By Bikash Narayan Mishra

Prime Minister Narendra Modi, while addressing the nation from the ramparts of Red Fort on August 15, 2019, set a target of turning India into a $5 trillion economy by FY25. Nominal gross domestic product stood at $2.83 trillion in FY20, so the country needed to grow by nearly 100% in the dollar term in the next five years.  

Doubling the size of the Indian economy has happened in the past in less than five years as well. In fact, this happened in four years– between FY04 and FY08– when India emerged as a $1-trillion economy for the first time. So, another doubling of the size in five years initially did not seem to be impossible.

The Covid Blues
But the unprecedented Covid outbreak in early 2020 changed everything. The government was forced to impose a pan-India lockdown; factories and other establishments remained shut so that the Covid spread could be contained. Several rounds of relief measures were announced by the government to soften the blow to individuals as well as businesses.

Just when things started looking up again and economic activities gained some traction in the March quarter of FY21, backed by government support like guaranteed loans under the Emergency Credit Line Guarantee Scheme (ECLGS), a massive nationwide vaccination programme and several other measures, hit the second Covid wave. Several localized lockdowns hit factory output, while growth in private consumption remained below par, reflecting the challenges faced by both the supply and demand sides of the economy.

Hurdles Beyond Pandemic
Cut to 2022, just when everyone thought the Omicron onslaught was behind us, the Russia-Ukraine conflict flared up in late February. Global supply chains witnessed massive disruptions and commodity prices, especially of energy, spiked, exacerbating inflationary pressure. Advanced economies witnessed even higher price pressure (US inflation scaled a fresh 40-year peak in May).  This led key central banks, including the US Federal Reserve, to raise interest rates substantially to break the back of inflation. Consequently, key economies like the US and those in Europe are now staring at recession, which will weigh down global demand and hurt the prospects of the Indian economy as well, thanks to the integration in a globalized world. The Reserve Bank of India, too, has raised the benchmark lending rate twice since May by a total of 90 basis points, in a difficult trade-off with growth; it is widely expected to go for another hike in August. Independent agencies have already revised down their growth projections for several key countries, including India, although the country will still remain the world’s fastest-growing major economy.

Shift In Time-Frame
Domestic policy-makers have, therefore, shifted the goal post of realizing the $5-trillion target by two years to 2027. This will catapult India into the league of top four economies in the world. Already, India is close to achieving the fifth-largest economy tag. According to World Bank data, India lost out the fifth spot to the UK in FY22 by a mere $13 billion.

So, reaching the $5-trillion mark will happen for sure in this decade but a more pertinent question is when and how.

Strong External Headwinds
A lot depends on both external and internal factors. A prolonged mild recession in the US, India’s largest export market, can impact New Delhi’s growth prospects, according to Nomura. As the global supply-chains remain tangled and protectionism gains ground across the globe, India’s exports will likely get affected. With the possibility of a swift end to the Ukraine crisis still out of sight, elevated commodity prices have inflated the import bill of the country. India’s trade deficit widened sharply to a record $70 billion in the first quarter of FY23 from less than $30 billion a year before. Imports spiked by more than 60% year-on-year in the June quarter amid a surge in the purchases of crude oil, coal and gold, driven substantially by high prices. At the same time, year-on-year growth in exports slowed down to 16.8% in June from 20.6% in May and 30.7% in April, as demand slowdown in advanced economies started to bite. The hike in the interest rate by the US Federal Reserve led to a capital flight from emerging economies, including India, and resulted in a fall of the rupee against the greenback. While a weak rupee should help exports, it does make purchases from overseas more expensive and doesn’t augur well for a net importer like India.

Migration of HNIs
The migration of high net-worth individuals (HNIs) to advanced economies has been a disturbing trend. According to the 2018 Henley Global Citizen Report, which follows private wealth and investment migration trends globally, as many as 8,000 HNIs have been predicted to leave India in 2022. Strict tax rules and reporting requirements in India as well as the need for stronger passports remain the primary factors driving the migration. More and more young entrepreneurs are exploring global business and investment prospects while demonstrating an ever-increasing risk appetite, according to the report. While the country’s old industrialist base remains intact, the tech savvy, more ambitious young generation seems eager to diversify a portion of their wealth in countries that provide a raft of benefits and low tax rates. Besides, the charm of a higher standard of living, including better education and health facilities for the family, is also a key driver for the migration. The EU bloc and the traditional favorites Dubai and Singapore are gaining popularity among Indians.

The Way Forward
Given the strong global headwinds and other challenges, we need massive investments of around $300 billion a year in key infrastructure sectors, such as roads, railways, airports, waterways, ports, gas and transport. It will not just spur economic growth but create enormous scope for employment, thus providing income to people and bolstering consumption on a sustained basis. Given that private capex still remains elusive (a revival is limited to only a few sectors), the government has to take the lead to create durable infrastructure assets, as capex has a much higher multiplier effect than revenue spending. Realising this, the central government has substantially raised its budgetary capital expenditure for FY23 to Rs 7.5 trillion (close to $100 billion), up 27% from the actual spending of Rs 5.93 trillion in the previous year. It’s noteworthy that finance minister Nirmala Sitharaman has stressed there will be no cut in the capex outlay in FY23 despite the challenging times.

Roping in States And CPSEs
However, given that the infrastructure sector requires three times more investments than what the central government has proposed to do, it must impress on states to raise their capex outlay as well. At the same time, both the Centre and the states must nudge public-sector undertakings under them to step up their capex. It must be noted that without constant prodding and monitoring by the Centre, this goal can’t be achieved.

Wooing The Private Sector
Given the limitation of the government outlay, a substantial chunk of the $300-billion investments must come from the private sector. Since the investment environment is sensitive to policy and regulatory initiatives and certainties, the government must not just ensure a predictable policy regime but make it easy for investors to start, run and quit (in case of a failure) businesses easily. Importantly, it must initiate reforms in various factors of production, such as land, labour and capital to attract investors.

As the government’s land acquisition Bill has hit the political hurdle, it makes sense to allocate land to potential investors in suitable industrial clusters where they don’t have to bother about obtaining various onerous approval, including environmental ones. Efforts must be stepped up to engage with states to implement the four labour codes on wages, social security, industrial relations and occupation safety, health and working conditions, which the Centre has proposed. Similarly, substantial work needs to be done to deepen the country’s debt market.

Another important requirement will be to firm up a viable policy to promote the public-private partnership (PPP) in the country. The PPP model hasn’t quite worked in India (apart from the limited success in the road sector). The government has proposed to come out with a new PPP policy and it would be interesting to see how it’s been structured to incentivise private players.

At the same time, drawing patient capital, such as pension funds, to the infrastructure sector will be crucial to the successful implementation of projects, especially those under the National Infrastructure pipeline. The National Bank for Financing Infrastructure and Development Bill, the new development finance institution that was set up last year and is expected to start operations soon, will also have a key role to play in financing such long-term projects.

Conclusion
Notwithstanding the challenges, India continues to be one of the fastest-growing economies in the world, and its macro fundamentals have improved dramatically in recent years. The near $600 billion in forex reserves gives policy-makers the confidence that the country can easily cope with any external headwind. With a focus on Aatmanirbhar Bharat initiative and the creation of an investor-friendly eco-system, things are improving. So, even if the goal post has to be shifted, it may not go too far and India is going to be a $5-trillion economy during the 2020s only.

(The author is Senior Advisor to the Indian Banks’ Association. The views expressed are personal)