India’s goal of $5trillion till the first half 2020 had a misty road ahead. All that could have gone sideways had already occurred. Since the inception of the idea in August 2019, India should have pushed forward with an 8% GDP growth rate in order to be on track to reach $5trillion by 2025, but instead, the economy fell into a trench, slipping to its lowest in decades. However, ironically, the ongoing pandemic has managed to present opportunities to India to get back on track stronger than before.
Slumping till early Covid
On Independence Day 2019, Prime Minister Modi placed a target of achieving $5trillion GDP by 2024-25. He announced that by investing ? 100 lakh crores in infrastructure, boosting domestic tourism and improving ease of doing business and many such reforms India can achieve this target in the next 5 years.
Soon after the announcement in 2019, growth started to topple. India witnessed an 11-year low GDP growth, which grew 4.2% in FY19, down from 6.8% which was estimated earlier, mainly due to the deceleration of mining, manufacturing and farming sectors. The automobile industry exhibited a sizable slowdown with domestic car sales falling 23.3% YoY, two-wheelers and tractor sales also lost traction. The FMCG companies witnessed a slowdown along with the non-oil, non-gold, non-silver imports (indicating a fall in consumer demand for imported goods). India fell to a 45-year high in unemployment rate in 2019.
Amidst the economic slowdown of 2019, most experts remained heedful of a further catastrophe and expected a pick-up only in early 2021. But the predictions remained pertinent only before the world got struck by a global scourge to the economy, Covid-19. Things took an unanticipated route, and the slowdown rates became astronomical. India’s economic growth slipped to 3.1 percent in the January-March quarter of 2019-20 showing the instantaneous impact of the COVID-19 pandemic, and pushing India farther away from the nation’s holy grail of a $5 trillion economy. What fuelled this slowdown? The most evident reason would be Investment in new projects. Investment shrank and reached a 15 year low in 2019, according to World Bank data. (It grew about 10% in 2018-19). According to IMF, India will be the worst hit among the large economies as its GDP is expected to contract by 4.5% in FY21. This is an uncharted territory for the government as India’s GDP has not contracted since 1979.
Paving the way through the pandemic
All the cases point towards a significant change in business cycle for India which is shown by the OECD’s composite leading indicator that predicts change in economic cycles by taking long term average as 100. India is underperforming among other countries till June due to the most stringent lockdown on Earth, but that case might be changing.
The recent clashes with China and clever focus on manufacturing may have opened doors for India’s well-being. Already agonised by the pandemic, countries like the USA, Japan, and Australia took this opportunity to side with India and oppose China’s sly geopolitics. Around 1000 companies are planning to shift from China to India for which India has set up a red carpet corridor by providing various incentives to these multinational companies. India also banned 59 Chinese apps citing ‘national security’ as the reason and introduced app innovation challenges to promote domestic industries. The American companies, already battered by the impact of Covid on the world economy, have shown great confidence in India and its leadership as FDI year-to-date from USA to India crosses the $40 billion mark. The latest investment alliance with Google of $10 billion in India’s digital industry in the previous weeks will emphasise on the much-needed technology upgradation in education and providing access to the Internet in rural areas. India has increased its pace towards becoming a more digitalised nation with facilitating a cashless economy and launching government portals like ‘Digi locker’. “India will be a global player in the digital economy” Sunder Pichai (CEO of Google).
Building on the success of SpaceX in the USA, India has also set up a new department, the Indian National Space Promotion and Authorisation Centres (IN-SPACe) “to provide a level playing field for private companies to use Indian space infrastructure.” The government had recently created a public sector enterprise, New Space India Limited, which will now re-orient space activities from a supply-driven model to a demand-driven one, thereby ensuring maximum utilisation of India’s space assets. The Ministry of Defence has estimated a $25 billion turnover including $5 billion worth of exports by the year 2025. India has also increased its demand for defence equipment and the mandatory 30% defence offset for foreign companies will help domestic manufacturers as well.
A huge opportunity lies for India in the healthcare sector. During the pandemic, India has managed to become the second largest manufacturer of PPE in the world and is the largest producer of the ‘game changer’ hydroxychloroquine drug in the world. India is on a path of becoming the hub for hi-tech manufacturing as global giants such as GE, Siemens, HTC, Toshiba, and Boeing have either set up or are in process of setting up manufacturing plants in India, attracted by India’s market of more than a billion consumers with increasing purchasing power. These investments prove to be evidence that India has become one of the most attractive destinations for investment in the manufacturing sector. Moreover, with a strong demographic dividend on India’s side for the coming decades, it has the power to replace China as the manufacturing hub. India’s ‘Atmanirbhar Bharat’ campaign can provide a significant market share to domestic players while the government parallelly liberalises regimes for foreign investors. India is attracting global attention at its business destinations and needs to judiciously use this opportunity as it can bolster the country’s growth and pave a way for India to reach $5 trillion at the earliest.
Underlying Threats and Suggestions
The Union Cabinet recently approved the National Education Policy 2020 (NEP) with the aim for transformational reforms in school and higher education systems in the country. This policy will replace the 34-year-old National Policy on Education (NPE), 1986. The new education policy is an ambitious step taken by the government which can bring a paradigm shift in the country’s brainpower. However, such a big step needs equal spending by the centre, but the government still hasn’t achieved the target of spending 6% of the budget which was set 55 years back. India spends 3.1% of its union budget on education. The government needs to focus more on the roots of the country’s youth and empowering them rather than providing blatant direct transfer benefits.
Another structural problem that India faces is its muted domestic demand. For years, India’s domestic demand has remained its pillar for growth. In the 2008 financial crisis, this demand acted as a bailout for the country and minimise the adverse effects that affected the major players of the global economy. Indian governance needs to focus on bolstering the demand in less affected areas due to the pandemic. This will enable the circular flow of income that has been curbed due to the stringent lockdown. While achieving growth is necessary, its trickle-down effect becomes a priority. India needs to tackle its high inequality with an estimated Gini Coefficient of 35.2 by inflicting growth in all sectors. A magnified focus on India’s ‘Skill India’ program will help empower the impoverished society. Increasing the base of Union Budget Schemes like ‘Bharatmala’, ‘Pradhan Mantri Jan Dhan Yojana’ and ‘Ujjwala Yojana’ is also essential to bridge the rural and urban road-infrastructure divide and providing basic necessities to every strata of the society.
The biggest challenge for the world is to have a green recovery from this recession, as emphasised by the International Energy Agency (IEA). “The next three years will determine the course of the next 30 years and beyond. If we do not [take action], we will surely see a rebound in emissions.” said Fatih Birol, executive director of the IEA. India has achieved 85 GW of the target of 450 GW clean energy by 2030. Although the government places a keen focus on sustainable development, bold steps need to be taken now. A judicious mix of coal-based power with HELE (high-efficiency low emission) technologies and renewables is the need of the hour. Tariff adjustments, building proper infrastructure for electric vehicles and liberalising the norms further in the industry can help India bolster through towards its target.
At 17% of GDP, the economic contribution of Indian women is less than half the global average. India can boost its GDP growth by 2% if 50% of all women join the workforce. For better women participation only, legislature cannot be a solution. Making a propitious environment for women employees, investing in rural education and human resource upliftment can provide systematic impediments to a male-dominated growth.
India is making detectable headway against Covid-19 substantiating it to be a stepping stone in India’s march towards its grand dream of a $5 Trillion Economy. India should not aim at going back to business as usual once the pandemic subsides, rather it should aim at building an economy for the future. All in all, ‘necessity is the mother of reform’ and Covid-19 although being a bane for the world can prove to be a boon for India in the long run.