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Here is how the Indian economy can rebound

Minhaz Merchant / Hindustan Times Share:
Prime Minister Narendra Modi. AFP

Modi’s entreaty to be “vocal about local” should be amended to “vocal about local and global”. To achieve a $6 trillion GDP by 2030, India needs to be not only self-reliant but make the world India-reliant.

The Indian economy is shrouded in pessimism. Despite dystopian short-term projections, India is on track to emerge as the world’s third largest economy by the end of this decade. The road ahead is long and hard but the math is incontestable. The Gross Domestic Product (GDP) for the year ending March 2021 is expected to fall by 10 percent. India’s GDP of Rs 203 lakh crore in March 2020 will, therefore, decline to Rs 183 lakh crore on March 31, 2021. At an exchange rate of Rs 75 per dollar, India’s GDP in March 2021 will thus be $2.4 trillion.

Real GDP growth could rebound to 5 percent in the year ending March 2022 on a low base. Add inflation at the current level of around 6 percent and nominal GDP growth (real plus inflation) would surge by 11 percent. Thus, by March 2022, India’s GDP is likely to rise from $2.4 trillion in March 2021 to just under $2.7 trillion.

Now work the math forward. The world’s fourth and fifth largest economies in 2020, Japan ($5.15 trillion) and Germany ($3.86 trillion), are barely growing. That is unlikely to change materially through this decade. In contrast, India’s real GDP growth between 2022 and 2030 could, with structural reforms, realistically average 6 percent per year with occasional crests and troughs. Along with average annual inflation at 4 percent, India’s nominal annual GDP growth would trend at around 10 percent. That translates into a GDP of $5.8 trillion by 2030 at current exchange rates, well ahead of Germany and slightly in front of Japan, assuming their historical rates of growth.

There are several hurdles the economy will encounter. First, a fall in the value for the rupee against the dollar, reducing India’s dollar denominated GDP. Second, tepid export growth, worsening India’s trade deficit. Third, stalled privatisation of listed Public Sector Units (PSUs), robbing them off greater efficiencies. Fourth, a lingering Covid-19 pandemic, stalling the resumption of full economic activity. Fifth, frequent state assembly election cycles, leading to populist policies, not necessarily sensible, reformist economic policies. Despite these caveats, the Indian economy will move forward haltingly but stubbornly.

When Prime Minister (PM) Narendra Modi took office on May 26, 2014, he inherited a broken economy. GDP growth in 2013-14 had plunged to 4.7 percent. Non-performing assets (NPAs) for banks had risen alarmingly. Worse, they had been hidden in bank balance sheets by evergreening, rolling over bad old loans with new loans. Modi admitted last year that he regrets not publishing a white paper on the state of the economy in 2014. His reasoning at the time was it would send a wrong signal to foreign investors if they were made aware of the full extent of the economy’s distress in mid-2014.

The battle in Indian finance

It was to prove a near-fatal mistake. Raghuram Rajan, who had been appointed governor of the Reserve Bank of India by then finance minister P Chidambaram in September 2013, ordered a review of bad bank loans in 2015. By then it was too late. Humongous NPAs, long hidden, were belatedly recognised in bank balance sheets in 2016. Over the past four years, major bankruptcies in the corporate, banking and financial sector can be traced back to the bad bank loans given without collateral, sometimes on the basis of forged documents, and occasionally after a friendly phone call to a PSU bank chairman from the ministry of finance.

While the Modi government inherited a toxic banking sector, it hasn’t covered itself in glory either. It has erred by suspending the Insolvency and Bankruptcy Code (IBC) for six months till September 25 on account of the pandemic. Momentum has been lost. Willful defaulters among promoters, cornered by IBC after it came into force in December 2016, now see an escape route. Any delay in prosecuting defaulters can be an unexpected but welcome gift to rogue promoters.

The second error by the Modi government is not rationalising Goods and Service Tax (GST) rates. India needs to move swiftly to a single-rate GST, 17 percent, as suggested at the outset by former chief economic advisor Arvind Subramanian, despite his later misgivings about it being feasible in India, is a good median rate. Essentials like food can stay at 0 percent but the “sin” rate of 28 percent on luxury goods and alcohol needs to go.

The third and most serious error by the Modi government is not providing a credible financial stimulus to the economy. It wants the cash-strapped private sector to invest, but won’t invest itself. The government has adopted the role of credit-guarantor instead of credit-giver. With banks reluctant to lend to corporates and non-banking financial companies, the government finds it has precious little to guarantee.

Modi’s entreaty to be “vocal about local” should be amended to “vocal about local and global”. To achieve a $6 trillion GDP by 2030, India needs to be not only self-reliant but make the world India-reliant.


Minhaz Merchant is the biographer of Rajiv Gandhi and Aditya Birla and a senior journalist and publisher. First published in Hindustan Times


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