Pushing the Indian economy to a size of $5 trillion by 2024-25 depends on real growth rate, inflation rate and the movement of Indian rupee vis-a-vis the U.S. dollar. Starting with a base size of $2.7 trillion in 2018-19, if annual growth is uniformly distributed across the next five years, a nominal growth rate of 13% per annum is required which can be decomposed into a real growth of 8%-9% and an inflation rate of 5%-4% with an assumed rate of depreciation on the Indian rupee of 2% per annum.
The Union Budget has proposed a number of growth-promoting initiatives to achieve this target.
First, the government proposes to access global investors by floating sovereign bonds denominated in external currency. This will ease pressure on domestic savings and interest rates which will eventually facilitate an effective transmission of a repo rate reduction to lending rates. Second, the government has come out with a clearer focus on Make in India where the emphasis will now be on relatively limited sectors such as MSMEs, start-ups, defence manufacturing, automobiles, and electronics. Third, the government aims to invite global investors for setting up mega-manufacturing plants to bring in advanced technology in electric vehicles, electronics and other related areas.
Fourth, the burden of NPAs on the banking sector is likely to ease with a budgeted capital infusion of ₹70,000 crore. Fifth, the Budget has announced that NBFCs would also be allowed to access the facility currently available to banks wherein interest on bad loans paid by loss-making entities is taxed in the year in which it is actually received. Sixth, government has shown its inclination to reinvigorate PPPs for its ambitious infrastructure expansion plans. An Expert Committee is proposed to be set up to examine the scope for long-term financing of infrastructure and recommend methods for doing so.
The issue that needs to be examined is whether these measures would be effective to uplift India’s investment rate from 31.3% in 2018-19 which delivered a growth rate of 6.8% to a level enabling real growth rate of 8%. To increase the growth rate by a margin of 1.2% points, we need an increase in the investment rate of about 5% points of GDP, based on an incremental capital-output ratio of about 4 which is derived as an average for the period 2016-17 to 2018-19. This will increase the investment rate to levels above 36% which must be sustained in the medium-term.
We need to recognise that Centre’s direct contribution to this investment effort through its capital expenditure is expected to be limited. In 2019-20, Centre’s capital expenditure to GDP ratio is estimated to fall to 1.6% from 1.7% in 2018-19. The medium-term prospects for Centre’s tax-GDP ratio indicates stagnation at about 11.6%. If fiscal deficit is to be reduced from 3.3% to 3% of GDP in 2020-21, it is likely that Centre’s capital expenditure relative to GDP may fall further. Thus, the key to uplifting growth lies in the investments that can come from the central public-sector enterprises, the State governments and the private sector. In the case of CPSEs including the SPVs meant for infrastructure investment, the Budget indicates that there would be a fall in their capital expenditure relative to GDP from 2.4% in 2018-19 to 2.1% in 2019-20. Any further increase in the investment rate will have to come from the state governments, which may participate in government’s infrastructure expansion programmes particularly for their own road infrastructure.
The government plans that the private sector can also be activated through the PPP mode. Given the past experience with PPP initiative, this may be a challenging task. If there is some slippage in the levels of growth achieved in the medium-term as compared to the target of 8% plus, it would only imply that the time taken for achieving the target of becoming a $5 trillion economy would exceed the stipulated five-year period by a small margin.
