Gauging The Odds
One of the medium-term goals set by PM Narendra Modi is for the economy to reach the size of USD 5 trillion. This in broad terms would translate to a size of around Rs 380-390 lakh crore in nominal terms. As per the budget, our GDP for FY23 is to be around Rs 258 lakh crore. This means that we need to grow by an average of 15 per cent per annum to accomplish this target latest by FY27 if there are no disturbances.
Assuming inflation is anchored at around 5 per cent, the economy has to grow by at least 10 per cent per annum in real terms on an average which is a tall but doable task. For such growth to be maintained on a sustainable basis, we need to have a few elements fall in place.
Consumption Takes The Lead
The thrust to an economy comes from consumption which can be kept ticking provided growth can provide more jobs to the people. More jobs mean more income which in turn is spent making it a virtuous cycle for growth.
Therefore, the crux here will be job creation at all levels and the focus will be on small and medium-sized enterprises and startups to provide the foundation that will be built by the corporate sector while agriculture provides the necessary support. A corollary here is that agriculture has to be consistent in the next three-four years with stable growth as a sub-normal monsoon has distortionary effects on growth.
Investment Matters
The private sector needs to fire continuously when it comes to investments. One part of the investment story will be linked with consumption because as consumption increases the capacity utilisation rates will improve leading to fresh bouts of investment. As long as capacity utilisation is less than 75 per cent, the incentive to invest will be low. For investments to take place, it will be necessary for utilisation levels to increase.
This will start from consumption goods and travel back to linkages to capital and intermediate goods. The other aspect is private investment in infrastructure which is lagging today due to legacy issues with the Insolvency and Bankruptcy Code working to resolve several such issues. The private sector needs to get into the act here and the legacy issues which plagued steel, power, coal etc. are behind us now.
The Financial Triad
The financial sector involving banking, debt and equity markets must work together to provide the funding required to keep investment ticking. The banking system was pushed back post the Asset Quality Review (AQR) process but is now out of it and banks are well capitalised and have made enough provisions for potential non-performing assets, which bring much optimism.
Along with the banking system, the debt market needs to become deeper and offer space for the lower-rated paper so that there is an opportunity for companies that have ratings of at least ‘BBB’ and ‘A’ to access this market. This becomes necessary for infra companies that have long gestation lags and will tend to be rated lower. Last, the equity culture should continue to tick so that companies can create the right leverage ratios to keep their enterprises up and running.
Government as a Spender
The fourth element is that the government, both Centre and states, need to keep spending on capex with no slowdown. The Centre has done a remarkable job so far with few compromises while states at times have been hesitant to spend when the fiscal targets are under pressure.
The government capex is always the starting point for the investment cycle and hence this has to be a continuous process. Intuitively the areas to benefit the most would be roads, railways and urban development.
Internal & External Balances
The fifth point is that RBI will have to always deal with the delicate balance of growth and inflation with a finely tuned monetary policy. As economies grow, there is a tendency for them to get overheated which requires monetary action. The RBI along with the Monetary Policy Committee will have to play a very important role to keep inflation under check at around 5 per cent while allowing interest rates to be altered both ways to ensure that businesses get funds at the right price while keeping inflation under check.
The sixth is that the external account has to be in balance and here again the RBI will have a role to play in ensuring that the rupee moves along the right path that steers clear of volatility. High growth will invariably mean a rise in imports that will widen the current account deficit. Rupee depreciation is essential to make sure that exports are competitive but too much of the same can be inimical for the balance of payments.
Foreign Investments
India has had very good success in attracting FDI through its pro-business economic policies. With FDI crossing the USD 80 billion mark, the momentum has to be maintained in the coming years.
For this, the Doing Business environment has to be worked upon, especially at the state levels. The government at the Centre has already brought about major reforms in taxation, credit and insolvency resolution which apply at the national level. At the state level, the administrative machinery needs to be more nimble so that there is competition among states which finally attracts more FDI.
On a positive note, it can be said that most of these elements are already in place and with the regular tweaking of policies the right environment has been created. However, the policy response is always uneven and this is what elongates the process of growth.
