JULY 08, 2019 News the Newsbehind 39
indianeconomicpanoramafactual evidence from other economies,
that a higher investment rate has
the potential to diversify a country’s
industrial base, create jobs and lift
household incomes, thereby setting off
a virtuous cycle of higher consumption
and savings rates. It posits that India’s
expanding work-age cohort can bring
about the higher savings rate needed to
kickstart this cycle with some adroit use
of behavioural economics.”
While these arguments are appealing
in theory, the Business Line writes
“they seem to gloss over the fact that
the investment- and export-led growth
models pursued by China and the East
Asian nations benefited immensely
from the openness of world trade in the
1990s, while the current environment
is one of simmering hostilities. Th e
suggestion that India should use the
present disruptions to ‘insert itself into
global supply chains’ may be easier
said than done. One also wonders if
the private sector will really take the
fi rst step in this virtuous cycle, without
evidence of strong demand growth.
It does not pinpoint the sectors or
skills needed for India’s services-driven
economy to transform into an export
powerhouse.......’
While the Survey’s macro
prescriptions need fleshing out, “its
micro analyses on the key constraints to
investment-led growth are spot on....”
A $5 TRILLION ECONOMY:
DOABLE BUT DAUNTING
R. Nagaraj (with the Indira Gandhi
Institute of Development Research,
Mumbai), says in economic terms “the
targeted $5 trillion economy mean is
Rs350,00,000 crore of gross domestic
product (GDP) at current prices, at
Rs70 to a U.S. dollar exchange rate.
India’s (provisional) GDP in 2018-19 at
current prices is Rs190,10,164 crore (or
$2.7 trillion), which means the annual
per capita income is Rs1,42,719, or
about Rs11,900 per month.”
Th e target, Nagaraj says “implies an
output expansion by 84% in fi ve years, or
at 13% compound annual growth rate.
Assuming an annual price rise of 4%,
in line with the Reserve Bank of India’s
infl ation target, the required growth
rate in real, or infl ation-adjusted, terms
is 9% per year. To get a perspective,
India offi cially grew at 7.1% per year
over the last fi ve years, but the annual
growth rate never touched 9%. Hence,
the target seems ambitious....”
But the target could be doable.
China, during 2003-07, grew at 11.7%;
South Korea, between 1983 and 1987,
grew at 11%. “So, Mr. Modi’s target is
smaller than the best historical records
and may seem realistic.”
NEED TO MOBILISE
DOMESTIC SAVING AND
RAISE FIXED INVESTMENT
RATES
Nagaraj argues that “no country
grew at such a pace without mobilising
domestic saving and raising fixed
investment rates.
“In the last fi ve years, on average,
the domestic saving rate was 30.8%
of gross national domestic income
(GNDI), and the investment rate
(gross capital formation to GDP ratio)
was 32.5%. Assuming the underlying
technical coeffi cients remain constant,
a 9% annual growth rate calls for 39%
of domestic saving rate and 41.2%
of investment rate. Correspondingly,
shares of private consumption need to
shrink to about 50% of GDP from the
current level of 59% of GDP at current
prices, assuming foreign capital infl ow
remains at 1.7% of GDP.
“In other words, India will have to
turn into an investment-led economy
as it happened during the boom last
decade (2003-08) before the fi nancial
crisis, or like China since the 1980s.
Granting that rapid technical progress
or changes in output composition could
reduce the required incremental capital-output ratio (ICOR), it nevertheless will
call for a nearly 8-9 percentage point
boost to saving and investment rates.”
Therefore, if the target of a $ 5
trillion economy is to be achieved,
there is need “for a re-thinking in the
ruling dispensation that seems to hail
India as a consumption-led growth
story. There is a belief that greater
foreign capital (FDI) infl ow would fi ll
in the investment gap........History
shows that no country has succeeded
in accelerating its growth rate without
raising the domestic saving rate to close
to 40% of GDP. Foreign capital can fi ll
in some vital gaps but is not a substitute
for domestic resources. Even in China,
FDI infl ows as a proportion of GDP
never exceeded 5-6%........Hence,
there is a need for caution against the
exuberance (or opportunistic bias) that
FDI will help to get to the $5 trillion
GDP target.”
What is even more serious is that
the economy has slowed down for a
while now. Th e $5 trillion target thus
“appears daunting. It may yet be doable,
provided policymakers begin with a
realistic assessment, by willing to step
up domestic saving and investment,
and not by the wishful thinking of FDI-
led growth accelerations in uncertain
economic times.”
WHAT THE ECONOMY
NEEDS OTHER THAN A $ 5
TRILLION ECONOMY
Other than the target of a $ 5 trillion
economy by 2024, Kaushik Das, India
Chief Economist, Deutsche Bank writes
that India should simultaneously target
the following by 2024-25:
* Doubling per capita income:
Th is should rise to $3,500 by 2024,
and almost double to $4,000 by- Because economies that have
a signifi cantly higher informal sector
employment, like India, tend to have a
lower per capita income, it is important
to have policies aimed toward a greater
formalisation of the economy. In