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:
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:
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
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:
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