Mission Possible

The goal of making India a $10-trillion economy by 2032 is both feasible and challenging. It is a "stretch target" in corporate lingo, but not beyond what the economy can achieve. In the past 16 years, the size of India's economy has roughly quadrupled in dollar terms. So, if we can maintain the same average rate of growth, it should be possible to quadruple again in 16 years, thereby reaching close to $8 trillion. This assumes stable exchange rates, but more of that later. If we put in the "stretch performance" parameters, it shouldn't be difficult to reach close to $10 trillion.

Alas, just as a map is not the actual territory, Excel projections are not actual economy forecasts. Past performance does give us hope and confidence, but future growth is not a simple extrapolation. As a Yogi Berra aphorism says, "Prediction is hard, especially about the future"!

India's growth in the next two decades will depend on the evolution or expansion of its labour, capital, savings, exchange rates and global disruptions caused by technology, climate change and geo-politics. The first three are somewhat stable and predictable, but the others can go up and down wildly. A case in point is the famous BRIC report by Goldman Sachs, published in 2002. It forecast robust growth of these four large economies all the way to 2050.

A digression: The original draft of the report had erroneously assumed that these countries' currencies would appreciate against the dollar for 50 long years! Luckily, the main conclusion of that report can still be rescued after correcting for this. Hence, the Niti Aayog target needs to be careful about what is being assumed for the rupee-dollar relationship till 2032. If the rupee strengthens sharply, it would be easy to reach the $10-trillion target. Obviously, that's not what is implied.

Three of the original four (now rechristened as BRICS) are badly faltering in 2016, and the 2050 forecast is looking wobbly. The acronym has survived (there's a BRICS Bank, apart from annual BRICS summits, even though Goldman has closed its BRICS fund) but hazards of long-term growth forecasts are illustrated in this case.

For India, there is a structural basis for forecasting long-term growth, which gives us some confidence. In a macro sense, think of the economy as a black box, which receives inputs and produces output. The inputs are labour and capital, and output is gross domestic product or GDP. In an incremental sense, both labour and capital contribute roughly 2.5 per cent to aggregate growth, and another 2.5 per cent comes from productivity increase. These three add up to a structural growth rate of around 7.5 per cent. This is the real GDP growth rate, stripped of inflation, and is unaffected by business, political or electoral cycles. It can go up or down a notch depending on climatic disruptions or reforms. The labour input has the advantage of India's demography, whereas the capital input has the advantage of a high savings rate. This rather mechanical view fails to describe the quality of growth, the changing distribution of sectors, the rise of income inequality or how quality jobs are going to be created on a large scale. This is where you need more details. The vision presented by the Niti Aayog team, which set the $10-trillion goal, did have some sketchy, but insufficient, details. The brief presentation available on its website outlines eight themes for action. These are growth acceleration, employment generation, health and education, governance, farm sector focus, swachh bharat, energy and innovative budgeting. You can club them into conventional (labour, capital, hard and soft infrastructure, innovation) and non-conventional (swachh bharat, improving governance) growth drivers. The beauty of this is that India always has huge upside potential (be it labour or capital productivity, crop yield, energy efficiency or whatever) as compared to global averages. As one cynical wag puts it, "India is a country with huge potential? and will always remain so!" What this emphasises is that on many metrics, we can only go up, not down.

The Niti Aayog blueprint projects 10 per cent annual growth, which looks too ambitious, especially in the present global context, which is not even lukewarm. Russia and Brazil are contracting, China is slowing, and Japan and much of Europe are stagnant. So, growth drivers mostly have to be domestic, at least in the short run. Hence, the main driver is consumption and investment. In the current scenario, private sector investment spending is not forthcoming. That's because large corporates are struggling to pay off huge debts, their existing capacity utilistion is low, and they don't have confidence about future demand. Hence, in the short run, growth impetus has to come from fiscal push, especially for building infrastructure. This does not mean crossing the red line of fiscal prudence but increasing the quality and efficiency of government spending. India's hunger for about a trillion-dollar infrastructure itself can give us sustained medium-term growth. This requires some credit guarantees, risk mitigation, quick resolution of disputes and participation of long-term patient risk capital (such as insurance funds).

India aims to take the share of manufacturing in gross domestic product from 15 per cent to 25 per cent. Some of this can happen if we can grab the opportunity emanating from China due to its rising labour costs. But we must also note that the age of robotics, drones and 3D printing is upon us. The future has no place for large-scale conventional factory jobs. Driverless cars are already threatening to make millions of drivers jobless in the western world. One-third of the world's 1.8-billion youth are neither working nor in schools and colleges. The challenge of generating jobs for youth is a global one. India has to chart a new non-China style path for creating jobs. Will it be in new sectors like renewable energy, or services sectors like health, education, IT and tourism? The next two decades hold the answer. ~

The writer is Chief Economist, Aditya Birla Group