THE 5 TRIL­LION DOL­LAR MIS­SION

Prime Min­is­ter Naren­dra Modi’s big pitch for this budget looks past all cur­rent eco­nomic chal­lenges. Ex­perts agree that for a real shot at this target, India will have to usher in trans­for­ma­tive re­forms

India Today - - COVER STORY - BY RAJ CHENGAPPA WITH SH­WWETA PUNJ Il­lus­tra­tion by SIDDHANT JUMDE

IIn an un­usual ex­po­si­tion, the Eco­nomic Sur­vey 2018-19, re­leased be­fore the Union budget by chief eco­nomic ad­vi­sor Kr­ish­na­murthy Subra­ma­nian, de­voted an en­tire chap­ter to be­havioural eco­nomics that enun­ci­ated four ma­jor tac­tics to im­ple­ment pub­lic pol­icy:

Lais­sez faire: Leav­ing in­di­vid­u­als/ firms to follow their own course;

Nudge: Gen­tly steer­ing peo­ple to a de­sired goal; In­cen­tivise: Us­ing pos­i­tive and neg­a­tive in­duce­ments to change be­hav­iour; and Man­date: Us­ing dik­tat to en­force a par­tic­u­lar outcome.

While his econ­o­mists favoured the nudge ap­proach, Naren­dra Modi is em­ploy­ing all the four driv­ers of change to achieve the goals he has set for his sec­ond term as prime min­is­ter. First, he em­ployed the ‘man­date’ ap­proach. He used Budget 2019 to sig­nal his in­tent and, as is typ­i­cal of his style, he thought big—re­ally big. He got Fi­nance Min­is­ter Nir­mala Sithara­man to com­mit in the budget doc­u­ment how his govern­ment will work to­wards nearly dou­bling the size of the In­dian econ­omy—from the cur­rent $2.61 tril­lion to a stag­ger­ing $5 tril­lion by 2024-25.

To get a sense of how enormous that target is, con­sider these facts: when Modi took over as prime min­is­ter in 2014, the size of the econ­omy was $1.85 tril­lion. At the end of his five-year term in 2019, the econ­omy had grown at an an­nual av­er­age of 8 per cent to reach $2.67 tril­lion. To reach $5 tril­lion by 2024, the econ­omy needs to maintain that growth. As Modi put it, “Ear­lier, India was walk­ing, but New India will be run­ning.” If the econ­omy does get to $5 tril­lion by 2024, and main­tains its growth mo­men­tum till 2030, India, cur­rently ranked #6 by size, could be­come the third-largest econ­omy, be­hind only the US and China.

In Varanasi, a day af­ter the budget, Modi re­duced com­plex macroe­co­nomic the­ory to ba­sics to ex­plain to a gath­er­ing of Bharatiya Janata Party (BJP) work­ers why he was push­ing hard for such a mammoth growth target. “The size of the cake mat­ters,” he told them. “The larger the cake, the larger the pieces peo­ple will get. So we have set a target of mak­ing India a $5 tril­lion econ­omy in five years. The larger the size of the econ­omy, the larger the pros­per­ity it will bring the coun­try.” The prime min­is­ter then went on to say that the fo­cus would be on dou­bling per capita in­come in the coun­try (Rs 10,534 a month cur­rently) be­cause, as he put it, “When per capita in­come rises, there is a cor­re­spond­ing in­crease in pur­chas­ing power, which trig­gers a rise in demand. To cater to this rise in demand, pro­duc­tiv­ity in­creases and there is an ex­pan­sion in man­u­fac­tur­ing and ser­vices. All this cre­ates new op­por­tu­ni­ties for em­ploy­ment. Per capita in­come rise also leads to in­crease in sav­ings, which can be in­vested.”

In Budget 2019, Modi bet on three main driv­ers to set the econ­omy on the path of achiev­ing the $5 tril­lion target: mas­sive in­fra­struc­ture de­vel­op­ment, eas­ing the credit squeeze and ma­jor struc­tural changes in agricultur­e. Top­ping the list was a com­mit­ment to spend Rs 100 lakh crore over five years on build­ing in­fra­struc­ture across the coun­try. That would mean an an­nual spend of Rs 20 lakh crore in­stead of the cur­rent Rs 7 lakh crore. It in­cluded the Rs 80,000 crore al­lo­ca­tion to up­grade 1.25 lakh kilo­me­tres of ru­ral roads in phase III of the PM Gram Sadak Yo­jana apart from con­tin­u­ing its mis­sion of build­ing national highways at a fre­netic pace. There was also a pledge to build 19.5 mil­lion houses by 2022 under the Prad­han Mantri Awas Yo­jana-Gramin. With over 97 mil­lion toi­lets built since 2014 under the Swachh Bharat Mis­sion, cov­er­ing 98.2 per cent of the house­holds by 2018-19, Modi launched the

MODI BET ON 3 DRIV­ERS FOR THE $5 TRIL­LION TARGET: IN­FRA DE­VEL­OP­MENT, EAS­ING THE CREDIT SQUEEZE AND REVAMPING AGRICULTUR­E

Har Ghar Jal Yo­jana to pro­vide piped wa­ter to these homes.

The sec­ond thrust was to clean up the fi­nan­cial sys­tem and clear the in­vest­ment log­jam. The budget pro­vided Rs 70,000 crore for the re­cap­i­tal­i­sa­tion of banks and a re­vival pack­age of Rs 1 lakh crore for the stricken non-bank­ing fi­nan­cial com­pa­nies (NBFC) sec­tor. The third driver was to pro­vide in­come sup­port of Rs 70,000 crore to dis­tressed farmers and, along­side, speed up ir­ri­ga­tion projects and boost agricultur­e ex­ports. The Blue Rev­o­lu­tion for fish­eries and ma­rine prod­ucts was also launched.

APART FROM man­dat­ing his $5 tril­lion vi­sion, Modi em­ployed the other three driv­ers of be­havioural change the Eco­nomic Sur­vey listed to achieve it: lais­sez faire, in­cen­tives and nudges. Sithara­man’s budget speech in­di­cated that in key sec­tors such as avi­a­tion, highways, rail­ways, ports and in­sur­ance, the govern­ment was mov­ing to­wards a lais­sez faire ap­proach by pro­gres­sively free­ing these sec­tors of con­straints on in­vest­ment and con­trol for for­eign and do­mes­tic play­ers. For show­er­ing in­cen­tives, the prime min­is­ter chose sun­rise and ad­vanced tech­nol­ogy ar­eas such as so­lar pho­to­voltaic cells, lithium stor­age bat­ter­ies, computer servers and semi­con­duc­tor fab­ri­ca­tion, promis­ing tax in­cen­tives to at­tract mega man­u­fac­tur­ing plants. This is aimed at for­eign com­pa­nies want­ing to shift base and in­vest­ments to India as a fall­out of the US-China trade ten­sions.

The budget also ‘nudged’ con­sumers and the auto in­dus­try into sup­port­ing a greener India and re­duc­ing the coun­try’s oil ex­ports by us­ing elec­tric-pow­ered ve­hi­cles. It com­mit­ted to low­er­ing the Goods and Ser­vices Tax rate on Elec­tric Ve­hi­cles (EVs) from 12 per cent to 5 per cent. To make EVs even more af­ford­able, the govern­ment said it would pro­vide ad­di­tional in­come tax ben­e­fits worth Rs 2.5 lakh for those tak­ing loans to pur­chase such ve­hi­cles. De­spite the mas­sive in­vest­ments be­ing pro­posed in these key sec­tors, Sithara­man was con­fi­dent that the govern­ment would be able to keep the fis­cal deficit under check.

Pre­dictably, op­po­si­tion par­ties dissed the prime min­is­ter’s procla­ma­tions on the budget. Congress chief spokesper­son Ran­deep Singh Sur­je­w­ala tweeted, “Zero on eco­nomic re­vival. Zero on ru­ral growth. Zero on job creation. Zero

on ur­ban re­ju­ve­na­tion. Can a mun­dane jug­glery of ‘acronyms’ pass off for a vi­sion of New India?” CPI(M) gen­eral sec­re­tary Si­taram Yechury dis­missed the budget as “fraud­u­lent” and stated that “the rosy pic­ture of the econ­omy is full of jug­glery”. Even BJP leader Subra­ma­nian Swamy was scep­ti­cal of the budget’s claim of dou­bling farmers’ in­come by 2022 with a sar­cas­tic tweet, “Sweet dreams.” The stock mar­ket, which had banked on Modi an­nounc­ing a slew of rad­i­cal re­forms to jump­start the econ­omy, reg­is­tered its dis­ap­point­ment with the Sen­sex fall­ing to a six-month low. Congress leader and for­mer fi­nance min­is­ter P. Chi­dambaram ob­served: “It seems Mr Modi is not willing to bite the bul­let on car­ry­ing out rad­i­cal re­forms.”

Coun­ter­ing such crit­i­cism, Arun Jait­ley, BJP leader and for­mer fi­nance min­is­ter, wrote in his blog that the Modi govern­ment be­lieved in ‘be­ing fis­cally pru­dent’ and not in ‘fis­cal ad­ven­tur­ism’. Added a top govern­ment of­fi­cial, “We are for sta­ble re­form with di­rec­tion and not for dis­rup­tion. We will do what­ever struc­tural changes are re­quired in the econ­omy but not go be­yond the man­date the elec­torate had given us.”

Modi him­self dis­missed his crit­ics as “pro­fes­sional pes­simists”. But many econ­o­mists, while wel­com­ing Modi’s $5 tril

MANY ECON­O­MISTS ARE WARY OF THE $5 TN PROM­ISE: MAINLY BE­CAUSE OF THE SLOWDOWN IN THE IN­DIAN ECON­OMY AND SLUG­GISH GLOBAL GROWTH

lion prom­ise, were also scep­ti­cal of his govern­ment achiev­ing the target. And for good rea­son. The In­dian econ­omy has per­cep­ti­bly slowed down, with the GDP plung­ing to 6.8 per cent—the low­est in five years. But with over­all global growth be­ing slug­gish, India man­aged to re­tain the tag of be­ing the fastest-grow­ing econ­omy. The av­er­age growth rate since Modi took over has been around 7.3 per cent, but this fig­ure is be­ing ques­tioned by even his for­mer chief eco­nomic ad­vi­sor, Arvind Subra­ma­nian. There are other fac­tors too that don’t in­spire con­fi­dence in Modi’s am­bi­tious plans. Pri­vate in­vest­ment and ex­ports—the two key growth driv­ers that the Eco­nomic Sur­vey iden­ti­fied as be­ing vi­tal for the hy­per-GDP growth needed to re­alise the $5 tril­lion ambition—have been slug­gish in the past cou­ple of years.

Ex­perts say that push­ing the In­dian econ­omy to $5 tril­lion by 2024-25 would de­pend on sev­eral fac­tors, in­clud­ing the real growth rate, in­fla­tion and cur­rency move­ment. Dr D.K. Sri­vas­tava, pol­icy ad­vi­sor, EY India, point outs: “Start­ing with a base size of $2.7 tril­lion in 2018-19, if an­nual growth is uni­formly dis­trib­uted across the next five years, India would need a real GDP growth of 8-9 per cent, in­fla­tion rate of 4-5 per cent and a steady ru­pee-dol­lar ex­change rate.” The in­vest­ment rate would also have to go up con­sid­er­ably—from the cur­rent 31.3 per cent to 34 per cent. It can­not

come from the govern­ment alone; the pri­vate sec­tor too has to pitch in. Sri­vas­tava’s pre­dic­tion: “The $5 tril­lion econ­omy can be pos­si­ble only by 2027 and not 2025.” (See ac­com­pa­ny­ing bites by econ­o­mists on the $5 tril­lion ques­tion.) Fi­nance sec­re­tary Sub­hash Chan­dra Garg, though, main­tains that the govern­ment is en route to achiev­ing the target on time and points to the budget doc­u­ment say­ing, “So much has been said about pol­icy sec­tor re­forms, getting pri­vate sec­tor in­vest­ment, PPP in dif­fer­ent sec­tors, mas­sive mon­eti­sa­tion pro­gramme.”

WHILE MODI has so far fol­lowed a pol­icy of eco­nomic grad­u­al­ism, if he has to meet the stiff dead­lines he has set for him­self, he will have to push for rad­i­cal re­forms. Es­pe­cially in the in­fra­struc­ture sec­tor which he is bank­ing on to give the econ­omy a booster shot. For in­stance, India now has the world’s third-largest do­mes­tic avi­a­tion mar­ket. The sec­tor, in fact, is ripe for trans­for­ma­tive mea­sures to make it a for­mi­da­ble global hub. But de­spite having an Open Sky pol­icy that per­mits 100 per cent For­eign Di­rect In­vest­ment (FDI) in an In­dian car­rier, the own­er­ship stake has been capped at 49 per cent. It also re­stricts in­vestors in coun­tries within a ra­dius of 5,000 km from com­ing in, thereby elim­i­nat­ing play­ers from the Far East and the Gulf—all to pro­tect a hand­ful of In­dian air­lines, in­clud­ing the failed Air India. That has crimped both do­mes­tic and for­eign ex­pan­sion. Qatar Airways flies to over 160 des­ti­na­tions while Air India only to 40. Ex­perts say the first thing the govern­ment should do is to hawk Air India. It should then have a truly Open Sky pol­icy, which in turn will boost the growth of do­mes­tic air­lines. As an avi­a­tion ex­pert asked, “Do we have a pol­icy for things like lap­tops and cars that say cer­tain geo­graph­i­cal en­ti­ties would be elim­i­nated? No. So why sub­ject the avi­a­tion sec­tor to such crimps?”

The budget did make a be­gin­ning by open­ing the lu­cra­tive air­craft fi­nanc­ing and leas­ing busi­ness to spe­cial eco­nomic zones apart from pro­vid­ing an en­abling ecosys­tem for India to be­come an in­ter­na­tional air­craft main­te­nance, re­pair and over­haul (MRO) cen­tre. It has also opened up air­ports for pri­vate man­age­ment and con­trol. But if India is to be­come a global player in avi­a­tion, the govern­ment has to do a lot, lot more. If it did so, it would also uplift the tourism in­dus­try the way air­lines did in Sin­ga­pore and Thai­land.

In­dian Rail­ways, too, needs a turn­around in ap­proach with a long-term pol­icy that will make it at­trac­tive for pri­vate play­ers to in­vest. For starters, there is a need to break the rail­ways’ mo­nop­oly on routes and open them to pri­vate play­ers like in avi­a­tion. The rail­ways has so far been cau­tious and as a first has al­lowed its wholly-owned sub­sidiary, the In­dian Rail­way Ca­ter­ing and Tourism Cor­po­ra­tion (IRCTC), to con­tract out the Delhi-Lucknow Te­jas Ex­press for a pri­vate player to op­er­ate. In other ar­eas, such as lay­ing

and main­tain­ing rail lines, in­stead of the cur­rent an­nual con­tract sys­tem, it can work out long-term agree­ments with pri­vate com­pa­nies. Davin­der Sandhu, part­ner and trans­port sec­tor leader, KPMG, says, “What we need is bi­par­ti­san po­lit­i­cal sup­port and a long-term vi­sion among stake­hold­ers that would en­sure pol­icy con­ti­nu­ity and at­tract big pri­vate play­ers to in­vest in the sec­tor.” Sithara­man, in her budget speech, ad­mit­ted that the rail­ways would need an in­vest­ment of Rs 50 lakh crore, or Rs 5 lakh crore an­nu­ally, in the next 10 years in­stead of the Rs 1.6 lakh crore a year be­ing put in cur­rently. The govern­ment is now working out a PPP model to set the wheels in motion, but it has to be at bul­let train speed.

In the road trans­port sec­tor, Union trans­port min­is­ter Nitin Gad­kari had wowed the coun­try with his no-non­sense, noth­ing-is-un­solv­able ap­proach that saw the pace of national high­way -build­ing go up from 11 km a day when he took over to

28 km a day by the time the first term of the Modi govern­ment ended. This term, Gad­kari in­tends to take the target up to 40 km a day, but the min­is­ter will find it tough to get fi­nan­cial sup­port with a large chunk of the budget al­lo­ca­tion ded­i­cated to ru­ral roads. Gad­kari, though, is con­fi­dent of meet­ing his targets. “I have no dearth of funds,” he told india to­day. “I built roads worth Rs 11 lakh crore through the BOT (build-op­er­ate-trans­fer), PPP, ToT (trans­fer of tech­nol­ogy) and Hy­brid An­nu­ity ap­proach. I am mon­etis­ing projects and gen­er­at­ing money to meet the goals.” Ex­perts say pri­vate in­vest­ment will flow in only if the terms are made more at­trac­tive and the risks less­ened given the past experience with PPPs. Says Vi­nayak Chatterjee, Chair­man, Feed­back In­fra: “While the hunger for pri­vate cap­i­tal is back, a huge amount of work has to be done for PPP 2.0. Un­less we tweak the pol­icy and pro­vide the nec­es­sary tax breaks to in­vest, the PPP model will be a pipe dream.” There is also a clear fo­cus on brown­field as­set mon­eti­sa­tion. While the link­age is ar­tic­u­lated in the budget, Chatterjee says the monies col­lected should be ring-fenced to avoid any di­ver­sion to other uses.

In agricultur­e, too, the govern­ment needs to un­der­take ma­jor struc­tural re­forms if it has to pull the sec­tor out of the morass it has sunk into and usher in the promised in­come rev­o­lu­tion for farmers. While the sec­tor saw a huge jump in al­lo­ca­tion from Rs 67,800 crore in 2018-19 (re­vised) to Rs 1,30,485 crore (bud­geted) for 2019-20, the bulk of the in­crease will go to­wards fund­ing the in­come sup­port scheme for farmers the prime min­is­ter an­nounced be­fore the gen­eral elec­tion apart from in­ter­est sub­ven­tion. Ashok Dal­wai, chair­man of the com­mit­tee on Dou­bling Farmers’ In­come (DFI), points out that agricultur­e re­quires two kinds of struc­tural in­puts: those of land and wa­ter that di­rectly ben­e­fit them, and of power, roads and pro­cess­ing units which, though in­di­rect, have a large im­pact on it. The Modi govern­ment, says Dal­wai, in its first term had ac­cel­er­ated the con­struc­tion of ir­ri­ga­tion projects and brought an ad­di­tional 7.6 mil­lion hectares of land under ir­ri­ga­tion by com­plet­ing over 52 stalled projects. Work on an­other 47 is be­ing done on top pri­or­ity. The cen­tral govern­ment’s ex­pen­di­ture on up­grad­ing ru­ral roads and in­tro­duc­tion of one na­tion, one grid in power will also con­sid­er­ably im­prove farmer pro­duc­tiv­ity and abil­ity to mar­ket prod­ucts. Along with in­vest­ments in food pro­cess­ing parks and cold chain net­works, the nec­es­sary in­fra­struc­ture is be­ing put in place. A com­mit­tee of chief ministers, headed by Ma­ha­rash­tra’s Deven­dra Fad­navis, has been formed re­cently to come up with a rad­i­cal re­form of the APMC Act. If all agree, it will al­low mar­ket forces to come into play and en­able farmers to sell their pro­duce across the coun­try at the best price. This also in­cludes an act to en­able con­tract farm­ing. Dal­wai says, “Cur­rently, our agricultur­e ex­ports are around $38 bil­lion; we need an ag­gres­sive pol­icy to boost them. Once the nec­es­sary in­fra­struc­ture is in place, we can eas­ily dou­ble that fig­ure in a short time.”

EX­PORTS not just of agri­cul­tural goods but also of items in which India has a core com­pe­tency are crit­i­cal to meet the targets Modi has set for the size of the econ­omy. Sa­jjid Chi­noy, Chief India Econ­o­mist, J.P. Mor­gan, says, “Ex­ports will have to grow in dou­ble dig­its to meet the $5 tril­lion target. If con­sump­tion is slow­ing, the only way is higher ex­ports.” This de­spite the global eco­nomic growth slow­ing and ris­ing pro­tec­tion­ism. It will be equally crit­i­cal for the cen­tral govern­ment to raise in­vest­ment through ex­ter­nal sources and the pri­vate sec­tor if it wants India in the league of $5 tril­lion economies. Ma­jor changes are also needed in land and labour laws apart from en­sur­ing con­ti­nu­ity in eco­nomic poli­cies if the so-called “an­i­mal spir­its” of the econ­omy are to be un­leashed to at­tain higher growth rates. The Eco­nomic Sur­vey ac­knowl­edges that meet­ing the $5 tril­lion target will need “a vir­tu­ous cy­cle of sav­ings, in­vest­ment, ex­ports and growth with in­vest­ment as the cen­tral driver”.

The dream of dou­bling the size of the econ­omy in five years is a laud­able one. But it is imperative that the Modi govern­ment carry out bold re­forms and work at break­neck speed to achieve it. As Ruchir Sharma writes in his book, Break-out Na­tions: In Pur­suit of the Next Eco­nomic Mir­a­cle, ‘No na­tion can hope to grow as a free-rider on the tail­winds of for­tu­itous global cir­cum­stances. They will have to pro­pel their own weight and the break­out na­tions of the new era will take their mantra from a Latin proverb [which trans­lates to]—“If there is no wind, row.”’ Row, India, row.

THE BAHI-KHATA OF INDIA India’s first woman fi­nance min­is­ter Nir­mala Sithara­man ar­rives in Par­lia­ment to an­nounce the budget

Source: Eco­nomic Sur­vey 2019; Data in per­cent­age points

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