Explained: India’s $5 trillion economy target and challenges ahead

New Delhi | Published: June 25, 2019 2:58:12 AM

Strategies for a12% growth over the next five years becomes complex, because it comes at a time when there are radical shifts in the global economic paradigm.

global trade, economy, india economyGrowth in global trade, particularly merchandise trade, with its multiplier effect has been a crucial part of growth strategies of all developing countries.

By Arindam Bhattacharya

Presiding over the 5th Governing Council meeting of NITI Aayog recently, prime minister Modi set a goal of $5 trillion for India’s GDP by 2024, saying it was a difficult target but achievable. It will need India to grow annually at 12% over the next 5 years. The PM clearly wants to galvanise the nation and is setting the narrative for the new government, which challenges the current signals of economic slowdown.

Achieving such an aspirational growth target calls for pulling all the economic growth levers—investment, consumption, exports, and across all the three sectors of agriculture, manufacturing and services. There is a fair amount of consensus that we have to address our inefficient factor markets as the topmost priority for India to achieve its full potential, especially the constraints imposed by our stressed financial and power markets. Without credit flow to support private investment and cheaper, abundant and good quality electricity to power growth, this GDP target will remain an aspiration.

Formulating the strategies for 12% growth over the next five years becomes more complex because it comes at a time when we are seeing radical shifts taking place in the global economic and value creation paradigm. Let me list six of these shifts that need to be accounted for as we go forward.

First is the shift in global trade. Growth in global trade, particularly merchandise trade, with its multiplier effect has been a crucial part of growth strategies of all developing countries. The trade intensity (ratio of global trade to global GDP) grew from less than 10% at the start of 20th century to over 50% by its end, reflecting the development of global supply chains. However, since the last financial crisis in 2008, trade intensity has stagnated, in particular for merchandise trade from which developing countries have benefited for the last half century. However service trade, especially digitally enabled trade (both service and merchandise) where developed countries are advantaged, is growing much faster, which represents a major structural shift in global trade. While there is a large short-term opportunity in attracting some of the capacity of labour intensive industries that is shifting out of China (if we can make our factor markets and incentive policies more attractive), our growth strategies need to be built in preparation for this paradigm shift taking place in global trading pattern.

The second shift is the emergence of a new ‘factor market’—data—which is no longer an ‘output’ of value added activity to be used to measure its effectiveness (e.g. through MIS), but has become an input into the very design of the activity through growth of IoT. An expert used the analogy that in the 20th century, data was like the ‘exhaust’ of the car, but in the 21st, it is like the ‘fuel’, a critical input to make the car drive better. Creating an effective market for data (through digital infrastructure, regulatory regimes, interoperability rules, robust privacy and security laws) is becoming as important for economic growth as creating more efficient traditional factor markets, and those countries that do it better and faster will reap the benefits and build global leadership in many industries.

A consequence of the growth of digital and data is the third major shift in the economic growth paradigm—the emergence of new value pools across industries. For instance, the traditional value pools in the automotive industry (new vehicle sales, components, finance, insurance, parts/service), which is nearly 100% today, can shrink to less than 60% in 15 years as the new pools driven by electrification, digitally-driven data services, ranging from preventive maintenance to restaurant location, and mobility services grow. Whether these new value pools will be captured by Indian or global companies will have an impact on India’s longer term growth prospects, and this kind of radical shift is happening across industries, often faster than what regulatory bodies and/or government can react to. This has to change.

The fourth shift is equally radical. World over, formal manufacturing jobs are declining as the fourth industrial revolution powered by digital technologies accelerates. However, digital technologies are also powering the emergence of new business models, start-ups and micro-enterprises, and growth of services by driving down costs. One of the major impacts of this shift is the emergence of the rapidly growing gig- economy jobs like the Uber car drivers and last mile delivery boys/girls of e-commerce companies. This poses several policy challenges. First, the nature and types of jobs, and the skills needed are changing. These jobs are not captured in our current laws which can facilitate their regulation and growth. In their absence, these are not captured in formal jobs survey, and are often poorly paying with no social security. In fact, given the growth of such non-formal jobs, many experts maintain that India does not have a jobs problem but a low income problem. The new economic paradigm is needed to facilitate the formalisation and growth of income generation from start-ups, micro-enterprises and of the self-employed.

The fifth shift important for longer term economic planning is the increasing role of IP and talent as a source of value creation in the 21st century, as opposed to primary role, in the 20th, of physical conversion of raw material into final products. This is clearly visible by the complete change-over of top-20 market-cap companies in the world in the last two decades from the resources and manufacturing dominated global firms to digital technology based companies driven more by IP, data, and talent. We have to give at least equal focus to growing industries which develop and leverage IP and talent, as to those that physically convert raw materials.

Lastly, and, to me, one of the most interesting shifts is in the nature of what I call ‘economic problem solving’. One of my senior BCG colleagues who had headed a global non-governmental institution recently remarked to me that economic development paradigms lag the development of on-ground cutting-edge solutions to economic and social problems. Today, technology, connectivity, financial flows allow more agility, flexibility and ‘micro-solutioning’ at local levels, which become critical in developing a world where government institutions are often weak. Our economic development models are still very much geared to large scale, top-down approach. We have to find innovative ways to identify, include and scale these development efforts in our national planning in the 21st century.

Our PM has set the aspiration. It is a bold one, calling for thinking out of the box, breaking the old paradigms of economic growth and development. Our success in doing so will be the difference between it remaining an aspiration and becoming a reality.

Senior partner and managing director, Boston Consulting Group Views are personal

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

FinancialExpress_1x1_Imp_Desktop