India’s $5-trillion GDP journey: Contribution of each state crucial

March 3, 2020 3:55 AM

While data shows India is on track to grow to $5 trillion in 5-6 years, each state must create a unique plan based on its GVA composition and human capital development.

India’s top five states in GSDP are Maharashtra, Tamil Nadu, Karnataka, Gujarat and Uttar Pradesh. India’s top five states in GSDP are Maharashtra, Tamil Nadu, Karnataka, Gujarat and Uttar Pradesh.

By TV Mohandas Pai & Nisha Holla

PM Modi’s target of a $5-trillion economy by 2025 has sparked much debate in the media and elsewhere. A senior economist from the government is on record saying the calculation is based on 8% real growth, 4% inflation and currency exchange at $1=Rs 75 by 2025.

We are currently at a nominal GDP of Rs 209.8 lakh crore or $2.96 trillion (at $1=Rs 71) in 2019-20, as per Union Budget documents. The accompanying table shows economic data of India and the top five states in GSDP. Taking a three-year CAGR from 2016-17 to 2019-20 estimates and projecting to 2024-25 shows India can grow to $5.07 trillion GDP at a constant conversion of $1 to Rs 71. At a conversion of $1 to Rs 75, the GDP projects to $4.8 trillion with a gap of $200 billion. The current three-year CAGR of 11.4% must be incentivised to grow at 12.4% to yield $5 trillion in 2025 at the Rs 75 conversion.

State GDP estimates for this year are based on the RBI State Finances report released in September 2019. They seem high in the light of India’s economic slowdown and growth rate revisions. Nevertheless, they serve as useful analytical points and can be revisited when revised estimates are released.

India’s top five states in GSDP are Maharashtra, Tamil Nadu, Karnataka, Gujarat and Uttar Pradesh. All five are growing stably, but can be driven faster with the right policies. Uttar Pradesh, in particular, has to mobilise its large youth base to improve economic productivity. It also stands out as most dependent on agriculture with 18.5% of GVA, as shown in the table. Gujarat is at 10.9%, whereas the other three are all under 10%. Gujarat is the only top-5 state with high industrial dependence at 51.8% GVA. If business-as-usual continues, Gujarat might find it problematic to keep growing when automation and other factors kick in. Instead, it must develop its services sector to augment its high industry output.

Karnataka has a substantial services contribution, at 68.5% of GVA, with industry at merely 23.7%. Maharashtra and Tamil Nadu’s GVA composition is more balanced, but still reliant on services at 50%-plus. While Gujarat must learn from these three states on developing the services sector with high value-add, the other states must learn from Gujarat how to industrialise sustainably as a vital source of employment and economic growth. Each state must study its unique composition and plan accordingly.

As analysed in our previous article (‘The state of job creation’; FE, February 22, 2020; https://bit.ly/2x2zbFH), state expenditures far exceed the Centre’s. State governments must utilise those corpora to boost economic growth in their states. Bold measures around urbanisation, industrialisation, human capital development and leveraging technologies where possible can transform states into economic powerhouses.

Clearly, data shows it is within the ambit of reality to grow to $5 trillion by 2025; or at the very least, come close. A growing economy must have lofty economic goals so everyone can get aligned towards achieving these. It is equally important to break the goal down backwards to understand how to accomplish it and where the pain points are. The Indian economy is undergoing a generational transformation, and several issues must be addressed to reach the $5 trillion mark in the next five years.

1. Significant workforce dependence on a low-performing sector like agriculture is problematic.
Latest data available for 2016-17 shows 43% of India’s workforce is dependent on the agriculture sector growing at 3.4%, whereas 57% of the workforce depends on industry and services growing at 5.5% and 7.6%, respectively. This unsustainable dynamic has resulted in high income-inequity. There is an urgent need for the government to update this data and analyse it to understand how to shift workers from agriculture to industry and services. India must set a goal to shift 1.5% of the workforce every year, which amounts to 8% of the workforce shifted by 2025.

2. Level of industrialisation and urbanisation is deficient. Need extensive investment in infrastructure and labour-intensive industries.
India is only at 34% urbanisation, compared to the world average of 55% and China at 59.2%. India must plan to urbanise all over the country, and deploy special programmes to develop 5,000 semi-urban centres, as analysed in our previous article (‘Urbanise or perish’; FE, August 2, 2019; https://bit.ly/2TtjaQF). This will drive economic expansion all over India and provide a solution to overcrowding in the big cities.

The recently announced Rs 102.5 lakh crore National Infrastructure Pipeline is welcome. There is an urgent need to find the resources to implement this quickly.

Quality infrastructure will lend a massive productivity boost to our economy, much like in China. The new move to attract tax-free investments in our infrastructure by foreign sovereign wealth funds is beneficial for capital inflow. The same incentives must extend to domestic investors; tax-free regimes will have Indian investors flock to invest, providing a much-needed boost to infrastructure spending.

Similarly, labour-intensive industries must be promoted all over India, particularly in states with large populations like Uttar Pradesh and Bihar. For this too, tax holidays and other incentives to entrepreneurs willing to set up industries that generate large-scale employment are required.

3. Quality, diversity and exportability of our products and services must improve to become globally competitive.
By consciously reverting to an export-oriented economy much like China, and now Vietnam and Bangladesh, India can leverage global markets to drive economic output. There is a need to invest in both labour-intensive industries like garments, automobile assembly, and hardware assembly, as well as specialised industries like chip design, 3D printing, automated manufacturing and medical devices. Services sectors like IT, financial and others must also be accelerated to leverage the higher value-add to the economy.

4. Lack of job creation in high-population regions is leading to economic inequity in the country.
Fertility and population growth rates are much higher in the north-central-east zones of India compared to the south and west, but job creation is inverse. A combined south-western population estimated at 42.74 crore in 2019 have created 60.8 lakh new formal jobs per EPFO between September 2017 and November 2019. Meanwhile, the north-central-east zones with a combined population of roughly 68.97 crore in 2019 created only 23.5 lakh new formal EPFO-listed jobs in the same period. A directed effort to raise the level of industrialisation and urbanisation in the north, east and central states will provide the large young populations there with ample job opportunities.

5. Education infrastructure must improve.
Our recent report on Human Capital Development in India (November 2019) demonstrates India has adequate higher education infrastructure overall and must now focus on rapid brownfield expansion to improve enrolment, quality and affordability. In particular, government spending can improve infrastructure in states with low access like Bihar and Jharkhand. There are also unusual cases of advanced states like Gujarat and Karnataka whose economic productivities are high but have de-focused on higher education. Gujarat’s GER of 20.4 trails the national average of 26.4, while Karnataka at 28.8 is the only southern state with a GER under 30. All Indian states must take stock of their education infrastructure to improve human capital in the age of knowledge economy-led growth.

While data shows India is on track to grow to $5 trillion in the next 5-6 years, we cannot afford to continue with a business-as-usual mindset. Each state must create a unique plan based on its GVA composition and human capital development. We must face the challenges head-on and invest accordingly. Fixing these five issues will fast-track India’s progress to a top-3 economy.

Pai is chairman, Aarin Capital Partners; Holla is technology fellow, C-CAMP

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