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5 Trillion USD by 2024

  May 24, 2020

5 Trillion USD by 2024

Strengths of Indian economy

India is one of the fastest growing major economies and is currently ranked as the world’s seventh largest economy (2019). India’s commitment to fiscal discipline, sound external position, unprecedented foreign direct investment (FDI) inflows, comprehensive structural reforms, and enhanced emphasis on social protection and financial inclusion have provided a robust framework for sustaining strong and inclusive growth going forward. India’s performance in the Doing Business Ranking, Global Competitiveness Index, Logistics Performance Index and Global Innovation Index are all positive and encouraging.

There are several additional underlying strengths that are indicative of the latent potential of the economy:

  • India currently enjoys “youth bulge” – by 2020, the average age in India will be 29 years. 
  • India offers an expanding market with income levels and size of the middle class increasing. Investments in infrastructure are projected over the medium term to lead to better connectivity and reduced logistics costs for businesses. 
  •  Digital technology has led to positive disruption in both governance and businesses.

Thus, India’s potential to achieve a USD 5 trillion GDP by 2024-25 is within the realm of possibility.

We need to steadily accelerate the gross domestic product (GDP) growth rate to achieve a target of about 8 per cent during 2019-23 This will raise the economy’s size in real terms to nearly USD 4 trillion by 2022-23.

Besides having rapid growth, which may reach 9-10 per cent by 2022-23, it is also necessary to ensure that growth is inclusive, broad based (all sectors, regions and states) sustained and formalized.

The investment rate should be raised from 29 per cent to 36 per cent of GDP which has been achieved in the past, by 2022-23.

Exports of goods and services combined should be increased from USD 478 billion in 2017-18 to USD 800 billion by 2022-23.

High growth rate has been achieved in India with strong macroeconomic fundamentals including low and stable rates of inflation and a falling fiscal deficit.  It needs to be maintained.

Investment for 5 trillion USD

The slew of measures required to boost both private and public investment are

1. India’s tax-GDP ratio of around 17 per cent is half the average of OECD countries (35 per cent) and is low even when compared to other emerging economies like Brazil (34 per cent), South Africa (27 per cent) and China (22 per cent). To enhance public investment, India should aim to increase its tax-GDP ratio to at least 22 per cent of GDP by 2022- 23. Demonetization and GST will contribute positively to this critical effort. In addition, efforts need to be made to rationalize direct taxes for both corporate tax and personal income tax. Simultaneously, there is a need to ease the tax compliance burden and eliminate direct interface between taxpayers and tax officials using technology.

2. States could also undertake greater mobilization of own taxes such as property tax, and taking specific steps to improve administration of GST to increase tax collections.

3. India’s savings rate needs to be increased from the current sub-30 to about 40% of GDP3.

4. Two areas in which higher public investment can be absorbed are housing and infrastructure. Investment in housing, especially in urban areas, will create very large multiplier effects in the economy- demand for inputs, employment, bank credit etc. Investment in physical infrastructure- roads, inland waterways, ports, airports, irrigation, digital connectivity, will address longstanding deficiencies faced by the economy.

5. The government has taken significant measures to attract foreign direct investment by easing caps on the extent of permissible stake holding and the norms of approval. By 2022-23, the government may consider further liberalizing FDI norms across sectors. Domestic savings can be complemented by attracting foreign investment in bonds and government securities. Regulatory limits can be relaxed for rupee denominated debt.

6. The government should continue to exit central public sector enterprises (CPSEs) that are not strategic in nature. Inefficient CPSEs surviving on government support distort entire sectors as they operate without any real budget constraints. The government’s exit will attract private investment and contribute to the exchequer, enabling higher public investment.

7. Private investment needs be encouraged in infrastructure through a renewed public-private partnership (PPP) mechanism on the lines suggested by the Kelkar Committee.

5 trillion USD and macroeconomic stability

Sustained high growth requires macroeconomic stability, which is being achieved through a combination of prudent fiscal and monetary policies.

• Government has been undertaking fiscal consolidation on an annual basis.

• The government has targeted a gradual lowering of the government debt-to-GDP ratio. The FRBM Act prescribes that the Debt to GDP ratio of the Government of India should be brought down to 40% by 2024-25.

It will help reduce the relatively high interest cost burden on the government budget that can be used productively for investment. It will also help avoid `crowding out’ the private sector.

• One of the major institutional reforms of recent years has been to legally mandate the RBI to maintain “... price stability while keeping in mind the objective of growth”. Inflation needs to be contained within the stated target range of 2 per cent to 6 per cent. Inflation targeting provides a reasonably flexible policy framework to respond appropriately to supply shocks.

Our external sector policies like export promotion etc should be such that there is no volatility on the rupee front and thus there is balance of payments stability.

5 trillion USD economy and Exports

India needs to remain globally competitive in the production and exports of manufactured, including processed agricultural, goods and services. Without export promotion 5 trillion USD economy is not possible. The following reforms would help in improving the competitiveness: 

  • A focused effort on making the logistics sector more efficient is needed.
  • Power tariff structures may be rationalized to ensure global competitiveness of Indian industries.
  • Improve connectivity by accelerating the completion of announced infrastructure projects. Enhancing physical connectivity will help reduce delivery times and improve global connectivity and the reach of our exporters. By 2022-23, we should complete projects that are already underway such as the Delhi-Mumbai Industrial Corridor (DMIC) and Dedicated Freight Corridors.
  • Work with states to ease labour and land regulations.
  • The government has recently established a dedicated fund of INR 5,000 crore for enhancing 12 “Champion Services Sectors”. Among others, these include IT & ITeS, tourism, medical value travel and audio visual services. Given the significant role of services exports in maintaining India’s balance of payments, the government should continue to focus on these sectors.
  • Explore closer economic integration within South Asia and the emerging economies of South East Asia particularly Cambodia, Laos, Myanmar and Vietnam, using the existing Bangladesh, Bhutan, India, Nepal (BBIN) and the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Co-operation (BIMSTEC) frameworks.
  • Credit should be available in time, in adequate amount and also at the right rate
  • Under the GST, refunds must be given in time

5 trillion USD and Manufacturing

India is the fifth largest manufacturer in the world. The sector registered a compound annual growth rate (CAGR) of around 7.7 per cent between 2012-13 and 2017-18.

The government has taken several initiatives to promote manufacturing. Among these are

  • Make in India Action Plan aimed at increasing the manufacturing sector’s contribution to 25 per cent of GDP by 2020-22
  • National Investment & Manufacturing Zones (NIMZs) which are one of the important instruments of National Manufacturing Policy, 2011.  NIMZs are envisaged as large areas of developed land with the requisite eco-system for promoting world class manufacturing activity. So far, three NIMZs namely Prakasam (Andhra Pradesh), Sangareddy (Telangana) and Kalinganagar (Odisha) have been accorded final approval and 13 NIMZs have been accorded in-principle approval. Besides these, eight Investment Regions along the Delhi Mumbai Industrial Corridor (DMIC) project have also been declared as NIMZs. NIMZs are based on the principle of industrial growth in partnership with States and focuses on manufacturing growth and employment generation. 
  • Start-up India initiative to promote entrepreneurship and nurture innovation, and
  • Micro Units Development and Refinance Agency (MUDRA) and Stand-up India to facilitate access to credit.
  • Recapitalisation of public sector banks to ease availability of credit to micro, small and medium enterprises (MSMEs).
  • Major infrastructure projects, such as the setting up of industrial corridors, to boost manufacturing.
  • The foreign direct investment (FDI) regime has been substantially liberalized, significantly improving India’s rank in terms of annual FDI inflows from 14 in 2010 to 9 in 2017. However, India receives only 25 per cent of the FDI that China gets and only 10 per cent of what the USA receives. 

However, manufacturing as a percentage of the gross domestic product has remained at about 16 per cent. Constraints that are faced in boosting manufacturing are:

  • Land acquisition laws are restrictive
  • Labour laws are rigid and discourage investment
  • Infrastructure in terms of power, roads and so on is to be strengthened
  • Skill deficit
  • Regulatory uncertainty: Regulatory risks and policy uncertainty in the past have dented investor confidence.
  • Technology adoption: The adoption of new technologies like artificial intelligence, data analytics, machine-to-machine communications, robotics and related technologies, collectively called “Industry 4.0”, are a big challenge for SMEs and for organized large-scale manufacturing.
  • Data security, reliability of data and stability in communication/transmission also pose challenges to technology adoption.
  • There has been no export driven industrial growth. Domestic demand alone may not be adequate for sustained, high value manufacturing
  • Despite improvements in our global Ease of Doing Business (EODB)
  • Rank, it continues to be a burden on the system. This is also true of investment conditions in the states. Getting construction permits, enforcing contracts, paying taxes, starting a business and trading across borders continue to constrain doing business.

The share of manufacturing in India’s GDP is low relative to the average in low and middle-income countries. It has not increased in any significant measure in the quarter century after economic liberalization began in 1991. Within manufacturing, growth has often been highest in sectors that are relatively capital intensive, such as automobiles and pharmaceuticals. This stems from India’s inability to capitalize fully on its inherent labour and skill cost advantages to develop large-scale labour intensive manufacturing. Complex land and labour laws have

also played a notable part in this outcome. That needs correction. 

If we can remedy the constraints mentioned above, Indian manufacturing can take off.

5 trillion USD Economy and Industry 4.0

The technological trend of digitisation in manufacturing, automation and data exchange in manufacturing technologies is called Industry 4.0. Also referred to as the fourth industrial revolution, it includes cyber-physical systems, the Internet of things, cloud computing etc. The adoption of computers and automation enhance productivity in the new age as was seen in the times of first industrial revolution. The fourth industrial revolution is different from earlier revolutions in its velocity, breadth and depth, and its impact on systems. 

It will significantly impact sectors like automobile, pharmaceuticals, chemicals and financial services and will result in operational efficiencies, cost control and revenue growth. Experts feel that emerging markets like India could benefit tremendously from the adoption of Industry 4.0 practices.

As India’s GDP enters the $ 5 trillion orbit, we will face both challenges and opportunities. Greater integration into the global economy, expansion and growth, and the importance of good-governance will matter more.

If Indian companies adopt Industry 4.0 across functions such as manufacturing, supply chain, logistics and procurement, they can enhance their productivity with much less expenditure.  

Greenfield smart cities present a huge opportunity because they are starting from scratch, and have the ability to start afresh everything, including modern facilities with public transportation, ICT-enabled infrastructure and impart the right kind of skills to its people. Greenfield cities can become centres of excellence for new-age industries and become innovation hubs.

India is expecting a revenue of $800 billion through exports in 2022, along with the creation of 100 million jobs. Advances in technology are vital to achieve this feat- some jobs are lost but many more will be created in education, skills and materials.

Similarly, our needs in health, environment and education can benefit from Industry 4.0.

One challenge is lack of skilled professionals who are capable in this domain. Our education system is still structured towards meeting demands of the earlier era of industrialization, yet advanced analytics, big data, robotics, AI and IoT are affecting every aspect of how we live.

The Indian education system is one of the largest in the world with more than 1.5 million schools, 8.5 million teachers and 250 million students from varied socioeconomic backgrounds. A high quality, research-led and skills-based education system is the need of the hour to reboot our economy with fourth industrial revolution.

The development of industries that produce the key building blocks forming the basis of Industry 4.0 could be incentivized. Incentives could be focused on MSMEs that manufacture products including sensors, actuators, drives, synchronous motors, communication systems, computer displays, and auxiliary electromechanical systems. Similarly, industries adopting Industry 4.0 standards could be provided support for a fixed period of time.

5 trillion USD Economy and Agriculture

Agriculture and allied activities contribute about 17% to the economy. Agriculture sector and rural economy have a significant role not only in ensuring food security and providing livelihoods but also providing impetus to the growth of industries and service sectors. It is important that we optimize the returns for agriculture for the economic growth to be sustainable, high and inclusive. The areas to be focused upon are

  • Modernize agricultural technology,
  • Increase productivity,
  • Crop diversification
  • Generate income and employment through a paradigm shift that ensures food security while maximizing value addition in agriculture.
  • Ensure marketing reforms so that farmer makes profit.