India attaining GDP of $5 Trillion by 2024-25: Myth or Reality?

What must be the tangible economic policies and what necessary actions are needed to fulfill government’s ambitious target?

CSS Rao is a Senior Development Economist and an Eminent Member of the Royal Institution of Chartered Surveyors, London (MRICS).  He has authored several monographs based on extensive involvement in various economies, macro-finance and international banking. Rao speaks to Mahua Venkatesh on the present state of Indian economy, prescriptions for growth and economic reforms that could position India as a global leader. Excerpts:

Mahua Venkatesh: What do you think are the reasons for this economic slowdown even after the slew of reform measures undertaken during the last three months?

CSS Rao: The growth rate ought to reflect commensurate benefits, improving levels of shared economic prosperity and greater financial inclusion. Now, if these are not being experienced, any rate of growth put forth is purely of academic value.  

Some of the principal fundamental contributory factors for decline in GDP growth rate in India during recent years despite reforms include the following:

1. Demonetization in 2016 crippled the entire economy, which has not yet recovered. It could take at least another three years to regain normalcy, provided major further corrective measures are initiated now.
2. The banking sector is in deep distress, saddled with a $200 billion equivalent of accumulated bad loans, which has severely dented the balance sheets of most banks. As a result, banks are unable to lend. Consequently, the flow of credit to industry, agro sector, services etc. is far below desired levels. This has led to a major drop in manufacturing and services.
3. There has been a steady withdrawal of FDI, reflecting reduced desire by foreign institutional investors’ (FII) and transnational corporates to invest in India.
4. Reforms have been inadequate, discordant and belated and the authoritarian style of administration has served to dampen and dis-incentivise entrepreneurial drive and private sector investment.

Unless all these are corrected, GDP growth cannot improve.

MV: Do you think a cut in personal income tax rate will spur consumption and thereby boost economic growth?

CSS Rao: Income tax rate cut is a tool of fiscal policy used by central governments worldwide to encourage economic growth. However, the impact and benefit of such rate cut is generally experienced after a dwell of nine to twelve months, because the entire process of growth in consumption — spurred by the increased spending capacity in the hands of citizens requires to be matched with corresponding increase in manufacturing and supply — takes that much time.

Further, significant growth in the national economy can be achieved only with a whole basket of well-planned corrective and supportive measures, not just by deploying one or two tools of monetary / fiscal policy.

MV: How do you think rural demand can be pushed?

The future of India lies in its rural sector due of its size and relatively untapped status up to the present time.  Rural demand can be stimulated by taking the following important measures:

1. Increasing long term government investment to support growth of the agro-sector. 
2. Encouraging larger participation by millennials in this sector via technology-driven yield enhancement programmes. Developing more and more value added agro-based industries closer to farms that can offer processed and ready to use packaged products across the nation along with a thrust on exports. This move has the additional merit of seriously discouraging people from migrating to urban areas in search of employment, thus preventing baneful migratory flux to cities.
3. The retained earnings of such rural populace will serve to enhance their spending (and saving) power, which will in turn spur demand in rural and semi-urban regions of India for real estate, various consumer goods and services etc. which in turn will lead towards an improvement in the standard of living of the rural masses.
4. State and central governments must concurrently focus on development of rural infrastructure such as roads, bridges, dams, renewable energy projects, waste recycling projects, low cost but good quality housing and related facilities, etc.  Interestingly, all of these initiatives have the inherent potential to dynamically generate large volume of sustainable employment in skilled, semi-skilled and unskilled categories.
5. Increase education and training facilities by implementing modern skill development centres in every district — with adjunct facilities for practical training, manufacturing and marketing of end products and services as well as residence of faculty and trainees — covering trades which have local relevance and are technology driven, employment oriented courses. Supporting self-employment and start up ventures would form an integral part.
6. Significantly boost support to the livestock industry including both upstream and downstream industries, which have the ready potential to spur gainful employment, income generation and  potential towards sizeable contribution to GDP.
7. Construction of a series of old age homes and day care centres in every district, which has tremendous potential to generate life-cycle sustainable employment in various trades. Importantly, this also helps to address another vital issue of great national importance viz., care of our elder citizens, especially in low and middle income strata, considering the vast ageing population of our country.
8. Providing attractive tax benefits to large corporates and MNC’s coming forward to “adopt” notified districts in each state, and proactively participating in its socio-economic development is something the government must consider.
9. Enhancing scale and a range of fiscal incentives in respect of investments made towards rural development following a geographically graded approach to promote backward and far flung areas is also important.  

MV: Why isn’t private investment picking up?

CSS Rao: Reasons attributed to above problems answers this question. In addition, it may be stated that the present disincentives to private sector investment and pursuit of spirited entrepreneurship have been significantly caused by the authoritarian style of national administration, with constant fear of punishment or retribution daunting the private sector, whether it is large scale or MSME in manufacturing and services.  Tax reforms with a modern outlook is most important.  All laws must be stringent yet citizen friendly and compliance must be greatly simplified.

MV: Job creation has been dismal. What should be done to create jobs?

CSS Rao: This is certainly one of the biggest areas which requires priority attention by the government.  Sadly, the present unemployment rate in India stands at 6.1%, which is a 45-year low. This simply cannot continue.

About 12.8 million new entrants come into the employment market each year in our country.  Most of them remain un (der) employed.

For employment to rise, manufacturing and agro sector needs to grow rapidly.  Core sectors such as steel, cement, energy, infrastructure needs to grow at a minimum of 8-10% annually. This is simply not happening for reasons cited above.

Moreover, superior skills have to be imparted to millions of youth aspiring for jobs. Textbook knowledge does not provide working skills any more than reading a book on cookery can impart culinary skills.  

1. Enhance skill development. The outdated ITI’s (Industrial Training Institute) are an apology for training.  Modern skill development centres must be created in every district of every state with utmost urgency, with due planning and care to encourage local talent and promote superior working skills combined. Of course, with the backing of proper theoretical knowledge to understand the why and the wherefore of every practical task in any trade.
2. Promote rural industries especially in agro-sector, as stated above.
3. Introduce modern concepts in large scale collective farming including mechanised and automated processing of large volume farm yields, by optimizing land holding and land utilisation.
4. Extensively promote the age old co-operative sector. This works well.  Encourage multi-cropping and other techniques to boost yield per hectare.

MV: Do you think merging banks at this point makes sense? Or will it create more complications?

CSS Rao: The merging of banks started when the subsidiaries of SBI were reverse merged with the mother bank SBI, followed by the unification of certain PSU (public sector undertaking) banks in recent years. For over a decade, I have been advocating PSU bank mergers in national interest and in their own.

In my earlier recommendations, I have spoken of just six PSU banks pan India, and a reasonable number of large, medium and small private sector banks and co-operative banks to meet the needs of a growing economy.  The value of such a move is to rationalise operations, enhance efficiency, reduce costs significantly without reducing employment (except VRS-voluntary retirement scheme), with each of the six banks concentrating on the development of large geo-territory assigned to them, such as north, west, east, south, central and north east India and/or grouped by respective states and union territories.

This is the future of banking.    

Such a progressive move will not create complications. The resistance that may come from employees arises from a fear of job loss. This should be safeguarded by the government through re-skilling wherever feasible so that those desirous of pursuing new career options can do so.  If not, the popular route of VRS is always open to them.

MV: Do you think the banking sector needs more aggressive reform measures?

CSS Rao: Rs 958 billion bank frauds reported in just six months past is proof enough that the present system is dangerously deficient. The need of the hour is recapitalisation of banks, introduction of appropriate new regulations to seriously deter NPAs (non-performing assets) and bank frauds which are so rampant till date, improvement in absorption of modern banking practices and digital technologies — all leading to improved health of the balance sheets of banks must become a reality very soon. 

NBFCs and banks in the co-operative sector have been a source of great embarrassment in recent years, their dismal performance caused largely by wilful mismanagement and fraud are matters of grave concern. This requires urgent redressal concurrently with RBI assuming a more stringent governance role to oversee the conduct of all banks and financial institutions in India.

MV: Is there a need to reduce government stake in public sector banks below 51% ?

CSS Rao: Frankly No, because with the consolidation of PSU Banks as recommended above, ownership and control of PSU banks must always remain with the government of India, for reasons of monetary control as well as administrative expediency.  This is non-negotiable.  However, the quality of professional management at senior and middle levels of these banks must be significantly improved, in order to ensure a great future for this primordial sector of our economy.

MV: Was it a good idea to seek reserves from RBI? Despite the RBI transferring Rs 1.76 lakh crore to the government, there has been no sign of economic revival. Why?

CSS Rao: It is well known that central banks are always operationally independent of the central government.  It is not prudent for the central government to have sought the stated amount from RBI. Apart from financial impropriety, it overtly signals the underlying weakness of the national economy.

This money rightfully belongs to RBI and must remain so.

If the government of India launches some really large projects of national importance which also represent good business models with attractive yields to investors, then, the government can place a persuasive communication before RBI (and to other prominent institutions) to consider investing in bonds issued by the entities promoting such new projects.  In such case, it becomes an attractive investment opportunity to RBI, which it is expected to consider. This is a more laudable approach to national development than the central government ‘compulsively appropriating’ large monetary resources belonging to RBI ostensibly to meet fiscal deficits arising inter alia from  funding welfare programmes which usually seek  to deliver self-serving political mileage, which, in my considered view, is against national interest and therefore incorrect.

MV: Finally, do you believe the much publicised target of India reaching a GDP of $5 trillion by 2024-25 is practically attainable? What are your recommendations if India needs to achieve this target?

CSS Rao: The size of India’s GDP stands at $2.7 trillion for fiscal 2018-19.  The confirmed annual rate of GDP growth is currently about 5%. At this rate, India’s GDP would be in the range of–
$2.83 trillion for fiscal 2019-20;
$2.97 trillion for fiscal 2020-21;
$3.12 trillion for fiscal 2021-22;
$3.28 trillion for fiscal 2022-23;
$3.44 trillion for fiscal 2023-24;
$3.61 trillion for fiscal 2024-25.
If the desired target of $5 trillion is to be met by 2024-25, the annual rate of GDP growth must be at least 10%.  [This presumes calculations at today’s exchange rate, which is incorrect.] So, this unrealistic target is in the realm of wishful thinking, especially considering the state of the world economy which is threatened by impending economic depression, ongoing trade wars, political uncertainties in major geographies, paucity of mega scale monetary resources including large scale FDI required for India’s exponential growth, demographic make-up, and so on.

A GDP of $4 trillion by 2024-25 would be a realistic target to attempt, provided all conditions are favourable and a complete range of effective reforms are indeed implemented.