A $3-trillion economy

On the completion of its 75th year of independence, there is little doubt that India’s development journey has been marked by significant milestones and reforms that enabled it to achieve substantial progress in many areas including rise in income levels, growth, literacy, life expectancy and a wide variety of other economic indicators. When India declared its independence in 1947, its GDP was a mere Rs2.7 lakh crore, accounting for a paltry 3 per cent of the world's total GDP. For 2021-22, India's GDP at current prices is estimated to attain a level of Rs236 lakh crore ($3.05 trillion).

Recently, Gautam Adani, founder & chairman, Adani group, said that India’s demographic dividend, which will carry it well beyond 2050, will put it on track to becoming a $28-30 trillion-dollar economy by 2050. "My optimism comes from my belief that no nation in the world is as uniquely well-placed as India is to capitalise on the four major vectors that will accelerate development – the pull from India’s demographic dividend, growth of its middle class, push from an accelerated digital economy and the sustainability focussed economy,” he said in Mumbai.

Adani, Asia’s richest man, is not known to talk out of his hat. After all, he is planning to invest $20 billion in clean energy generation, component manufacturing, transmission and distribution over the next 10 years and believes that the need for sustainability and renewable power is a game changer for India.

The process of liberalisation, which started during the mid-1980s and made the Indian economy more open to trade and external flows, had gained pace during the 1990s. The objective was to improve the efficiency of the Indian economy through reduction in trade barriers such as import tariffs. Sure, India’s economy managers could have done better. For instance, after the burst of privatisation during the Vajpayee regime, the sale of PSUs was put on the back-burner and is picking up only now. The redeeming feature is that the sale of Air India has finally gone through after many false starts.

Bank privatisation

Last month was the 53rd anniversary of the day (19 July 1969) when Indira Gandhi nationalised 14 major banks, which accounted for over 80 per cent of India’s bank deposits. Attempts to reverse this process have been slow and tardy. The two finance ministers in successive Modi-led governments – Arun Jaitley and Nirmala Sitharaman – have treaded cautiously on this count, preferring to move instead towards mergers of public sector banks.

Sitharaman has announced privatisation of two public sector banks in her 2021-22 budget, but there was strong opposition  from the employees' union to the move. But will the government go in for complete privatisaton of the banking sector? Ditto the coal sector, which even 75 years after independence produces well below our requirement, necessitating imports.

Senior bankers have suggested that complete privatisation of the banking sector is feasible, but it will take more than a decade to implement the plan. Already, private banks contributed about almost 40 per cent of the industry’s total credit – up by over 10 percentage points in five years. The amalgamation of HDFC and HDFC Bank, once legal formalities are done, will create a private sector banking behemoth, resulting in a balance sheet size of almost Rs18 lakh crore. So, why not just expedite the process? If a government bank has to exist, let it be the SBI.

Booming exports

But this is not to say there has been no progress in other sectors. Today, India has developed a significant footprint in the global economy. The value of exports of goods and services stood at just about $0.1 billion during 1950-51; but, by in 2021-22, the figure was $418 billion for merchandise exports while that of services was $254 billion. The share of export of goods and services in India’s gross domestic product (GDP) is also rising, having gone up to 21.4 per cent of the GDP in 2021-22 from 18.7 per cent in the previous fiscal.

Service exporters alone are looking at an export target of $350 billion in the current fiscal -- up a steep 37 per cent from last year, despite headwinds and recession fears in the global market. According to the Services Export Promotion Council (SEPC), an expected rebound in inbound tourism and growing demand for India’s services in sectors such as medicine, law and even gaming may help the country boost services export revenue to $1 trillion in 2027, three years ahead of estimates. However, this target would require boosts, enhanced trade agreements and incentives from the government across various services sectors.

To go on a higher growth trajectory, Indian economy will have to get over the hump of tighter monetary policy that has emerged in developed economies and macro-economic stress being felt in some emerging markets. This is expected to impact demand for Indian exports as well, at least in the next 6-12 months. 

The Modi government’s economic management policy in the face of this challenge is one of perseverance. The mantra is simple: instead of getting distracted by ‘cyclical factors’, India should focus on becoming part of the global supply chain in an aggressive way, since we live in a time when global supply chains are churning and realigning.

India will persist with the production-linked incentive schemes and encourage FDI to build economies of scale even as it pursues free-trade agreements with more countries. There is a renewed focus on the big (and long pending) FTA with the European Union. With the cycle eventually turning, barring another shock, India will get a smoother patch.

The government feels that India is weathering the current situation rather well, despite the high oil prices and tightening global liquidity. Most official assessments still expect the economy to grow by over 7 per cent in real terms this year. This will make India the fastest growing major economy, and it’s likely to repeat this performance next year.

Years of structural reforms mean India’s supply-side engine is now capable of sustaining GDP growth of over 8 per cent over long periods. This means that when a clear road is available, policymakers will be in a position to press the accelerator. For now, the challenge is to manage inflation and maintain macro-stability.

Inflation imported?

On inflation, the government believes that the current cycle is almost entirely imported, particularly due to high energy prices. The local economy is not generating inflationary pressures. Also, our inflation rate is below those of both the US and Europe. Nonetheless, RBI has tightened monetary policy partly in sync with global central banks and partly to head off second order feed-through to domestic prices.

To provide relief to the common man, fuel related taxes have been cut. As the growth momentum is good and there is no need to be adventurous with a large fiscal push at this point. It is enough that the current infrastructure plan is implemented.

Linked to this is the spurt in the price of commodities. Some commodities may have declined of late, but the main concern is energy prices. They remain elevated even if they are currently down from the peak. The conflict in Ukraine and uncertainties about Russian energy supplies to Europe are still in play. Therefore, we are still not out of the woods as far as energy prices are concerned.

Rupee valuation

Then there is the challenge of rupee valuation. The Indian rupee has declined against a very strong dollar, but it has appreciated against virtually all other major currencies. The Reserve Bank has used foreign exchange reserves to smoothen the move, but has refrained from targeting a rupee-dollar level. This is the correct approach, as it is not necessary to keep up with a rapidly appreciating dollar.

Defending a specific level would merely create a target for speculators and use up reserves. As mentioned earlier, Indian policymakers are focused on macro-stability and if we handle this cycle well, the rupee can always gain back lost ground. 

In the coming years, India should work towards freeing up the rupee, aspiring for the rupee to become a hard currency in 10 years and for it to be included in the International Monetary Fund’s SDR (special drawing rights) basket along with the dollar, pound-sterling, Euro, Japanese Yen and Chinese Yuan. This aspiration should neither be confused with any short-term benefits nor with the role of the US dollar as the world’s anchor currency. The world has many hard currencies and an additional one will not challenge the dollar’s dominance.

Raghuram Rajan, the former governor of the Reserve Bank, recently said that, while growth figures in India is better than many nations as of now, the country needs to do better, as it has a huge population. Though the growth figure is about 7 per cent – which the government quoted in Parliament in response to the debate on price rise – Rajan is of the opinion that this growth has been "insufficient for the kind of jobs we need." Rajan is no favourite of this government, but his premise that co-relating jobs and demand can be the only twin drivers of economy makes sense.

Jobs create demand 

Despite growth, India Inc’s capacity utilisation is low. The economy thus need more demand, going forward. This will happen only if there are more jobs and the buying power increases. Currently, a lot of this growth is jobless growth. Everybody cannot be a software programmer – one of our success stories. Indians need other jobs as well – and that too decent jobs.

India is today at a dramatic inflexion point. It is likely that, over the next few decades, India will have firmly positioned itself as the greatest opportunity of the 21st century and become even stronger 2050 onwards (as Adani believes). There, however, will be challenges such as periods of slowdown that every large economy goes through. But, there should not be any denial of the scale of the opportunity that awaits India.