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How Nirmala Sitharaman can make Budget 2021 a stepping stone to Modi’s $5-trillion GDP dream

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Will the Indian economy cross the $5-trillion mark? It is like asking if the sun will rise tomorrow. The real question is: when?

Belying many doomsday predictions, the Covid-struck Indian economy has proven to be resilient. Recent data provides some evident signs of recovery. Auto sales, consumer durables, freight traffic, and consumption of petroleum products, all have shown a marked acceleration in the last 3-4 months. The GST figures for December 2020 at Rs 1.15 lakh crore are by far the highest monthly collection with an impressive year-on-year growth rate of 11.6 percent.

Contrary to the feared double-digit contraction, the economy size is expected to shrink by only 7-8 % for this fiscal year. Due to bumper harvest and income support provided by the Centre, the agricultural sector has registered a decent growth in the June 2020 quarter. Besides, the relatively small share of luxury services such as hotels, restaurants, etc. — the most affected economic activities by the Covid — restricted the extent of the damage to the economy.

The economy is expected to grow at 10% in the next fiscal year to become one of the fastest-growing economies in the Asia-Pasific region. By the end of 2021, the economy would have made up for the contraction this year. What happens thereafter will determine how fast India will achieve the $5 trillion mark. Will there be enough steam left to deliver a growth rate of 8-9%?

The journey is not going to be smooth. The pandemic has hit the employment and income of many engaged in services and informal sectors. According to media reports, there is a spike in small borrowers’ auto-debit transactions’ failure rates, presumably due to lack of funds in their accounts. Private demand and investments remain subdued as the credit growth rates are low to 5.5-6 % compared to the long-term average of 14-15%. After the second wave of Covid in the developed world, prospects for exports are also uncertain.

Fortunately, the medium to long-term prospect remains sanguine. Contrary to the pessimistic view in the World Bank’s Global Economic Prospects report 2021, the Indian economy has come out of Covid without severe damage to the factors of production: labour and capital. For most banks and NBFCs, loan repayment rate remains high. The quality of their assets now is better than the past one decade.

Macro fundamentals like low-interest rates, sufficient foreign exchange reserves, low external debt, manageable inflation and political stability are conducive for growth. There is pent-up demand from middle and high income groups who were unable to spend much in the last three quarters. Quick vaccination can expedite the economic recovery. Pharmaceutical, information technology, and textiles sectors would benefit from the sizable fiscal spending by foreign governments’ vaccination and income supports.

However, reaching the $5-trillion mark would require serious doses of additional investment and increased productivity.

Structural reforms such as insolvency and bankruptcy code or the GST along with agricultural and labour sector reforms and digital India initiatives will help boost productivity of public and private sectors.

The real challenge is to ensure funding of the fresh investments required to make the Indian economy the third largest economy. The three sectors calling out for attention are healthcare, agriculture, and infrastructure.

Good quality physical and digital infrastructure is crucial for the Atmanirbhar Bharat Abhiyan. Given the states’ dismal fiscal position, the onus of infrastructure funding is with the centre. Moreover, private investment through public-private partnerships (PPP) can provide some much-needed funding support. This author’s study shows that PPPs expedite project execution speed and improve infrastructure assets’ quality. The benefits of infrastructure investment will be multifold — employment, demand boost across sectors, efficient supply chains, and increased competitiveness of the economy. Investment in digital infrastructure and artificial intelligence is needed for India to emerge as an intelligent services’ hub, and for foreign companies to see it as a viable alternative to China and relocate to India.

According to an estimate, we need an investment of Rs 500 lakh crore over the next seven years. Inevitably, most of this investment would be sourced from domestic banks and capital markets, and foreign direct investment. However, private investment depends on the cost of capital, and regulatory certainty. Here, much more remains to be done. Many projects remain mired in contractual disputes with government departments and face various regulatory hurdles. Regulation and pricing of infrastructure remains a source of uncertainty. All these factors that make private investment unnecessarily risky are the primary reasons behind investors’ aversion towards projects.

The funding support provided for infrastructure and policy measures to reduce uncertainty over private investment will determine when we become a $5 trillion economy. The Budget 2021 is going to be a tightrope walk for the Finance Minister.

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