India On Track Towards $5 Trillion Economy

In the Budget 2019, India’s Finance Minister Mrs. Nirmala Sitaraman focused on the roadmap to attain $ 5 trillion economy by 2024. She has announced a “Vision for the decade”, a series of policy measures, which has a clear focus on investment and economic growth.

The policy measures include strengthening of physical and social infrastructure, enhancing financial inclusion through digital infrastructure, nutrition and good health for women and children, water management and the focus on blue economy, strengthening the space programme, self-sufficiency in food grains and pulses, enhancing “Make in India”, strengthening “Ayushman Bharat” with emphasis on “minimum government, maximum governance”.  Prime Minister Narendra Modi has said every Indian would be a stake-holder in this process.

However, the structural reforms to reach $ 5 trillion economy by 2024 are clearly mapped out.There could a potential danger of India missing the higher trajectory growth path to a “middle income trap” as cautioned by Rathin Roy, Member of Prime Minister’s Economic Advisory Council.

Attracting investment for growth is the focus of Modi 2.O government. It is emphasized that fiscal consolidation is a pre-requisite for investor’s confidence to invest in Indian economy. India needs to be cautious about fiscal consolidation; it should not be at the cost of gross capital formation in the economy. Tax buoyancy-led fiscal consolidation is significant for economic growth than public expenditure compression.

Taxation is a powerful policy tool for economic growth. On the taxation front, the rationalization of corporate tax is a significant step forward. The corporate tax rate was reduced to 25 % to all firms whose turnover was upto Rs. 400 crores turnover.  The measures regarding “ease of filing returns” needs to be given more emphasis for increasing revenue from GST.

India would also need to frame policies for tackling the agrarian crisis.  Even today, most of the crops in India are rain-fed, and the monsoon failure can be detrimental as crop failure can lead farmers to perpetual debt.  There is an urgent need to increase the gross capital formation in agricultural sector.

Harnessing demographic dividend for economic growth would be significant. The policies need to be focusing on education and health to strengthen the human capital formation, which in turn is a powerful determinant of economic growth. The Finance Minister has also announced that an expert committee would be formed to evaluate the gender budgeting of last 15 years.  This policy announcement has reinforced the “Leave No one Behind” (LNOB) motto of the second Modi government, by giving emphasis on gender sensitive human development.

“Last mile connectivity” is important for the outreach of government programmes to the poor households. The UJJWALA programme represents gender budgeting in energy infrastructure; is an important policy step of the Modi government. The UDAY programme is aimed at financial and operational turnaround of DISCOMs (power distribution companies) – to provide electricity to 100% households is work-in-progress. India needs to identify the constraints of these policies at the implementation level, as deficient infrastructure affects the quality of living.

Attracting foreign capital to Indian economy through Foreign Direct Investment (FDI) in significant sectors including aviation is supportive for growth. However, the foreign portfolio investment – “hot money” which responds to the interest rate differentials – needs to be dealt with caution as capital outflow may result if the interest rate of US gets higher. On trade front, the budget has announced certain hikes in the customs duty. Against the backdrop of US-China trade war, India needs to sketch its’ trade policy judiciously.

India is now a $ 2.87 trillion economy. If we grow in nominal terms more than 10 per cent annually, only then will we be able to reach the $ 5 trillion economy by 2024. The sectoral level investments and capital formation at the state and local levels in India are required for reaching the target of $ 5 trillion economy.

Script: Dr. Lekha S Chakraborty, Professor, National Institute Of Public Finance &Policy & Research Associate
The Levy Economics Institute Of Bard College, New York