India’s grand $5 trillion goal, and the policies to achieve it

On this Independence Day, T.V Mohandas Pai and Nisha Holla look at the several policy initiatives required in the next six years to maintain the eight-percent growth rate and reach the $5 trillion target India has set for itself.

Prime Minister Narendra Modi has given India and its citizens a lofty goal of maturing into a $5 trillion economy by 2025. Every growing country needs an ambitious goal, so everyone is aligned and focused on reaching it. To reap this vision, we must first take stock. In FY 2018-19, India's GDP is estimated to be Rs 190 lakh crores or $2.7 trillion (at Rs 70 = $1). Say we grow at eight percent for the next six years, with inflation at 3.5 percent, yielding a nominal growth rate of 11.5 percent - in constant currency of Rs 70 = $1, starting at $2.7 trillion - the $5 trillion goal is well within reach. Putting aside considerations like the rupee depreciation, the critical issue is, can we reach this goal of eight percent growth over the next six years?

When India’s economy opened up in 1991, the GDP was $275 billion; reaching $2.7 trillion today translates to a growth of 8.5 percent per year in dollar terms. The 8.5-percent per year is phenomenal growth and a testimony to the healthy growth drivers India possesses. Given India's strong 28-year history and capacity for growth, we estimate that the probability India reaches the $5 trillion goal is more than 80 percent.

Several policy initiatives are required in the next six years to maintain the eight-percent growth rate and reach the $5 trillion target:

  • Stable society: PM Modi has already laid the foundation for providing basic amenities to every Indian citizen. By 2021, every Indian will have a roof over their head, food on the table, a gas connection, and so on - need will disappear, and everyone can aspire to improve quality of life. Economic growth cannot occur in a sea of poverty, and Prime Minister Modi has worked hard to solve India's biggest problem.
  • Improve productive sectors: Data shows 42.7 percent of India's workforce in 2016-17 was engaged in the agriculture sector, crawling at a 3.4 percent growth rate and contributing only 17.3 percent to the GDP. Meanwhile, 57.3 percent of the workforce was engaged in industry and services growing at 5.5 percent and 7.6 percent, respectively. This is resulting in high income inequity. By 2030, India must move a majority of agriculture-dependents to industry or services. About 10 percent of the workforce engaged in agriculture is sufficient - the US and China have both done this, while successfully producing food surpluses in the agriculture sector. The highest value-add is in the services and industry sectors; expanding them with skilled labour and incentives will contribute heavily to our economic growth.

Table: 2016-17 data comparing agriculture, industry and services sectors in India across share of Gross Value Added, GVA growth rate, workforce distribution and per-capita numbers. Data from RBI, MOSPI World Bank

  • Urbanise with labour-intensive industry (LII) clusters: Urbanisation aggregates human activity and boosts productivity and specialisation. Rapid urbanisation is necessary to provide jobs for all – this is not in the 10 major cities but by developing 5,000 small towns all over India. By creating labour-intensive industry (LII) clusters in and around these towns, people all over the country will have proximity to well-paying jobs instead of migrating en masse to the major cities. With careful planning, this network of 5,000 small towns will become India's growth engine.
  • Infrastructure development and supply chain: India's construction sectors need a significant boost – roads, railways, ports, tourism infrastructure, power surplus infrastructure, and more. The speed of carriage of goods on railways needs to increase from the current 25kmph to 50-60kmph. While contributing to the economic growth (like in China), this move will also provide mass employment and a logistical backbone to boost India's industrial and export capabilities and supply chain efficiency. Today, our supply chain costs are 14 percent of the GDP, which is absurdly high. The GST is a great venture and is already reducing supply chain costs by two percent; with enhanced transportation and the creation of a common market for India, costs could come down to 8-9 percent in the next three years.
  • Jobs and skilling: India needs 15 million jobs a year, but only 11 million-12 million are counted. The problem is not a shortage of jobs, but that of low-quality jobs and wages. Mass employment and skilling through LIIs and the construction industry can solve this problem. Similarly, incentivising specialisation through higher education and research will build a workforce pipeline for hi-tech and other high value-add industries.
  • Tax and justice: Tax terror has hurt India badly, and litigation has doubled in the last five years. The tax justice system needs reforms to reduce unnecessary litigation and stop tax terror. There is an urgent need to lower corporate taxes to 25 percent—the worldwide average—to allow our large companies to grow and compete globally.
  • Judicial reforms: It is imperative to improve our judicial infrastructure and police investigative capacity - so justice can be served to the aam aadmi in three years, as opposed to the current 15-20-year horizon. There are 250,000+ awaiting trial in prisons, reduced to a situation where their court date never comes up and are too poor to post bail. Today, we have 18 judges/million population; this must grow to 50 in 5-6 years. The capacity of the police to investigate and keep us safe must also increase. A great society can only be built on the foundation of a strong justice system that is available to all.
  • Digital economy: India is rapidly moving from a data-poor to data-rich country. Most Indians now have digital identities. With one million+ mobile phones, 560 million+ internet connections, and 350 million+ additional bank accounts opened since 2014, our digital economy has reached scale. We are already capitalising on this through new payment modes, ecommerce, and startup entrepreneurship. However, our data and platforms are owned by the US, Chinese, and Japanese companies – Google, Facebook, Twitter, Tencent, Alibaba, and others. About $50 billion capital has entered the ecosystem since 2014, of which less than 10 percent is estimated to be Indian. We are in danger of becoming a captive digital colony, a situation that can only be remedied by taking ownership of our data and platforms. We need laws for keeping Indian data in data centres within our borders. We must also infuse the system with more Indian capital - careful implementation of the announced $1.5 billion Fund of Funds under GoI's Startup India is a need of the hour.
  • Banking: India has been phenomenal in the banking sector, which can be a strong growth driver. Total lending to GDP is just over 50 percent, while total deposits to GDP is just over 65 percent. These ratios can be incentivised to grow with increased infrastructure, integrating technology and building a robust banking sector.
  • Empower big cities: India’s big cities are engines of growth – Mumbai is a financial hub, Delhi is the seat of political and growing technological power, Bengaluru is a global technological hub – but are starved of resources. Take Bengaluru, for example. It is the richest city in India with the highest per-capita income and pays a tremendous amount in tax, which is spent on the rest of Karnataka. With no budget allocation to Bengaluru, it has inadequate infrastructure with no capacity to deal with the continual immigration from the rest of the country. Despite its financial underpinning for the State and country, Bengaluru is politically insignificant. High-growth cities like Bengaluru must be made self-governing with a full-time mayor and in-charge of its own allocation. That allocation can then be spent on improving infrastructure and mobility to boost productivity. Every major Indian city has potential to become a global hub in various domains (like Silicon Valley or Shanghai) which will, in turn, boost India’s economy.
  • Higher education: A nation's true worth is in its higher education system. The US' political and military strength stands on the innovation of its universities and research labs. India must reform its higher education system, give autonomy to its universities, and set up state-of-the-art research labs to attract the best talent. Policymakers must focus attention on improving GER and quality of education.
  • Good governance: Prime Minister Modi has set the tone by ensuring there's no corruption in Delhi. We need government at all levels to work with the people to implement policy that is effective and responsive to the needs of citizens.
  • Role of States: We are now in an era where the role of the Center is increasingly limited, and State spending is growing. State GDP across India varies enormously, driven by population dynamics, fertility, and other factors. India cannot develop unless its highly populated areas in the North-Central-East regions become prosperous. Just like Maharashtra Chief Minister Fadnavis has put forth a farsighted vision of a $1 trillion economy by 2025 to match Prime Minister Modi's $5 trillion goal, we need chief ministers of each State to evaluate and execute a long-term plan and vision for their State.

India is a colossus with profound civilizational heritage and tremendous potential for global impact. For most of history, India was the largest economy in the world. On this Independence Day, we look back at the time we won our freedom through the largest-ever freedom movement in the world – ultimately liberalising 60 percent of humanity from the throes of colonisation. Today, India has to play its role as the largest democracy - to demonstrate how to build a sustainable system based on justice, meeting the needs of its billion+ citizens, and where every young person and citizen can dream of great achievements. Only India can lead the way.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)

(Edited by Evelyn Ratnakumar)