Finding Investments for a $5 Trillion Economy

Investment has become a buzzword. Right from Finance Minister’s Nirmala Sitharaman’s budget speech on 5 July 2019 through Prime Minister Narendra Modi’s Independence Day speech setting the government’s goal of $5 trillion for Indian economy or Rs 343 lakh crore in five years, i.e., 2024. Clearly so, investments have become an urgent priority. 

The rising trajectory of growth is certain to take the economy to $5 trillion. The recent track record experience of the economy has been a positive one as far as accelerating growth goes. The economy grew 3.5 per cent from 1950-1980 and 5.5 per cent from 1980-2000 and 7.5 per cent from 2000-2012. It’s only in the last five years that the growth rate has slowed down. 

The primary policy challenge that needs to be overcome for reaching the goal of growing the size of the economy to $5 trillion, he highlighted, is to figure out why the economy slowed down and how it can return to the long-term trajectory of 7.5-plus per cent growth. In other words, the nature of the economic challenge will have to be understood for the right policies to follow. 

For the last 20-30 years, the expectations were that India is a rising-curve economy and currently expectations are bearish because of the deceleration in the rate of investments seen year-after-year over the last five-six years, which then resulted in a deceleration in the rate of savings.

Reviving the expectations, according to Sanjaya Baru, is the key to reversing the slowdown in private investments. “We need a 1991-type approach where everyone in government is involved in reviving optimism in the economy but policymakers in this government have not understood the importance of sentiment”.

He called the 5 July Budget “a wasted opportunity’’ that could have been the occasion to alter the sentiment exactly the same way, the July 1991 budget had done it overnight.

Recommendations were made on ways of reviving the sentiment and finding the finances for powering the economy to the size of $5 trillion in a time-bound manner. 

Charan Singh, Non-Executive Chairman, Punjab & Sind Bank, identified the increased flow of resources–as per the Bimal Jalan Committee report–from the Reserve Bank of India (RBI) that is expected to continue for the next couple of years constitutes a source of financing investments. The RBI has contributed to the fisc for more than five decades, so all the hue and cry being made in the public discourse over the transfer is unwarranted, he said. 

There are many other sources available such as taxes, he said. In an emerging economy, there will always be challenges of deficits and borrowings will always be constrained. Singh proposed a third mode—of the bond market. “We can empower the Panchayati Raj Institutions (PRIs) and municipal corporations to raise resources in the bond market for funding growth and infrastructure. Handful of municipal corporations such as in Ahmedabad and Bengaluru have raised bonds. We need to institutionalise this and make it regular.”

The US financed its railways and infrastructure very successfully through the bond market. Similarly, for specific projects such as a Metro line from say Connaught Place to Greater Noida, the municipal corporation in Noida should be able to float a bond. In this illustration, he said, residents of the area, businesses operating and landowners in the area would naturally like the project to succeed and will be interested in financing it. 

Any increase in female labour participation will automatically give a boost to the GDP, he said. At 30 per cent, India is way behind its neighbours such as Nepal and Bangladesh that have achieved average female labour participation rates of 60 per cent. One way to tap this well-trained human resource is through tax concessions, he recommended. 

Singh said that growth will receive a boost also if enough liquidity begins to flow to businesses, especially the small ones, so that they can tide over the crunch due to the disruptions caused by the stress in the non-banking financing companies (NBFCs) segment. 

Shamika Ravi, Part-time Member, Economic Advisory Council to the Prime Minister & Director, Research, Brookings India, said that to reach the goal of $5 trillion “a national growth strategy” is needed. Tinkering or minor tax reforms will not deliver $5 trillion in a time-bound fashion, she said, “It will take concerted effort across all ministries”. 

Government is not going to deliver growth, she added. It will only set in place the systems and the framework in which the $5 trillion realisation will happen.

She cited examples of how India’s neighbourhood has started to take advantage of global affluence and shift in consumption patterns. For the last eleven years, Bangladesh is exporting double the amount of apparels that India is exporting with very similar background and skills. Thailand in the last twelve years has attracted three times the tourists as India. 

Comparing the average cost of making a shirt in Bangladesh, Vietnam, China, Kenya and Ethiopia gives a sense that it is not just labour holding India back, she said. India’s import restrictions make it an uncompetitive market, even as the world is moving towards markets that are competitive. This includes Indian enterprises, she said.

India also needs to avail of the window of opportunity that the trade war between the US and China is opening up, she said. But this will not happen automatically. A slew of policies will have to be announced that make India a competitive destination to do business out of. 

The details of what it will take for apparel exports to grow to three times they are will have to be worked out. It is not just labour reforms. All ministries will have to engage in concerted effort to evolve the strategies for such goals, as part of the overall push towards $5 trillion, she said.

She highlighted the urgency of judicial reforms for improving the sentiment, saying contract enforcement is a part of ensuring investments take place. “It takes on an average 15 years for cases to get cleared in courts in the state of Bihar. Who will invest?”. 

She also underscored the scale at which credit expansion needed. The share of credit to private sector as a proportion of GDP in China is 140 per cent. In India, it is still 40 per cent, she added. 

Finally, she said this is the time for government to proceed with massive infrastructure spending of the type seen during the tenure of the NDA 1. 

Picking up from where Ravi left, Zohra Chatterji, Former Secretary, Textiles, Government of India and Distinguished Fellow, SKOCH Development Foundation talked of how the textile sector can help the economy move towards the $5 trillion goal.

With rising labour costs in China, a whole market is being vacated, which has created an opportunity ready for India to grab, she said.  

To do so, India already has a solid base: It is the largest producer in the world of cotton and jute and the second largest for silk and the textile sector employs the second largest number of people after agriculture and benefits from low labour costs. 

The hurdle is, the schemes and incentives announced by government tend to be sporadic and lack continuity and strategy.

Exporters usually don’t know if a scheme would be continued and so are unable to benefit from it, she said. She gave the example of the technology upgradation scheme that modernised the mill sector. It had attracted over Rs 2 lakh crore of investments to the sector but suffered from disruptions. As a result of which, a huge backlog of subsidies remains uncleared. “The firms in the sector being typically small-sized, find it difficult to sustain themselves in face of such uncertainties,” Chatterji said. 

She pointed out that because the spinning, processing, weaving and other segments of the industry are disbursed all across the country, the efficiency levels are low. “Goods keep moving all over the country before the finished product is ready and that reduces competitiveness”.

Ashwani Mahajan, National Co-Convener, Swadeshi Jagaran Manch, insisted that the strategy must focus on issues such as the exchange rate value of the rupee and the level of the rate of interest, which, he said, should be low enough to yield attractive returns to private investors. Only then will investments get triggered.

He denounced the option of raising foreign currency-denominated sovereign debt and also Foreign Direct Investment (FDI) because, he said, only a third of the total FDI inflows into the economy go into greenfield plants or new technologies, with the rest pouring into brownfield projects. 

The outflow of royalty and technical fees from the FDI projects, he said, has reached $20 billion. Further, giant foreign firms such as Google, Walmart and Facebook are lightly taxed in India and need to be taxed more. A source for raising the funds needed to grow the economy to $5 trillion can be to tax these companies at rates comparable to those imposed on Indian firms, he said.