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'$5 trillion economy by 2024 does not seem possible'

January 15, 2020 09:17 IST

'We are at $2.7 trillion and 2024 is not far away.'
'The country will need to grow by 9% every year for 5 years continuously and raise the aggregate investment rate to 38% of GDP to achieve the government's target of turning India into a $5 trillion economy.'
'Given the fact that we are only growing at about 5% and our investment rates are only about 30%, it may take a number of years before we can reach that targeted level.'

Illustration: Dominic Xavier/

"We should not be unnecessarily bothered about the total size of the economy. We should be bothered more about per capita income, and not the overall size of the economy," Professor Sunil Mani, Director, Centre for Development Studies, Thiruvananthapuram, tells Shobha Warrier/ in our series of interviews with economists and business people on what urgently needs to be done to boost the economy.

Is GDP growth falling below 5% and all the sectors registering negative growth a temporary phenomenon and cyclical in any economy?

I don't agree with the cyclical versus structural argument at all. I hold the view that the rate of growth of India's economy has been much below what was shown earlier. This has been pointed out by many economists.

That's because all of us feel there has been a certain amount of over-estimation of GDP and this overestimation in its measurement does not appear to have been corrected at all.

My feeling is that after the 2008 global crisis, though we argued at that time that we were not affected by it, we were, and we appeared to have not recovered well enough.

If you look at all the macro economic variables, like GDP growth, savings and investment rates rate of growth of exports, etc, all these fell immediately after the global financial crisis and have been fluctuating thereafter.

According to various analysts, a slowdown in consumption demand, decline in manufacturing, inability of the Insolvency and Bankruptcy Code to resolve cases in a time-bound manner, and rising global trade tension and its adverse impact on exports are some of the factors affecting India's growth.

Are we in recession right now?

The economy has been slowing down for six consecutive quarters despite the government announcing a slew of measures to arrest the slide of GDP growth rate.

The growth rate of the economy has been declining, but still positive. So it is not a recession in the strict sense of the term as GDP has not contracted.

Nevertheless, this slowdown is worrisome as there is evidence of rising unemployment and reductions in consumption demand which will further slow down the economy. The recent numbers on the GDP growth rate confirm this.

Is refusal to accept the reality the reason why the government cannot find a remedy to stop the downward trend in the economy?

No, the government announced a slew of measures. But they seem to be addressing more of the supply side than the demand side.

There is now a fair amount of consensus among a wide range of economists, of different persuasions, that a fall in aggregate demand is the cause of this slowdown.

Maybe the government will announce some measures to reverse the slowdown in the forthcoming Budget.

What should the government be doing other than being in denial?

First of all, the government should accept that there is a problem with the Indian economy.

There is nothing wrong in accepting that there is a problem. Many economies including China are experiencing a slowdown in GDP growth.

It is like you are down with a disease, but do not want to accept the truth and take any medicine. This approach will not help you to recover.

So, the government should first accept that there is a problem. Also, the problem is on the demand side and not so much the supply side.

Once you accept that the problem is on the demand side, you can come out with policies that would improve demand in the economy.

This can be done by helping farmers, creating more employment through MNERGA, etc so that people can have more disposable income to spend.

The unemployment rate is going up. Has this also affected the demand side?

First of all, overall domestic investment sentiments are very low. The Gross Fixed Capital Formation as a per cent of GDP has been declining.

Second, Net Foreign Direct Investment is only about $30 billion and it has been stagnating at that level in 2017-2018 and 2018-2019 according to the RBI's latest annual report.

Net portfolio investment in 2018-2019 has been negative at $618 million.

Because of these two reasons, opportunities for employment are also very low.

Since opportunities for employment have been low, demand has been low. Because the demand is low, investment goes further down.

So, it is a vicious circle.

Yes, it is a kind of a vicious circle. There is a fair amount of consensus among economists regarding this kind of phenomenon.

What started with the NPA (non performing assets) problem in public sector banks continues despite the government infusing money in these banks as recapitalisation. Do you see a change in the NPA problem in the near future?

I do not see a change in the NPA problem as some of the banks have been camouflaging. This is a very important issue that is affecting the economy.

In fact, I have argued right from 2008 that Indian banks were in a bad shape. There was an asset-liability mismatch, and this happened in 2008. But at that time, we were quick to say that Indian banks were very safe and their exposure to toxic assets was limited to one bank.

But the asset-liability mismatch has been a problem right from 2008.

So, once again the government in power was in denial mode. The NPA problem was accepted openly much, much later in 2015, when Raghuram Rajan asked the banks to declare NPAs...

Exactly. If you look at Economist magazine, they have been talking about the rot in the Indian banking system for quite some time. It has been referring to the mounting dud loans in the State-run commercial banking sector. So, this has affected private investment sentiment badly.

With no bank credit going into industry due to the NPA problem, private investments have not been happening.

With low investment, there are fewer employment opportunities and also low demand, which reduces the rate of growth. This has been going on for some time now.

What we need to do urgently is to fix the banking system, have policies that can increase domestic demand.

When confidence of the private sector is low, shouldn't the government increase public spending by starting, for example, infrastructure projects so that there would be economic activity?

Yes, that is one way of increasing domestic demand. When you invest in massive infrastructure projects, it can lead to fresh manufacturing investments coming in.

Although quite a bit of improvement has been done in the previous years, we are not still there when you compare ourselves to countries like China.

On a number of infrastructure areas like, for instance roads, quality and quantity of electricity, ports, wagon turnaround in railways and even in the distribution of water, we do have a long way to go compared to other fast-growing large countries like China.

So, once you start investing in infrastructure, I have a feeling that it will improve private investment sentiments too. The positive co-relation between infrastructure investment and private industrial investment is very well established.

For the last few years, many economists are talking about the need for the government to invest in infrastructure projects to kickstart the economy, but nothing has been happening on the ground. Why is it so?

I think the government is interested in satisfying certain international norms in fiscal deficit. They want to keep a certain percentage of the GDP as fiscal deficit.

So, they have been relentlessly cutting down on government expenditure, essentially to meet those targets.

There is a fair amount of consensus in India that one of the ways in which the government can increase demand is by increasing government expenditure. This way, they can put money into the hands of people.

For example, the MNREGA programme should be expanded. It is the largest employment programme seen anywhere in the world.

Despite all its limitations, it had a major role in providing employment especially in the rural areas. This programme can increase rural income and rural demand which can lead to increased manufacturing activities.

These kinds of policies can increase domestic demand.

The government wants to make India a $5 trillion economy by 2024, but with the economy growing at less than 5%, has it not become an unattainable target?

I think we should not get into this $5 trillion debate. We are right now at $2.7 trillion and 2024 is not too far away. We are not talking about a distant future; it is just 4 years away.

The country will need to grow by 9% every year for five years continuously and raise the aggregate investment rate to 38% of GDP to achieve the government's target of turning India into a $5 trillion economy.

Given the fact that we are only growing at about 5% and our investment rates are only about 30%, it may take a number of years before we can reach that targeted level.

We should not be unnecessarily bothered about the total size of the economy. We should be bothered more about per capita income, and not the overall size of the economy.

Some experts I spoke to said that the economy would be able to sustain fluctuations as we were fundamentally strong. Do you agree?

If you are looking at the fundamentals, I will look at the savings rate and also investment rate, and these are not going up.

The quality of our infrastructure has to be improved in a number of areas.

Our banking system is in a bad shape.

Employment is a major issue.

Agricultural demand is a major issue.

Consumption is going down.

There has been a rising repatriation of FDI.

NPAs in the banking sector has reached 10% to 12%.

Now, how can anyone say the fundamentals are in good shape?

In my view, the fundamentals of the economy need improvement, otherwise we won't be able to maintain continuous growth.

In which direction do you see the economy going in 2020?

I do not want to be pessimistic. But it is very difficult to predict the future especially with the Middle East issue escalating into a war-like situation.

Petroleum prices have already started increasing and this is not good news for us. It can change the whole scenario any time. This is not going to be very helpful for India or the rest of the world.

Since we are already in a difficult situation, it may affect our growth prospects adversely. I think the government must give more importance to dealing with the economy.