Tracking India's economic slowdown: Narendra Modi's $5 trillion goal is wishful thinking unless Rs 100 lakh cr infra puzzle is solved

Editor’s note: This is the fifth part of a series in which Firstpost’s columnists analyse the ongoing economic slowdown and offer solutions. From an economic perspective, the highlight of Prime Minister Narendra Modi’s Independence Day speech was the reiteration of the government’s ambition to take the economy to $5 trillion in size over the next five years. “Right now, we are at around $2.70 trillion. For this, the government wants to invest Rs 100 lakh crore in developing infrastructure over the next five-year period,” Modi said. Is this a doable idea? To understand this in detail, let’s look at what has been the infrastructure investment scenario so far. According to the 2019 economic survey tabled in the Parliament, the country needs to spend at least 7-8 percent of its Gross Domestic Product (GDP) on infrastructure or $200 billion (Rs 14 lakh crore approximately), if it wants to dream of becoming a $10 trillion economy by 2032. Right now, India has been able to do about half of it (around $100 billion or Rs 7 lakh crore) annually, leaving a gap of $90 billion annually. That’s the present scenario. [caption id=“attachment_7167451” align=“alignleft” width=“380”] File image of Narendra Modi. ANI[/caption] Now, let’s look at the $5 trillion target. If the Modi government needs to meet the Rs 100 lakh crore investment figure envisaged for the next five years, on an average, Rs 20 lakh crore needs to be spent on a yearly basis. Currently, we are far below the threshold, doing about Rs 6-7 lakh crore yearly. The question is, who will fill the remaining gap? That is especially when the government is in a tough spot fighting revenue deficit and expenditure burden (on account of the absence of private investments) simultaneously. Right now, both the commercial banks and non-banking finance companies (NBFCs) aren’t ready for this. Banks are fighting a non-performing asset (NPA) monster and the NBFCs are down with a severe liquidity crunch as well as a growing trust deficit. Nearly 17 percent of infrastructure loans are in the stressed category on banks’ books, according to RBI data. To be sure, this has come down a bit from the previous years after a major chunk of the NPAs has been written off technically. What this basically means is that our financial institutions are not up to the task. What is the government’s fiscal situation? There is no good news on that either. The government is running a tight balance sheet. The latest warning has come from the Comptroller and Auditor General of India (CAG). According to a report in The Economic Times, the CAG has pegged the fiscal year 2018 fiscal deficit considerably higher than the number at 5.85 percent, far higher than the government’s figure of 3.46 percent. Also, the revenue scenario doesn’t look good as the slowdown-hit companies, especially those in the automobile industry, are seeking tax reductions to tide over the current difficult phase. Unless the government finds a way to speed up the disinvestment and generate money, it will be extremely difficult to even maintain the current pace of infrastructure investments, forget about doubling the target. It will be a futile exercise to pass on the burden of long-term infrastructure funding to banks. The government will have to deepen the bond market. The Union Budget 2019 spoke about the government’s plans to tap the overseas market in addition to the domestic market. One needs to wait and watch that.

If the Modi government finds a way and manages to implement the Rs 100 lakh crore investment as announced, this will indeed act as a big stimulus to the economy and help revive the job market. With unemployment at a 45-year high and private investments falling, it is highly critical for the government to act with an urgent stimulus package. The industry has already sought a package nothing less than Rs 1 lakh crore from Union Finance Minister Nirmala Sitharaman. Their demand is reasonable given that economic activities are hardly showing any signs of an uptick and job situation continues to worsen. The problem is that the government doesn’t have a strong hold on its finances as of now. Part 1: Why Narendra Modi govt shouldn’t delay fiscal stimulus to revive struggling industries Part 2: Country needs meaningful transition policies; simple demand and supply games won't do Part 3: Narendra Modi govt has a herculean task ahead to pep up growth with dying private investment Part 4: Path to revival will be slow, painful; govt must start work now