Panel discussions

Where From Here is the 5 Trillion Dollar Economy

Read Time:15 Minute

Mr M R Sivaraman, Former Revenue Secretary, Government of India, Mr Arun Kumar, Malcolm S Adiseshiah Chair Professor Institute of Social Sciences, New Delhi, and Mr K Kumar, Sr. Partner & Leader, Consumer & Industrial Products Deloitte Touche Tohmatsu India LLP shared their insights on the question of the 5 trillion dollar economy.

M R Sivaraman

Gross Domestic Product (GDP) is the value addition made within the geographical limits of a country. Gross National Product (GNP) includes the value addition of the country’s GDP plus that which is made outside the country.

GDP takes different forms. It is estimated at factor prices. Factor price means the goods and services and the taxes attached to them. Normally, we talk about GDP at market prices so that everyone understands. Then there is GDP with reference to a particular base year. It is 2011-12 for India.

GDP all over the world follows the system of accounts developed by almost all the chief statisticians of most of the countries. India was also a member of this UN committee. It has a 600-page manual that goes into the details of how each account has to be properly taken into consideration while estimating the GDP.

Estimating GDP correctly is a challenge. For example, take the price of paddy. Should we take MSP price at the factory gate or at the market where we go and buy? Interest is also a factor income. The street vendor who goes to the money lender close by takes 1000 rupees in the morning and agrees to pay 1100 rupees in the evening. This is much higher than the rate of interest of the government of India.

Then we have GDP at purchasing power parity. When you compare the GDP of nations—that is the GDP at our rupee account divided by the dollar value, then it gives a different picture. The GDP of India at the beginning of this year would have been higher than the GDP now—the rupee has depreciated with respect to dollar.

India’s GDP in terms of purchasing power parity in 2021 was $8.9 trillion; For China, it was $24.1 trillion and the US $20.9 trillion. India is at number three in the world. Estimating the GDP of India is a very complex issue. A doctor is valued at 1000 rupees a year whereas a government doctor is getting 8000 rupees a month. An egg has been valued at one paisa per egg.

I had running battles with economists in this issue. I’m not an economist. I did an exercise, when I was in the government, with my economists and they found our GDP was underestimated. I spoke about this up to the level of the then PM Vajpayee. He constituted a committee to study this. Based on its findings, India’s GDP in that year was revised upward by 18%.

If GDP of India is underestimated, a lot of things like the fiscal deficit and the tax to GDP ratio will all go wrong. It has a lot of implications for the economic policy.

Black Economy and GDP

In 2008, the then Finance Minister, the late Mr Pranab Mukherjee, asked the National Council of Applied Economic Research, the National Institute of Public Finance and Policy and the Indian Institute of Financial Management to do a detailed exercise independently on black money. They estimated that it was between 72% and 76% of our GDP.

Professor Arun Kumar, in an article that he wrote in DNA in 2019 estimated that India’s black money was 144 lakh crores. We do not really know how much of this is in GDP. I studied a street vendor next door to my house who sells breakfast, lunch and tea. Her net income was 7500 to 10,000 rupees a day. She has bought a 50 lakh worth of flat next to my flat. If all of these are captured correctly, probably we may be near $4 or 4.5 Tn already.

Savings Rate

Taking the GDP of 3.5 trillion dollars figure as of now, we have to make good 1.5 trillion dollars to reach the figure of five trillion dollars. Are we in a position to achieve this?

Now, valuation in the country is dependent on investment, which is dependent on savings. Our savings rate in the last few years has been very unsatisfactory. In 2017, it was 31.3%; in 2021, it has come down to 28%. Compare it with China’s 45.5%.

Savings divided by the capital output ratio gives the rate of growth of an economy. That’s a standard formula. In the case of India, it should be around 4.5, which means we are growing at about seven percent. To touch five trillion dollars with this rate of savings, we may take seven years. Now, many state governments are making heroic attempts to reach one trillion dollar economy in their states.

High Defence Expenditure

Secondly, our defence expenditure is increasing. We can’t call defence expenditure non-productive, because, defence by itself gets value addition. Indigenisation leads to employment and value addition within the country.

The third factor which is eating away our resources is periodic elections. One general election costs 4000 crores and one state election costs 200 to 300 crores depending upon the size of the state and its complexity. Of course, there is value addition in elections and people are employed in the process. But it could have been used for many other purposes.

Regional Disparity

Then we have serious regional disparities in income. In the case of Bihar, the per capita income in 2019-20 is Rs 50,733. In Goa, it is 5.2 lakhs and Delhi, 5.6 lakhs. 14 states in India have a per capita income of more than 3000 dollars. Bihar has a population of 10 crores.

What is happening in Bihar? They are willing to spend a lot of money on caste census but they don’t focus on mapping the MSME sector there to find out how they can grow. There are policy constraints. Some state governments like Tamil Nadu, UP, Maharashtra, Karnataka and Telangana are trying to move forward.

We have to also take into account internal disturbances and natural disasters. The International Meteorological Organization has estimated the loss of India in 2020 on account of natural disasters to be 6.3 Bn $. In rebuilding this, there will be value addition but we are rebuilding an asset which has been lost. This is the magnitude of disaster.

International Problems

There are problems in the international financial system. We are talking about the US heading for a recession. The interest rates are going up in the US. The Russia-Ukraine war has created unusual inflationary levels the world over, which is also percolating into India and which we are not able to tackle. These are some of the important factors which may obstruct our movement towards multi trillion dollar economy.

Falling Labour Participation

Another worrying feature of the Indian economy is the falling labour participation rate. It came down to 40%. As on December 21, it reached 45.7 but still it is very low. The reason is because of low participation of women in the workforce; it is probably one of the lowest in the world at 19%. Bangladesh has 55% labour participation rate.

If people do not come and produce things and they remain idle at home, then how can there be value addition? In the case of Tamil Nadu, I saw a report that the youth do not want to go for a job. The lowest labour participation of youth is in Tamil Nadu.

There are certain remedial actions being taken by the government. For example, they are now launching a massive program of self-help groups among women. A lot of women get employed or self-employed. I am myself in charge of about 200 self-help groups. Some of them have a turnover of Rs 50,000 a week and some have a turnover of Rs 10,000 rupees a week. They make pickles, bakery products, etc. I don’t know if this revenue generated gets added to the GDP estimate calculations.

Raise Wages, Cut Freebies

The then Prime Minister, Dr Manmohan Singh, once asked me, “If you were the Prime Minister, what would you do?” I said, “The first thing I will do is to raise the minimum wages in this country.” If you increase the minimum wage, you can also expect greater productivity. A large number of states are going in for freebies which make people a little bit indolent, although we may say that freebies are a matter of correcting the social injustice that has taken place within the system. Even in the United States, Obama gave free cell phones to a lot of poor people.

Toward the end of the 18th century in the UK, the Lords, Dukes and others joined hands and started giving free bread, free food, free clothing, etc., as part of an agreement. Then ultimately, they realised that they did not give labour for the industries. So, William Pitt, the younger, abolished this when he became Prime Minister and said that people are to be paid according to the work they do.

Forex Reserves

India’s forex reserves which were 641 billion dollars, have now come below 600 billion dollars. Even these reserves do not fully belong to us. It’s not state surplus reserves. That is some amount of reserve that comes through FDI or remittances, which cannot go back. But the rest of the thing called hot money can fly away. Even foreign institutional investors can sell off assets and go back. This once happened in South Korea. So we cannot say that the 500 or 600 billion dollars of forex is a great asset with us.

Disruptive Technologies

In the coming years, there is also going to be disruptive technologies coming and replacing many of the things that we see today. We have to compulsorily shutdown thermal power plants in the next 20 years because of the climatic change. What happens to the 2.5 million families who depend on mines for livelihood? Because of EV, the automobile sector will suffer. EVs, I am told, have 20 moving parts compared to 2000 moving parts in conventional vehicles. Just like cell phones replaced landlines, EVs will definitely replace conventional automobiles. There will be social problems when people are displaced.

These are going to be some of the major obstacles that we will come across in our march towards making this country a five trillion dollar or ten trillion dollar economy.

Prof Arun Kumar

The pandemic and the Ukraine war have created continuing problems for the world economy, including the Indian economy. China’s economy has been hurt very badly by the extreme lockdowns that they have had. Since China is the manufacturing hub of the world, supply chains have been disrupted.

A Proxy War

The Ukraine war is a proxy war between two superpowers. On the one hand, we have Russia which is a superpower and on the other hand, we have Ukraine supported by EU, NATO and USA. There are sanctions on Russia and we are headed towards a new cold war between these two blocs (Russia, China and friendly countries versus Ukraine, EU and USA). The old cold war was ideological between a communist socialist bloc and a capitalist bloc. This time, both are capitalist blocs. The struggle is for dominance. The US has already said that China poses a bigger danger to them than Russia. So the western powers will continue to move against China.

Shift the Paradigm

What we follow today in India is called the supply side policy paradigm. This needs to change. From 2016-17 onwards, the rate of growth was about eight percent and then it declined pre-pandemic to about 3.1 percent quarterly growth rate. If we grow at 10%, then in 2027-28, we will reach five trillion dollar economy, assuming that the dollar to rupee parity stays at 80 Rupees to the dollar and inflation is 6% for the entire period.

If we grow at 12 percent, then we will reach it in 2026-27 and at 14%, we will reach in 2025-26. These are some of the projections. But that is going to be very tough because starting at 4% to get to 10% requires 16 percent real growth of the economy, which has never been achieved. So in other words, by 25-26, it’s almost impossible to reach five trillion dollar target.

What are the impediments to the growth of the economy?

The Bleeding Unorganised Sector

During the pandemic, we had a huge impact on the unorganized, non-agriculture sector. The consumer confidence is now still at around 75. In January 2020, just before the pandemic, it was 104. Capacity utilization for the organized sector has reached only around 70% as per RBI data. After the pandemic, it’s now clawing its way back. At this low capacity utilization, we can’t expect the investment rate to suddenly go up.

The unorganized non-agriculture sector has been declining. At least five percent of the units closed down, as five percent demand shifted from the unorganized sector to the organized sector. Hindustan Lever’s annual report talks about this demand shift and why the market share for Hindustan Lever has gone up. The small sector is unable to deal with the problems they are facing. They are unable to avail input tax credit. The demand is shifting due to a combination of demonetisation, GST and the pandemic.

Inequalities and Inflation

Recent surveys by agencies including Credit Suisse and Oxfam have shown that inequalities are growing. When inequality grows, mass demand does not rise and we are dependent on investment to fulfill the demand. The investment and savings have been quite low in India.

India’s rate of inflation has been very high. The wholesale price index has been about ten percent, for more than 12 months. The CPI, the Consumer Price Index has been growing at above 6% for the last 4 to 5 months. At a high rate of inflation, poor people and the unorganized sector get impacted and demand further declines. There are now supply bottlenecks and commodity and metal prices have risen. The shipping and freight rates are rising. Due to shortage of containers, containers get stuck at ports, so the transport costs are rising.

Fuel costs are rising as Russia is a big supplier of energy and because of sanctions, those supplies could not come to Europe. Fertilizer prices have also gone up. Ukraine and Russia supply food items like wheat and sunflower oil.

Finance is getting highly disturbed because of the sanctions on banks and other financial sector of the Russians and this will create further issues for India, because India’s trade with Russia will get disrupted. We cannot make payments in our banks in the normal way, because of the sanctions. Many problems will arise in trade and finance.

The US in the last quarter had a negative rate of growth. People are worried that the US economy can slip into recession. It’s a likelihood, and there is the stagflation—high inflation with very low rate of growth.

We have unemployment, under-employment and disguised employment. Our labour force participation rate is low. 94% of the unorganised sector earns less than Rs 10,000 per month. Though external factors are beyond our control, internal factors are in government control.

What should the government do?

  • It must change its policy from supply side paradigm to demand side paradigm.
  • Focus on employment generation both in rural and urban areas by creating schemes. Rather than massive highway projects, we need small projects in rural and urban areas that will generate employment.
  • We need to boost the micro sector of which there are 6 crore units. In small and medium, we have 6 lakh units and in large, we have 6000 units. 97.5% of MSME employment is in micro sector. This, and the small sector are now in trouble. Hence the unemployment problems.
  • Tax the wealthy through wealth tax.
  • Increase direct tax rates and reduce indirect taxes. GST should be made the last point tax.
  • There will be new viruses coming; we have to be aware of these and plan measures in place.
  • Make use of technology in managing viruses and in overall growth.

K Kumar:

  • If an American company employs 100 people in its fifth year, in its 40th year, it employs about 800 people. The employment gets multiplied by 8 times. Also, we must note that in the 40th year of a company, the technology also grows substantially. So productivity per employee must have gone up, not just by 8 times but in multiples of 8 times. If you compare this scenario with an Indian company, it grows by just 1.4 times in 8 years. We call it as dwarfism.
  • Our entrepreneurs are, no doubt, aspirational. But we do not give them an ecosystem to grow.
  • We must have many companies creating wealth rather than a few.
  • We must see if there is headroom for MSMEs to grow. If we compare India with US, China and Germany, we can find that our MSMEs account for 30% of our GDP. In China, it is 55%, it is 42% in the US and 48% in Germany.
  • China has half the number of MSMEs as India. That shows that we have many dwarfs and they impact the economy.
  • 40% of our exports are done by Indian MSMEs. China’s MSMEs contribute to less than 10% of their exports; the US MSMEs 30% and 16% in Germany
  • We need to question ourselves if we make our MSMEs to take a larger load than they can actually take. Lack of competitiveness and lack of headroom for them to grow and occupy a significant place in the GDP affect them. We must help them to find markets in India.
  • While we talk about 5Tn $ economy, we must also be concerned by the quality of such economy. MSMEs must be groomed in such an economy, like how Japan groomed companies like Citizen and Sony.
  • Right now, we put all MSMEs in one bloc and focus mainly on their skilling. We have to treat them differently as some of them may be already skilled and they may need some other form of support. For instance, our Kanchipuram saree makers need to be provided with a market and our spas need international accreditation. We need to look at sector specific needs and address them.
  • China has one village, one product and one industry concept and that industry is a world-beater. We have to also work on such concepts.