The Narendra Modi government’s ambitious target of a $5 trillion economy by 2024 has triggered interesting debates. Some see this as mere wishful thinking—an unachievable target. There is another set who argues that the prime minister is asking for less. India should target a much higher growth, a much bigger size to accommodate millions of young skilled youth in the job market and lift the economy to the next level as the world’s next big manufacturing hub, they say. Who are the realists here?
Dreaming big is essential; for only a target-based approach backed by a solid roadmap has delivered in economies that have achieved great scale. But, before targeting the $5 trillion mark, India will have to get its act together in a range of areas, unclog the sizeable number of stalled projects, remove policy shortcomings and blunders that were strictly avoidable. Finally, the government must understand the problem areas that are pulling it down in the race among peer economies.
The first problem is the depressingly slow pace of infrastructure development in the last decade. India is still at the position where China was 20 years ago in terms of infrastructure development. The 2019 Union Budget by Finance Minister Nirmala Sitharaman has laid out an ambitious roadmap. It talks about plans with a pan-India focus to give a further boost to Sagarmala, Bharatmala and UDAN projects, besides the dedicated industrial and freight corridors. The plans are ambitious, but the problem is resources.
Here is the puzzle: The government estimates Rs 100 lakh crore infrastructure investments over the next five years or an average Rs 20 lakh crore a year. This is a far cry from what is spent on infrastructure currently which is barely one-third of what is estimated. The question is, where will this money come from. India does not have powerful institutions that can fund long-gestation infrastructure projects. Banks do not have enough long-term liabilities to match such loans. Lenders have gone terribly wrong in the past by not following healthy lending practices.
About 70 percent of the banking system (read state-run banks) are at the mercy of the government for capital for its survival. India does not have a deep bond market to take up the financing burden. The state-insurer Life Insurance Corporation of India (LIC) has been overexploited to do businesses it has never understood. There aren't many other options left to take up the infra-funding burden. The government's plan to borrow off-budget is risky and unadvisable. The question that comes up again is, who will fund the multi-billion infra dream.
The second major drag is the government's excessive involvement in businesses. The government remains a majority, active participant in several entities including banks, airline, infrastructure firms. It controls 70 percent of the banking industry. This participation has resulted in a lot of money getting stuck in these entities. The government will have to exit these businesses backed by a solid, aggressive disinvestment plan to unlock this money.
The third is the depressing pace in carrying out land and labour reforms. This has been a major turn-off for investors looking at setting shop in the country. Sitharaman's Budget talks about narrowing labour laws. This is a step in the right direction but quick execution is important. Since land is a state subject, respective state governments need to work with the Centre to bring about the change. In the past, investors got a shocker from episodes such as Singur. These kinds of incidents cannot be allowed to be repeated if India wants to progress economically.
Fourth, the government will have to also need to work out an exigency plan to get private investors back. This is even more critical now since domestic consumption is dropping to dangerous levels. Mint quoted a CMIE report that said investment in new projects plunged to a 15-year low in the quarter ending June 2019. Both private and public sectors announced new projects worth Rs 43,400 crore in June 2019 quarter, 81 percent lower than what was announced in the March quarter and 87 percent lower than during the same period a year ago. According to the finance ministry’s data, projects worth almost Rs 11 lakh crore remain ‘stalled’ or are having issues. Railways, roads, and power sectors account for more than half of these stalled projects.
Fifth, as this writer argued in an earlier article, so far the economy has been largely riding on public money. Government spending has largely aided GDP growth. Sure, this was needed at a time when private investors were absent. However, an economy which rides largely on government money for a prolonged period of time does not promise much to the economy in the long run. What is needed is the participation of private investors.
The government’s $5 trillion target is ambitious and a strong statement of intent. But this intent must be followed up with action supported by a clear action plan to succeed. Else, it will remain mere wishful thinking. The year 2024 isn’t that far.
Updated Date: Jul 17, 2019 17:38:51 IST