Against the backdrop of a likely global economic recovery due to US President Joe Biden’s $3-$4tn infrastructure spending package, growing investor appetite for riskier assets and India’s quick turnaround from the impact of the pandemic, the Indian economy has embarked on the path of gradual rebound.
Real GDP growth returned to positive territory in the fourth quarter of 2020, supported by a pick-up in gross fixed capital formation. The World Bank has scaled up its projection for India’s economic growth to 10.1 per cent for FY22, quoting recovery in private consumption and investment growth. Exports have also started rising ($34bn in March). However, the emergence of the second Covid wave and localised lockdowns could pose risks to India’s growth.
An ongoing, complete transformation of the Indian economy is underway. ‘Atmanirbhar Bharat’ - self-reliant India - is declared as the focal point of India’s economic policies. It is primarily a strategy to get closely integrated with global supply chains. Well-researched critical pragmatic policies having broad-based multiplier linkages are working simultaneously.
These include building a variety of infrastructure, privatisation and asset monetisation, the development financial institution (DFI) and the production-linked incentive (PLI) scheme for champion sectors. MSMEs are being supported in multiple ways. Implementation discipline, for the first time, is being made an integral part of policies. For instance, the government is snipping red tape in PSU sale approval and cutting the timeframe significantly. NITI Aayog and DIPAM are considering sector-wise approval for privatisation, instead of getting clearances for individual PSUs.
The process of privatisation is getting overhauled. There is a relentless pursuit of promoting the private sector in every possible way. Profit is no more considered a dirty word. A National Skills University is in the offing. All this implies the beginning of a modern virtuous cycle of growth of investments, production, employment, exports, boost to MSMEs, the mushrooming of value-creating start-ups with the support of technological prowess and the strengthening of supply chains. Government finances look better than revised estimates due to robust GST revenue collection.
$5-trillion economy goal
India’s aspiration of achieving a $5tn economy in the next few years entails an inclusive, yet diverse growth, enhancing the quality of lives of millions of people, conserving natural resources, deploying capital prudently and steering the climate agenda. The key factors will be an increase in the size and scale of manufacturing and export competitiveness.
For this, the government is implementing the PLI scheme across 13 different sectors (battery, electric vehicles, pharmaceutical, renewable energy, electronic and technology products, auto and auto components, drugs, telecom and networking products, textile, food products, solar PV modules, air conditioners, LEDs and specialty steel). Incentives are provided in the range of 4 to 6 per cent on incremental sales over a chosen base year on domestically produced goods in target segments for five years. This should eventually lead to the firming up of the trajectory of investments and job-creating growth.
Increasing the size of the economic pie will enable poverty reduction. The PLI scheme has received favourable traction from global investors. Though an attractive short-run measure, it needs to be complemented by consistently creating a sustainable and attractive eco-system for firms to operate. As per the latest Economic Survey, this scheme “will ensure efficiencies, create economies of scale, enhance exports, provide a conducive manufacturing ecosystem, and make India an integral part of the global supply chain”. The PLI scheme’s linkage with the massive MSME sector via mandating higher local value addition could prove to be a game changer.
Manufacturing inefficiencies are inherently structural. The main challenge lies in high operational costs, cumbersome taxation policy and complexities of doing business. Competitiveness in India is dented by high cost and poor quality of power, exorbitant logistics cost, distorted credit access for MSMEs, low labour productivity and abysmal research and development assistance. It is welcome that the government has initiated reforms in all the above areas.
The banking sector too is getting consolidated. The government will infuse Rs 14,500 crore in four banks, by issuing non-interest-bearing special securities. PSBs getting capital infusion implies preparation for privatisation.
Privatisation and disinvestments are undergoing a complete overhaul. Disinvestments receipts from offers for sale, buybacks and three IPOs at Rs 32,835cr have been higher than the revised FY21 target and that too amid a pandemic. Privatisation of government companies should not be considered akin to selling off the family silver. The government can utilise the proceeds for investment in infrastructure and education. There is deep value in many PSU stocks. Besides, markets are projected to deliver 15-20 per cent CAGR return over the next five years.
Companies have enthusiastically responded to government policies taking a long-term perspective, restructuring their operations and building new business models that would create value locally. They are engaging with partners to be part of the PLI scheme. Manufacturing corridors are reportedly ready to handle the second wave of Covid. However, firms, especially labour-intensive ones are wary of labour scarcity in case the virus rages.
The momentum in agriculture growth implies a trajectory of around 3-3.5 per cent in FY22. The target of doubling farm income by 2022 may not be realised, in case the three farm laws remain unimplemented. These laws are for the removal of middlemen and facilitating farmers to sell anywhere in the country. Protesting farmers apprehend the new laws would decimate the safety cushion of minimum support price and abolish the mandi system, thereby leaving them to face big corporations. The Supreme Court-appointed three-member committee to examine the new farm laws, consulted around 85 farmer organisations and has submitted its report.
Budget 2021-22 initiated setting up a DFI to stimulate infrastructure investments. The proposed DFI must find innovative ways to bring back the private sector into infrastructure. The focus is on equipping it financially to raise long-term funds, the perennial bugbear of infrastructure financing. The health sector is in dire need of a health DFI, to improve medical services, especially in Tier-2 and 3 cities. This would open enormous investment opportunities in the healthcare sector.
India has been digitising across sectors of the economy, with Covid-19 accelerating the pace. We are on our way to become a highly data-intelligent country, from merely a data-rich country. There is a need to create new data scientists and artificial intelligence experts. The 40s-and-beyond talent pool needs to be tapped. Despite the pandemic crisis, our economy has been unfolding a tsunami of business opportunities for entrepreneurs.
For long, India has only been exporting to areas constituting only 25 per cent of the global trade. As a result, we missed out on the mobile revolution and became a major importer of mobiles and telecom equipment. India has now started getting into completely sunrise areas like hydrogen, battery production, genomics and 5G technology. The government is equipping people with skill sets. Skilling will be part and parcel of the new education policy (NEP), pushing it from the school-level onwards.
India needs to focus on improving project preparedness, towards making efficient use of finances. This will enable improved accountability for taxpayers. We also need good preparation on land acquisition, environment impact assessment and detailed project reports. Establishing a good track record for projects is essential.
The biggest bottleneck relates to our poor implementation track record so far. Having good corporate governance and effective implementation to the last mile will be major challenges. Reliability of statistics is an important issue towards bridging the prevailing trust deficit between stakeholders and the government. The insolvency resolution framework needs to be strengthened as it has proved the most potent tool for lenders to enforce credit discipline.
For the economy to attain a sustainable 8-9 per cent growth trajectory, a strong manufacturing sector, supported by a liberalised agri sector and an efficient services sector, coupled with the revival of exports will be essential, to have a great multiplier effect.
The writer is a corporate economist.