings. As loans are costly in the country, companies should access cheaper loans in the global market.

The government should address the concerns of investors for a common market by setting up of a countrywide agricultural market, common power tariff and inclusion of petro products in the GST. Deceleration in exports and moderation in the growth in the services sector are causes for worry. However the growth of remittances has offset the deterioration in current account deficit. Exporters should navigate in this difficult global situation and find out a solution.

The government has made a commitment to make investments in the infrastructure sector in the Union Budget which is laudable. It has also called for private sector participation in railways. In matters of infrastructure and social sector development government should not shy away from making adequate investment, even if it breaches fiscal discipline

Raising of rural income through several schemes like crop insurance programme, rural roads, pension scheme for farmers, piped drinking water to rural household, gas and electricity connection to rural households, rural housing scheme, rural waste management and fisheries schemes and the like. Encouragement to Start Ups, Stand Ups is in right direction. But it needs to do more for dalits, tribal people and women to live up to its principle of Sab ka Saath, Sab ka Vishwas. The dream of $5 trillion economy should also aim at raising the GDP per capita which can help the common man. (IPA Service)