The whole narrative on India’s future economic growth trajectory, it appears, is now largely centered on the $5-trillion economy target by the year 2025. India is currently a $2.7-trillion economy. How relevant is this $5-trillion target for the average Indians? An analysis would tell you that the figure itself is no magic number as far as the overall development of the country is concerned. Then what should matter? That’s where veteran economist and former central bank governor, C Rangarajan has a word of advice for the Narendra Modi government and the $5-trillion lobby.
“Even if you reach $5 trillion, the per capita income in India will grow from the current level of $1800 to $3600. Even then, India will be called low-middle income country,” Rangarajan said while delivering the 7th Yasaswy Memorial Lecture organised by IBS-ICFAI Business School on the topic, 'The Current Economic Situation.'
To be recognised as a developed country, according to Rangarajan, a country needs to grow its per capita income to $12,000.
“It will take 22 years for India to grow at 9 percent per annum to reach there. The task before us is highly daunting. We need to get out of the current slowdown as quickly as possible,” Rangarajan said.
Precisely, this is exactly the point made by other noted economists including Nobel laureate, Abhijit Banerjee. In a recent presentation, Banerjee stressed that inadequate growth in per capita income continues to be the point of concern for India.
Per capita income gives a more accurate picture of the actual development in an economy at an individual level, compared with merely looking at the headline Gross Domestic Product (GDP) figures of a country. Banerjee is of the view that the growth of the economy has slowed massively, investment has collapsed and public borrowing (if properly added up) is 9-10 percent of the GDP.
Also, quoting the National Sample Survey (NSS) data, Banerjee said average consumption expenditure at current prices fell from Rs 1,587 per person per month (ppm) in 2014 to Rs 1,524 ppm in 2017-18 in rural areas, while in urban areas it fell from Rs 2,926 ppm in 2014 to Rs 2,909 ppm in 2018. How to grow per capita income? There is no short cut. The country will need to work on a host of economic and social indicators—population control, managing resources and growing domestic manufacturing sector, improvement in health, education and employment—to bring the desired fruits of economic growth to the individual level.
Now, even if one talks about the $5-trillion target, at the current rate of slowed growth, the target is merely wishful thinking. This is a point when India should actually worry about increasing the chances of a state of stagflation—a state of high inflation, high unemployment, low demand and low growth.
As Rangarajan says, India will require an annual growth rate in excess of 9 percent to become a $5-trillion economy by 2025, hence he describes the target, “simply out of question.” But, of course, 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 on a range of areas, unclog the sizeable number of stalled projects, remove policy shortcomings and decide not to repeat the blunders that were strictly avoidable. Finally, the government must understand the problem areas that are pulling it down in the race for global leadership 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, however, is where this money will 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 is 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 that who will bridge the funding gap.
Right now, discussions on the $5-trillion target are meaningless at least until India manages to get its economy out of the slowdown phase at the earliest. The country’s economy is no longer growing at 8 percent rate annually. In fact, for the second quarter, the GDP growth is likely to fall below 5 percent, according to rating agencies. That will make the full-year growth just around 6 percent. After 5 percent GDP growth in the June quarter, the high frequency economic indicators have pointed to further deceleration in growth in the subsequent months. The factory output contracted in August and September indicating a prolonged slowdown in economic activities on the ground. The primary challenge for the government is to rescue the economy from slipping to a state of stagflation.
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Updated Date: Nov 22, 2019 15:23:54 IST