Budget Analysis | Trillion dollar question: Is Modi's $5tn a realistic target?

Analysis | Trillion dollar question: Is Modi's $5tn a realistic target?
(L) Finance Minister Nirmala Sitharaman gestures during a photo opportunity as she leaves her office to present the Union Budget in the parliament on Friday, Prime Minister Narendra Modi. Photo: Reuters

The 2019 budget has been largely in line with the expectations outlined by the Economic Survey of India released on Thursday.

Prime Minister Narendra Modi's ambitious $5 trillion target for the economy by 2025 and a higher growth target of 7 per cent for the next fiscal is indubitably the highlight in this year's roadmap.

The modus operandi for achieving this target almost in its entirety depends on investment – Rs 100 lakh crore has been set apart exclusively for investment based activities in the next five years.

It is expected to revive the growth prospects of the economy which hit its lowest growth rate in five years.

The investment will be pumped into the economy through two different arenas: infrastructure and industry. While road, rail, air and housing will prove as vital channels for investment in infrastructure, MSMEs, start-ups, Make in India and E-vehicles will be the driving force in industrial sector.

The fact that India's tax receipts have risen significantly in the past few years implies that the country will be able to finance these investment plans in an effective manner.

All's well up to this point.

The problem lies in the fact that the budget and the highly futuristic economic survey, does not paint a very rosy picture of the current economy.

The Indian economy hit a five-year low of 6.8 per cent growth in the financial year 2018-19. The growth rate slowed down to 5.8 per cent in January-March quarter. Though partially attributed to the uncertainty that loomed over the economy during the election period, the fact that this is the slowest pace in last 20 quarters in none too welcoming.

Analysis | Trillion dollar question: Is Modi's $5tn a realistic target?
Minister of Finance Nirmala Sitharaman

The survey also points out in its first chapter that the $5 trillion economy is far from realistic without a sustained growth rate of 8 per cent.

However, India is unlikely to reach this figure in near future due to the following reasons.

Firstly, empirical evidence suggests that economies tend to converge or register lower rates of growth as they transition into bigger economies. (Poorer economies grow faster as they do not experience a strong diminishing returns effect .)

A few examples may be cited to this effect from our neighborhood. After decades of near double digit growth rate the Chinese economy faltered to a steady 6-7 per cent range in the past four years.

A similar trend was also shown by the East Asian tigers -- South Korea, Hong Kong, Taiwan and Singapore. The economies which rapidly expanded in the 1980s lost their momentum 10 years down the line.

But the slowing growth rate by no means implies that the macro-economic policy is at fault. It merely implies that the Indian economy is maturing or transitioning into an advanced stage. Though it lags behind the first-world countries in terms of per capita income, India is the sixth largest economy in the world in terms of nominal GDP ($2.61 trillion).

Secondly, India's rising trade deficit is likely to be unchecked in the upcoming years considering India's trade spat with major trade partners like the United States and the increasing focus on free trade on world platforms such as WTO, G20 and so forth.

Thirdly, the dip in growth of agricultural sector where a lion's share of the workforce (more than 40 per cent) is employed in the sector does not work in favour of the economy. A spike in consumption and subsequent growth, is unlikely if the farming community remains impoverished.

In this context, the economic survey's suggestion to solve job creation, demand, exports, and economic growth together instead of addressing them as separate problems is commendable.

In fact it is essential that all macro economic variables are considered in the same equation as opposed to the ceterus paribus (all things remain equal) principle followed by many economists while devising a strategy for the economy.

The survey suggests that the predicted growth rate can only be sustained by a “virtuous cycle” of savings, investment and exports catalysed and supported by a favourable demographic phase.

While an investment driven economy holds the advantage of a higher growth prospect, it may not be the best case scenario for the job prospects in the country if the investment is not labour-driven.

A capital intensive investment will result in loss of jobs that eventually drives down consumption -- a major driving factor for the growth of any economy. The focus on MSMEs and start -ups is, therefore, a welcome move considering its labour intensive nature.

Let's hope that all the factors outlined in the budget at least sets the ball rolling for an improved economy with a higher standard of living, if not for a $5 trillion economy.