June 18, 2018

India: Formula for 10 percent Growth



Prime Minister Narendra Modi once again elucidated the goal of achieving 10% growth rate in the near future while addressing his brainchild NITI Aayog, and asked to come up with ideas that can help India climb the Mount Everest of growth dynamics. Not long ago, the prime minister had set the target of becoming a $10 trillion-dollar economy. Though China has achieved the feat of growing at a breakneck speed of 10% for almost three decades, India has this distinction of growing at a double-digit rate only once during Rajiv Gandhi era since we made our tryst with freedom at midnight in 1947. What China has achieved for nearly three decades year after year since 1980, we did come at a kissing distance of that at the time of the global boom of 2005-07 when we grew more than 9% for three consecutive years. This was the only Goldilocks economic phase for India when capital was gushing towards India. At the height of this boom, capital flows skyrocketed to 16% of the global GDP, but ever since, it has receded back to the 1980 level of around 2%. Our own savings rate has also fallen from the high of 36% in 2007-08 to below 30% in the last few years. The incremental capital-output ratio, a parameter of capital efficiency has jumped from around 4% in boom phase to 7% in last few years.

While bad loans have piled up in the banking system especially with PSBs due to reckless lending during the boom period, the credit growth has just got struck up in single-digit, the lowest in the last six decades. If it is to be believed, once the insider of RBI, former deputy governor KC Chakraborty says that banking sector NPAs could be as high as Rs 20 lakh crore, which means almost 25% of all loans are in the red zone. The creation of the Insolvency and Bankruptcy Code is definitely a big step forward, but the Debt Recovery Tribunal is caught up in the logjam, which has engulfed the entire legal system. If the state recovers only 15% of bad loans in the subsequent years, it paints a gloomy picture. Japan recovers 92% of all its bad loans, the US over 80% and developing countries like Indonesia make a recovery of over 50%. No doubt, when the resources are getting scarce, it will be a Herculean task of achieving 10% growth, which requires 40% of savings and investment rate with the Incremental Capital Output Ratio of 4. As we are getting foreign capital worth only 2% of our GDP, the savings rate needs to get back to its peak of 36% to achieve this growth rate.

Our economy seems to be making a meaningful recovery as we grew 7.7% in the last quarter of the last fiscal — almost seven years after the recession began in FY12. At the time when Pranab Mukherjee was the finance minister, the economy made a smart recovery from 2008 great recession and grew by 8.6% and 8.9% in FY10 and FY11 on a dose of steroids of a close to a double-digit fiscal deficit. Once the tightening of the belt began amid the inflationary spiral, the economy nosedived to below 5% in the subsequent years. We were trying to make a recovery again in the second half of fiscal 2017, this time around, the lightening of demonetisation struck!

Now that we are approaching 8% growth rate, which seems more plausible given our input matrix, Modi has suddenly emboldened NITI Aayog officials to think beyond and explore possibilities of a double-digit growth. While we spend just 4.2% on capital infrastructure, China achieved 10% growth rate for three decades spending over 10% on building the same. While our resource mobilisation is quite similar to China’s, that country does not spend much on subsidies. Even merit subsidy of health and education has been controlled to free resources for capital creation. India’s subsidies add up to 15% of the national government budget, which does not include the cross and disguised subsidies. The correction of this matrix is a huge task, given our democratic governments. Pulls and pressures often make reforms difficult. The pressure groups make the reform process impossible. China has the advantage of an authoritarian regime, which helped it pursue capital creation at a break-neck speed with a single-minded pursuit, and it is not only the factories of the world now but employing its vast masses productively in them.

Economists have propounded the theory of a circular economy or a regenerative model for a developing country like us to use scarce resources in an effective way. A circular economy, in contrast to the ‘make-use-dispose’ model of the linear economy, focuses on the use of resources for the longest possible time as also recovering and regenerating products and materials at the end of their life cycle. For this, the government needs to enable a regulatory framework for the circular economy. The government needs to push the limits of the circular economy and make it a mass movement. According to FICCI-Accenture study, which was released recently, by adopting the circular business model, India could reap a reward of between $382 to $697 billion by 2030. The circular economy through its innovative business model offers a unique opportunity to decouple growth from resource requirements. According to the report, five factors will be critical to accelerate circular models in India — greater awareness, disruptive technologies, enabling policy landscape, innovative funding models and collaborations and partnerships.

India became the fastest-growing major economy of the world in the last quarter of the calendar year 2017. But this south Asian giant can do even better, potentially even hitting double-digit growth rates, as the prime minister propounds. However, to achieve a GDP growth of 10%, India would need the service sector to grow close to 20%, complemented by 4% and 8% growth in agriculture and industry respectively. The ‘Make in India’ campaign and the country’s young demographics will not just draw a better consumption pattern for the country but also push the overall growth rate towards the double-digit mark.

At present, the overall growth rate of India varies between 7-8%, of which it is 2-3% in agriculture and 5-6% in the industry. This implies that the service sector grows at more than 10% per annum. Growth in agriculture is possible if there are improved irrigation facilities and use of high yielding seeds leading to more production. The farmers should also be properly trained with modern skills. It is a time-taking proposition in India as in any other country. Industrial output will increase if more investments in plant and machinery are made. Traditional Indian industries are tea, sugar, textiles, steel, coal and minerals. New areas are power and telecommunications. Growth here will depend on additional investment, export prospect, the stability of the Indian rupee and domestic inflation. In an era of deglobalisation after the great recession in 2008, export growth has been quite subdued as compared to almost 20% growth in the boom phase. Exports that have retracted to around one-sixth of our output needs to be firmed up to increase the industrial production to as much as 10% per annum, which seems an onerous — if not impossible — task. Thus, the last area of growth is service sector where it is already 10%. If we project agriculture growth at 4% and industrial growth at 8% per annum in the next 5 years, the service sector has to grow as high as 20% to achieve 10% average growth in overall GDP. So, massive investment in infrastructure, software, banking and insurance will be required for such growth. Easier said than done! However, increasing infrastructure like railways and road communication will increase trade and commerce.

In the recent past, China achieved sustained growth due to a massive increase in infrastructure and export of Chinese goods. To increase Chinese exports, they devalued their currency; as a result, Chinese imports became costly. The foreign exporters failed to make payment for Chinese goods due to declining Chinese imports. China also felt the heat when it failed to pay back to foreign exporters in the dollar, which became costly relative to the Chinese Yuan. There was a worldwide payment crisis as China is the largest exporter and second largest importer in the world. Thus export-led growth is not an unmixed blessing. It is a truism that simply because there will be 10% growth in GDP, there will be massive employment and removal of poverty.

To conclude, 10% GDP target should be the objective and a moderate average growth rate of 8% in all the three sectors will increase the overall size of the economy based on social justice and creation of adequate employment opportunities in different sectors. As more than half of India’s population depends on agriculture — Sirf News holds that this large demography devoted to one vocation is unsustainable — there is an urgent need for growth of this sector along with industry and service sectors, where the growth must be in yield of crops while a large section of the manpower in agriculture must diversify to other professions. India is a fertile land rich in water and maritime resources unlike many other bigger countries of the world which are barren, cold or grassland. It took about 58 years for India’s GDP to grow to $1 trillion, but only eight years to reach $2 trillion (by 2016). At the current growth rates, it will take about five years to reach $3 trillion, and only three years after that to add the next trillion. Becoming a $10-trillion economy is now definitely within India’s planning realm

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