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The Path to a $5-trillion Economy

The Path to a $5-trillion Economy

Attaining the much-hyped GDP size is taking longer than anticipated. With several policy levers now in place, the target should be snared soon.

Photograph by Chandradeep Kumar Photograph by Chandradeep Kumar

It took the Indian economy eight years to double to $2 trillion in 2014 and another seven to grow to just under $3 trillion currently. At that rate, the leap to a $5-trillion economy by 2024-25, as envisaged by Prime Minister Narendra Modi’s government—seems unfeasible, especially after the Covid-19 pandemic and its lingering aftereffects.

The pandemic delayed the timeline by about 3-4 years in an ‘optimistic’ scenario, estimates EY Chief Economist D.K. Srivastava, and until 2029-30 in the worst-case outcome. Irrespective, India will become the world’s third-largest economy by the end of the decade, according to the Centre for Economics and Business Research (CEBR), a UK-based economic think-tank.

Indeed, the latest government estimate is for a 9.2 per cent expansion this fiscal year, recovering from a historic contraction last fiscal and setting India up to claim the mantle of the fastest-growing economy in 2021. But the growth has to accelerate for the GDP to climb from Rs 222.9 lakh crore in FY22 (pegged in last year’s Budget) to $5 trillion, or Rs 375 lakh crore in current prices—a 68 per cent increase in three years.

India already has several policy drivers including the 500-gigawatt (GW) green energy plan, production-linked incentive (PLI) manufacturing push, digital economy drive, Rs 145 lakh crore-plus infrastructure pipeline, and targeted incentives for micro, small, and medium enterprises (MSMEs) to set the pace of growth. Besides, sound taxation policies, like the rationalisation of GST rate slabs, and improved compliance measures will provide the government with adequate revenue buffers to drive fiscal policies. Finance ministry sources say the government’s priorities for the upcoming Budget will be capital expenditure and spending on health infrastructure.

“The objective of touching the $5-trillion target is surely in sight with several new enablers, reforms and prudent policy push,” says Chandrajit Banerjee, Director General of industry body CII. “A key driver for the economy in this decade will be the emergence of a competitive manufacturing sector. The creation of good quality infrastructure in roads, rail and logistics will lower the cost of doing business for firms and enable higher exports.”

Building Bulk

To help its transition from an agrarian to a service sector economy, India launched the $1.9-trillion National Infrastructure Pipeline (NIP) in 2020. That was complemented by the launch of the Rs 100 lakh crore Gati Shakti plan last October. The government is aiming to increase the length of the national highway network to 200,000 km, create more than 200 airports, heliports and water aerodromes, and double the gas pipeline network to 35,000 km by 2024-25. In addition, it aims to set up 11 industrial corridors, two new defence corridors, 4G connectivity in all villages, and increase renewable energy capacity to 225 GW from 87.7 GW.

The Gati Shakti digital platform brings the infrastructure projects of 16 ministries under NIP, sharing resources such as satellite images, infrastructure, utilities, and logistics to alleviate the time and cost overruns. For perspective, government data in October showed as many as 438 projects, each worth Rs 150 crore-plus, had cost overruns topping Rs 4.3 lakh crore, while 563 were delayed by an average of 47 months.

Investments in physical infrastructure, besides health and education, will be among the key engines of growth, says S. Mahendra Dev, Director and Vice Chancellor, Indira Gandhi Institute of Development Research. “But, the impact on growth will depend on how successfully these infrastructure plans are implemented. The medium-term growth can be higher at 7-8 per cent if the big drivers are fulfilled and some of the bottlenecks are removed. Otherwise, medium-term growth may be around 5 per cent.”

Expanding Exports

Speaking of exports, the government has aligned its “Make in India for the world” and “Local goes global” visions in a road map to achieve $1 trillion worth of merchandise exports and $700 billion in services exports by 2028.

The commerce department has already started a drive to identify and push 31 commodities through 200 countries, targeting $400 million in exports for FY22. It plans to cultivate 700 districts to become export hubs. But India should fit into the global value chain and become export competitive, says Arpita Mukherjee, Professor at Indian Council for Research on International Economic Relations (ICRIER). “At present, Indian companies are losing their market share in key export markets like the US, EU or the UK to companies from countries like Vietnam.”

There is also a growing concern that while the value of exports has stayed constant over the last decade, the withdrawal of export incentives has trebled. Moreover, 70 per cent of India’s exports comprise only a 30 per cent share of the world’s traded commodities, indicating a lot of exports are raw materials and low-value products. The government has plans to monitor imports in real-time to identify high-value products it could manufacture in-house, aiming to kill two birds with one stone.

Make in India

Nothing highlights India’s manufacturing drive more than the “Make in India” campaign. The government rolled out a Rs 1.97 lakh crore PLI scheme to boost manufacturing in 13 key sectors ranging from mobiles and textiles to food and pharma products. Companies have committed or invested Rs 12,960 crore since April 2021, with pharma firms topping the list, government data shows.

Over and above the 13 sectors, PLI schemes have also been launched for drone manufacturing and semiconductors.

The PLI schemes are also expected to give a fillip to MSMEs and help meet the government’s aim of increasing MSMEs’ GDP contribution to 40 per cent, from 30 per cent.

“Given that around 80 per cent of our industry is in MSMEs, promoting them will be a key driver of the economy and create employment. There is a need to create jobs to increase the purchasing power of the consumers,” says Mukherjee.

While quality infrastructure will lower the cost of doing business and enable higher exports, the remaining cost disadvantages can be offset by the PLI schemes, says CII’s Banerjee.

Digital Drive

Banerjee is especially buzzed about the potential digital advancements. “I believe that high-end manufacturing such as semiconductor production will begin in India. This will be supported by the availability of skilled workers to work with advanced technologies such as AI, IoT and machine learning,” he says.

But India’s digital economy already has a home-grown hero. The volume of digital transactions surged 88 per cent from 23.26 billion in 2018-19 to 43.7 billion in 2020-21, according to government data. UPI alone registered over 22 billion transactions during 2020-21, quadrupling over the last three years. Moreover, Aadhaar-Enabled Payment System (AePS) inter-bank transactions have also grown ninefold over the past four years.

Digital transactions have also plugged tax leakages, resulting in better-than-expected tax mop-ups that will buffer the government’s spending. The net tax revenue between April and November of FY22 is 65 per cent higher than FY21 and is already 73 per cent of this fiscal’s target.

There is much more to come, says Rakesh Nangia, Chairman of advisory firm Nangia Anderson India. “India’s trillion-dollar economic growth in the next decade can come from ancillary digital assets and related businesses that are yet to be invented. India can leverage the digital asset opportunity by adopting blockchain technology, which is self-sufficient for digitising India’s financial ecosystem.”

Going Green

India is ahead of the curve in green energy. Its total non-fossil fuels based installed energy capacity hit 156.83 GW last November, achieving its target of 40 per cent of total installed capacity nine years before schedule. But it is still some distance from its target of 500 GW of installed capacity and 50 per cent of energy from renewables by 2030, as PM Modi committed at the Glasgow climate change summit last year.

That kind of commitment would require technological advancements across areas such as solar, battery storage, and mobility, Amitabh Kant, CEO of public policy think-tank NITI Aayog, told BT recently. “India needs to have a top-class grid to manage this Indian storage facility. India needs to do pumped storage. India needs to ensure that it can use its renewables to crack water and do green hydrogen,” he said.

While electricity dominates the public discourse, it accounts for only 18 per cent of India’s total energy demand. The remaining 82 per cent from sources such as coal, oil and gas, and biomass needs to be converted into green energy, and that, said Kant, is a key challenge.

India’s imports of fossil fuels will double to $320 billion in the next decade, he estimated. “Now, to ensure that we become not an importing, but an exporting country, we need to become not merely a producer of green hydrogen but to become the world’s biggest producer of electrolysers, green steel and green ammonia. All this would require a massive amount of financial resources,” Kant said.

Tax Anomalies

It is imperative India attracts foreign investment in diverse sectors, especially in areas like green energy and infrastructure, which is limited at present, says ICRIER’s Mukherjee. For that, “the tax regime should be simple and there is a need for greater transparency, predictability and clarity in policy,” she says.

Nonetheless, India remains a top destination for foreign direct investment (FDI), and recorded its highest-ever annual FDI inflow of $81.97 billion in FY21. But India still lags many competing countries in the ease of doing business and in tax laws, Mukherjee found in a recent study she conducted. “In many product categories, there are inverted duties which increase the cost of production.” In some cases, they deter investments.

The GST Council has already started fixing this inverted structure—where the tax on raw materials is higher than on finished goods—for several products, including renewable energy devices, pharmaceuticals and tractors. This anomaly for mobile phones was corrected in March 2020. The Council is also looking at reducing the number of tax slabs from four to three.

India has also amended some of its corporate tax laws in the past few years, to help trigger investments. In 2019, the government cut the corporation tax to 15 per cent for manufacturers that set up shop after October that year and started production before the end of FY23. Last August, it settled its nearly decade-old and much-maligned law on retrospective tax.

But there is more to be done, like correcting the anomaly in the trade tax for special economic zones (SEZs), Mukherjee points out. Goods and services from an SEZ to the domestic market are considered imports and subject to customs duties. Conversely, there is nearly no import duty on goods and services from countries with which India has signed free trade agreements.

Perhaps the most cautionary note comes from Biswajit Dhar, Professor at Jawaharlal Nehru University, who says the agricultural sector should no longer be sacrificed at the altar of a services-driven economy. “Among the most significant failures of India to realise its economic potential has been the abject neglect of this segment of the economy, which continues to support about 60 per cent of the workforce. If the income levels of this workforce increase as it should, the target of making India into a $5-trillion economy can be realised before the end of the decade.”

India will eventually become a $5-trillion economy. The only question is if that will happen sooner rather than later.

Published on: Feb 15, 2022, 9:17 PM IST
Posted by: Vivek Dubey, Feb 07, 2022, 11:40 AM IST