Not by wishful thinking (How to make India a $5 trillion economy)

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 Not by wishful thinking (How to make India a $5 trillion economy)

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• PM Modi's bold target : In June 2019, the PM set a bold target for India - to become a $5 trillion economy by 2024. The "Team India" gathered for the Governance Council meeting of NITI Aayog now has to turn it into reality.
• The facts :

1. The figure of $5 trillion translates to Rs.350 lakh crores (Trillions) of GDP at current prices, with $ 1 = Rs.70.
2. Today's GDP of India (2018-19) in current prices is Rs.190 trillion which is $2.7 trillion.
3. Today's per capita income is Rs.1.42 lakh (Rs.11,900 per month).

• Target means that : The new target will take a total of 84% growth in 5 years from today, or a 13% annual compounded growth rate.

1. If annual inflation rate is 4% (RBI's range), the real growth rate needed is 13 minus 4 = 9% per year.
2. In past many years, India has not crossed 7.5% per annum growth rate.

• What other Asian nations did : China had a record growth phase from 2003-07 when it grew at 11.7% per annum. South Korea grew at 11% from 1983 to 1987. So Indian target is not unrealistic.
• What is needed : India now needs to mobilise domestic saving and raising the fixed investment rates.

1. From 2014-19, domestic savings rate was 30.8% of GNDI (gross national domestic income) and investment rate (GFCF / GDP ratio) was 32.5%.
2. For a 9% annual GDP growth rate, India needs 39% of domestic saving rate, and 41.2% of investment rate.
3. Share of private consumption needs to become 50% instead of 59%, and FDI inflows must not go down from 1.9% of GDP.

• Investment-led economy : So, India has to become the investment-led economy that it was from 2003-08 before global recession struck. Of course, radical technological changes can surely reduce the ICOR (Incremental Capital Output Ratio), but a boost of 8-9% in saving and investment rates is compulsory.
• What if data were wrong : If the past few years' data are not credible, and GDP grew not at 7% but at 4.5%, then the $5 trillion target is too tough to achieve.
• What we really want India to become : As on date, the wisdom is that "India must be a consumption-led growth story".

1. Belief - Higher FDI will fill in the investment gap
2. History shows that no nation grew rapidly without taking domestic savings rate to 40% at least
3. Foreign capital can never substitute domestic savings

• FDI situation in India : Maximum was in 2008-09 at 2.7% of GDP, and has decelerated after that. Today, we have more and more PE (private equity) with 3-5 yrs outlook, rather than real FDI (long term fixed investments), hence net FDI rate is much lower that gross, and was just 1.5% in 2017-18. So, FDI cannot drive our goal of $5 trillion!
• Dangers : For some time now, Indian economy has been slowing down. Savings rate now is 29.6% or less, and GFCF rate is 30.6%. The banks are unable to push lending due to NPAs, and NBFCs are hit hard due to IL&FS crisis. The Baltic Dry Index shows that trade war will hit exports to GDP ratio hard.
• Get priorities right : India can touch the $5 trillion target with - (a) right priorities, (b) raising domestic savings rate, (c) improving the investment rate, and (d) not relying on FDI-led boost to GDP, in uncertain trade-war times.
• Summary : The new GDP target of $5 trillion by 2024 is a great opportunity to reflect on the fundamental problems facing the Indian economy, not the least of them being reducing savings and investment rates.

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