Unfortunately, the Finance Minister avoided a review of the macro-economic situation and her assessment of the present state of the economy.
While speaking on Budget 2019-20 in the Rajya Sabha, I said, “If the nominal growth rate of GDP is 12%, the size of the GDP will double every six years. If the nominal growth rate is 11%, it will double every seven years.” I urged the Finance Minister to not stop with the goal of a $5 trillion economy in 2024-25 but also point out that the size of economy will become $10 trillion six or seven years thereafter and it will become $20 trillion six or seven years thereafter.
It was not my intention to mock the goal of a $5 trillion economy. It is a fair goal (and we shall be happy when we reach that milestone), but it is not an extraordinary goal. Why do I say so?
The nominal growth of the Indian economy has been, on average, 12% a year for the last 10 years. Please note it is nominal growth. If you do your math and multiply 100 by 11 or 12% once for every year you will arrive at the following table:
Of course, to measure in USD, the exchange rate has to remain reasonably stable. If the rupee-dollar exchange rate remains between `70-75 a dollar, the Indian economy that was at the level of $2.75 trillion in 2018-19 will reach the level of $5 trillion by 2024-25. In fact, the Economic Survey has assumed that the rupee may depreciate up to `75 per dollar while estimating that the size of the GDP will be $5 trillion by 2024-25. But why stop there?
The size of India’s economy that was $325 billion in 1991 doubled by 2003-04, doubled again by 2008-09, and doubled again by September 2017 to $2.48 trillion. In future too, the GDP will double every six or seven years. Each milestone will be a matter of satisfaction but not an extraordinary achievement.
The more important questions are:
1. How do we quicken the rate of nominal growth from 11 or 12% to 14% (which is when India will achieve the double digit GDP growth rate of 10%)?
2. What will be the rate of increase in the per capita income of the average Indian?
3. Will inequality between the poorest 10% and the richest 10% widen or narrow?
We need answers to these questions and we need policies that will address the underlying reasons for low nominal growth, low rise in per capita income, and growing inequality. Unfortunately, the Finance Minister avoided a review of the macro-economic situation and her assessment of the present state of the economy.
Some answers to the questions can be found in the Economic Survey 2018-19. According to the Chief Economic Adviser (CEA), the key to higher growth is greater private investment. A few days ago he reiterated that domestic resources for investment alone would not be sufficient and, hence, the importance of foreign investment.
Searching for resources
The CEA has good reason to be worried about the insufficiency of domestic resources. Government/public investment can be made only out of tax revenues and public sector surpluses. Of these, tax revenues are under pressure. 2018-19 was a particularly dismal year; yet the government has set aggressive targets for tax revenues in 2019-20. Evidently, the CEA does not share the government’s optimism.
The table above justifies the CEA’s concerns. If the ambitious tax revenues are not realised, the government’s total revenues, as well as capital expenditure, will come under pressure — as it happened in 2018-19 when the government ‘lost’ Rs 1,67,455 crore of tax revenue and its capital expenditure was hit.
The CEA is right. Absent greater investment, the growth rate of GDP will be about 7% in 2019-20. Hence the ambiguity in the official documents about the inflation-adjusted growth rate of GDP — 7 or 8%!