HDFC Chairman Deepak Parekh on Thursday said that we should not debate over whether India will become a $5 trillion economy but how soon it becomes one is the real question.
"The key point is that each trillion (in the recent past) has been added in a shorter time," says Parekh while giving a keynote address at the management school S P Jain Institute of Management and Research in Mumbai. It took six decades for India to become $1 trillion economy since independence. The country became $1 trillion economy in 2007. It doubled the GDP size in a short span of eight years in 2015. The country today is the $2.8 trillion economy.
The government has set a target of 8 per cent real GDP growth rate with 4 per cent inflation (nominal GDP of 12 per cent) to become a $5 trillion economy by 2024/25. But the sudden collapse of GDP to 5 per cent in the first quarter (April-June) of 2019/20 has created new challenges. The Reserve Bank of India has a GDP forecast of 6.1 per cent for 2019/20.
Parekh, who ruffled feathers in the government in 2015 when he said there was no change on the ground on ease of doing business, is quite optimistic about India's growth prospects. "There is no major economy in the world that has the capacity to absorb the scale of investment that India needs nor the similar growth potential," says Parekh.
The advanced economies are already staring at a recession while Chinese economy has slowed down with GDP hovering around 6 per cent.
Amid talks of gloom and doom, Parekh said Indian economy is running at the forefront. "There are short-term challenges, especially on the consumption growth, but these appear to be cyclical in nature, not with deep-rooted malice," said Parekh. The 74-year old veteran is known for building businesses in the financial services with an impeccable track record of integrity and business ethics.
Parekh also suggested that India should continue improving the ease of doing business, reducing the cost of doing business and ensuring a stable, fair and consistent regulatory regime. "There is a fight for global capital. India is not the only game in town. Several emerging economies, though small, are fiercely competing with each other to attract global capital," said Parekh.
Parekh also said Indian economy needs both banking and non-banking sources to meet its funding needs. As per the RBI data, the flow of resources to the commercial sector has fallen big time by 88 per cent in the first half of 2019/20. "This clearly reflects the risk-averseness in the system," said Parekh. Banks have scaled back lending since the asset quality review in 2015, which brought into light the hidden non-performing assets.
In fact, till last year, the commercial sector relied heavily on non-banking funding sources as a substitute when banks were not lending. But after the IL&FS, the short-term market also got shut. "The key hurdle now is the trust deficit," said Parekh. Investors such as mutual funds, insurance firms and high net-worth individuals are staying away from the market because of fears of defaults in the commercial paper market.
Parekh said several companies are also unwinding their over-leverage positions. In a downturn, the over-leverage has seen the downfall of many companies. "The simple rule is that capital must always be raised from the position of strength," advised Parekh.