In an unusual exposition, the Economic Survey 2018-19, released before the Union budget by chief economic advisor Krishnamurthy Subramanian, devoted an entire chapter to behavioural economics that enunciated four major tactics to implement public policy:
Laissez faire: Leaving individuals/ firms to follow their own course;
Nudge: Gently steering people to a desired goal;
Incentivise: Using positive and negative inducements to change behaviour; and
Mandate: Using diktat to enforce a particular outcome.
While his economists favoured the nudge approach, Narendra Modi is employing all the four drivers of change to achieve the goals he has set for his second term as prime minister. First, he employed the ‘mandate’ approach. He used Budget 2019 to signal his intent and, as is typical of his style, he thought big-really big. He got Finance Minister Nirmala Sitharaman to commit in the budget document how his government will work towards nearly doubling the size of the Indian economy-from the current $2.61 trillion to a staggering $5 trillion by 2024-25.
To get a sense of how enormous that target is, consider these facts: when Modi took over as prime minister in 2014, the size of the economy was $1.85 trillion. At the end of his five-year term in 2019, the economy had grown at an annual average of 8 per cent to reach $2.67 trillion. To reach $5 trillion by 2024, the economy needs to maintain that growth. As Modi put it, “Earlier, India was walking, but New India will be running.” If the economy does get to $5 trillion by 2024, and maintains its growth momentum till 2030, India, currently ranked #6 by size, could become the third-largest economy, behind only the US and China.
In Varanasi, a day after the budget, Modi reduced complex macroeconomic theory to basics to explain to a gathering of Bharatiya Janata Party (BJP) workers why he was pushing hard for such a mammoth growth target. “The size of the cake matters,” he told them. “The larger the cake, the larger the pieces people will get. So we have set a target of making India a $5 trillion economy in five years. The larger the size of the economy, the larger the prosperity it will bring the country.” The prime minister then went on to say that the focus would be on doubling per capita income in the country (Rs 10,534 a month currently) because, as he put it, “When per capita income rises, there is a corresponding increase in purchasing power, which triggers a rise in demand. To cater to this rise in demand, productivity increases and there is an expansion in manufacturing and services. All this creates new opportunities for employment. Per capita income rise also leads to increase in savings, which can be invested.”
In Budget 2019, Modi bet on three main drivers to set the economy on the path of achieving the $5 trillion target: massive infrastructure development, easing the credit squeeze and major structural changes in agriculture. Topping the list was a commitment to spend Rs 100 lakh crore over five years on building infrastructure across the country. That would mean an annual spend of Rs 20 lakh crore instead of the current Rs 7 lakh crore. It included the Rs 80,000 crore allocation to upgrade 1.25 lakh kilometres of rural roads in phase III of the PM Gram Sadak Yojana apart from continuing its mission of building national highways at a frenetic pace. There was also a pledge to build 19.5 million houses by 2022 under the Pradhan Mantri Awas Yojana-Gramin. With over 97 million toilets built since 2014 under the Swachh Bharat Mission, covering 98.2 per cent of the households by 2018-19, Modi launched the Har Ghar Jal Yojana to provide piped water to these homes.
The second thrust was to clean up the financial system and clear the investment logjam. The budget provided Rs 70,000 crore for the recapitalisation of banks and a revival package of Rs 1 lakh crore for the stricken non-banking financial companies (NBFC) sector. The third driver was to provide income support of Rs 70,000 crore to distressed farmers and, alongside, speed up irrigation projects and boost agriculture exports. The Blue Revolution for fisheries and marine products was also launched.
The Bahi-Khata of India: India’s first woman Finance Minister Nirmala Sitharaman arrives in Parliament to announce the Budget.(Photo: Vikram Sharma)
Apart from mandating his $5 trillion vision, Modi employed the other three drivers of behavioural change the Economic Survey listed to achieve it: laissez faire, incentives and nudges. Sitharaman’s budget speech indicated that in key sectors such as aviation, highways, railways, ports and insurance, the government was moving towards a laissez faire approach by progressively freeing these sectors of constraints on investment and control for foreign and domestic players. For showering incentives, the prime minister chose sunrise and advanced technology areas such as solar photovoltaic cells, lithium storage batteries, computer servers and semiconductor fabrication, promising tax incentives to attract mega manufacturing plants. This is aimed at foreign companies wanting to shift base and investments to India as a fallout of the US-China trade tensions.
The budget also ‘nudged’ consumers and the auto industry into supporting a greener India and reducing the country’s oil exports by using electric-powered vehicles. It committed to lowering the Goods and Services Tax rate on Electric Vehicles (EVs) from 12 per cent to 5 per cent. To make EVs even more affordable, the government said it would provide additional income tax benefits worth Rs 2.5 lakh for those taking loans to purchase such vehicles. Despite the massive investments being proposed in these key sectors, Sitharaman was confident that the government would be able to keep the fiscal deficit under check.
Predictably, opposition parties dissed the prime minister’s proclamations on the budget. Congress chief spokesperson Randeep Singh Surjewala tweeted, “Zero on economic revival. Zero on rural growth. Zero on job creation. Zero on urban rejuvenation. Can a mundane jugglery of ‘acronyms’ pass off for a vision of New India?” CPI(M) general secretary Sitaram Yechury dismissed the budget as “fraudulent” and stated that “the rosy picture of the economy is full of jugglery”. Even BJP leader Subramanian Swamy was sceptical of the budget’s claim of doubling farmers’ income by 2022 with a sarcastic tweet, “Sweet dreams.” The stock market, which had banked on Modi announcing a slew of radical reforms to jumpstart the economy, registered its disappointment with the Sensex falling to a six-month low. Congress leader and former finance minister P. Chidambaram observed: “It seems Mr Modi is not willing to bite the bullet on carrying out radical reforms.”
Countering such criticism, Arun Jaitley, BJP leader and former finance minister, wrote in his blog that the Modi government believed in ‘being fiscally prudent’ and not in ‘fiscal adventurism’. Added a top government official, “We are for stable reform with direction and not for disruption. We will do whatever structural changes are required in the economy but not go beyond the mandate the electorate had given us.”
Modi himself dismissed his critics as “professional pessimists”. But many economists, while welcoming Modi’s $5 trillion promise, were also sceptical of his government achieving the target. And for good reason. The Indian economy has perceptibly slowed down, with the GDP plunging to 6.8 per cent-the lowest in five years. But with overall global growth being sluggish, India managed to retain the tag of being the fastest-growing economy. The average growth rate since Modi took over has been around 7.3 per cent, but this figure is being questioned by even his former chief economic advisor, Arvind Subramanian. There are other factors too that don’t inspire confidence in Modi’s ambitious plans. Private investment and exports-the two key growth drivers that the Economic Survey identified as being vital for the hyper-GDP growth needed to realise the $5 trillion ambition-have been sluggish in the past couple of years.
Experts say that pushing the Indian economy to $5 trillion by 2024-25 would depend on several factors, including the real growth rate, inflation and currency movement. Dr D.K. Srivastava, policy advisor, EY India, point outs: “Starting with a base size of $2.7 trillion in 2018-19, if annual growth is uniformly distributed across the next five years, India would need a real GDP growth of 8-9 per cent, inflation rate of 4-5 per cent and a steady rupee-dollar exchange rate.” The investment rate would also have to go up considerably-from the current 31.3 per cent to 34 per cent. It cannot come from the government alone; the private sector too has to pitch in. Srivastava’s prediction: “The $5 trillion economy can be possible only by 2027 and not 2025.” (See accompanying bites by economists on the $5 trillion question.) Finance secretary Subhash Chandra Garg, though, maintains that the government is en route to achieving the target on time and points to the budget document saying, “So much has been said about policy sector reforms, getting private sector investment, PPP in different sectors, massive monetisation programme.”
While Modi has so far followed a policy of economic gradualism, if he has to meet the stiff deadlines he has set for himself, he will have to push for radical reforms. Especially in the infrastructure sector which he is banking on to give the economy a booster shot. For instance, India now has the world’s third-largest domestic aviation market. The sector, in fact, is ripe for transformative measures to make it a formidable global hub. But despite having an Open Sky policy that permits 100 per cent Foreign Direct Investment (FDI) in an Indian carrier, the ownership stake has been capped at 49 per cent. It also restricts investors in countries within a radius of 5,000 km from coming in, thereby eliminating players from the Far East and the Gulf-all to protect a handful of Indian airlines, including the failed Air India. That has crimped both domestic and foreign expansion. Qatar Airways flies to over 160 destinations while Air India only to 40. Experts say the first thing the government should do is to hawk Air India. It should then have a truly Open Sky policy, which in turn will boost the growth of domestic airlines. As an aviation expert asked, “Do we have a policy for things like laptops and cars that say certain geographical entities would be eliminated? No. So why subject the aviation sector to such crimps?”
The budget did make a beginning by opening the lucrative aircraft financing and leasing business to special economic zones apart from providing an enabling ecosystem for India to become an international aircraft maintenance, repair and overhaul (MRO) centre. It has also opened up airports for private management and control. But if India is to become a global player in aviation, the government has to do a lot, lot more. If it did so, it would also uplift the tourism industry the way airlines did in Singapore and Thailand.
Indian Railways, too, needs a turnaround in approach with a long-term policy that will make it attractive for private players to invest. For starters, there is a need to break the railways’ monopoly on routes and open them to private players like in aviation. The railways has so far been cautious and as a first has allowed its wholly-owned subsidiary, the Indian Railway Catering and Tourism Corporation (IRCTC), to contract out the Delhi-Lucknow Tejas Express for a private player to operate. In other areas, such as laying and maintaining rail lines, instead of the current annual contract system, it can work out long-term agreements with private companies. Davinder Sandhu, partner and transport sector leader, KPMG, says, “What we need is bipartisan political support and a long-term vision among stakeholders that would ensure policy continuity and attract big private players to invest in the sector.” Sitharaman, in her budget speech, admitted that the railways would need an investment of Rs 50 lakh crore, or Rs 5 lakh crore annually, in the next 10 years instead of the Rs 1.6 lakh crore a year being put in currently. The government is now working out a PPP model to set the wheels in motion, but it has to be at bullet train speed.
In the road transport sector, Union transport minister Nitin Gadkari had wowed the country with his no-nonsense, nothing-is-unsolvable approach that saw the pace of national highway -building go up from 11 km a day when he took over to 28 km a day by the time the first term of the Modi government ended. This term, Gadkari intends to take the target up to 40 km a day, but the minister will find it tough to get financial support with a large chunk of the budget allocation dedicated to rural roads. Gadkari, though, is confident of meeting his targets. “I have no dearth of funds,” he told india today. “I built roads worth Rs 11 lakh crore through the BOT (build-operate-transfer), PPP, ToT (transfer of technology) and Hybrid Annuity approach. I am monetising projects and generating money to meet the goals.” Experts say private investment will flow in only if the terms are made more attractive and the risks lessened given the past experience with PPPs. Says Vinayak Chatterjee, Chairman, Feedback Infra: “While the hunger for private capital is back, a huge amount of work has to be done for PPP 2.0. Unless we tweak the policy and provide the necessary tax breaks to invest, the PPP model will be a pipe dream.” There is also a clear focus on brownfield asset monetisation. While the linkage is articulated in the budget, Chatterjee says the monies collected should be ring-fenced to avoid any diversion to other uses.
In agriculture, too, the government needs to undertake major structural reforms if it has to pull the sector out of the morass it has sunk into and usher in the promised income revolution for farmers. While the sector saw a huge jump in allocation from Rs 67,800 crore in 2018-19 (revised) to Rs 1,30,485 crore (budgeted) for 2019-20, the bulk of the increase will go towards funding the income support scheme for farmers the prime minister announced before the general election apart from interest subvention. Ashok Dalwai, chairman of the committee on Doubling Farmers’ Income (DFI), points out that agriculture requires two kinds of structural inputs: those of land and water that directly benefit them, and of power, roads and processing units which, though indirect, have a large impact on it. The Modi government, says Dalwai, in its first term had accelerated the construction of irrigation projects and brought an additional 7.6 million hectares of land under irrigation by completing over 52 stalled projects. Work on another 47 is being done on top priority. The central government’s expenditure on upgrading rural roads and introduction of one nation, one grid in power will also considerably improve farmer productivity and ability to market products. Along with investments in food processing parks and cold chain networks, the necessary infrastructure is being put in place. A committee of chief ministers, headed by Maharashtra’s Devendra Fadnavis, has been formed recently to come up with a radical reform of the APMC Act. If all agree, it will allow market forces to come into play and enable farmers to sell their produce across the country at the best price. This also includes an act to enable contract farming. Dalwai says, “Currently, our agriculture exports are around $38 billion; we need an aggressive policy to boost them. Once the necessary infrastructure is in place, we can easily double that figure in a short time.”
Exports not just of agricultural goods but also of items in which India has a core competency are critical to meet the targets Modi has set for the size of the economy. Sajjid Chinoy, Chief India Economist, J.P. Morgan, says, “Exports will have to grow in double digits to meet the $5 trillion target. If consumption is slowing, the only way is higher exports.” This despite the global economic growth slowing and rising protectionism. It will be equally critical for the central government to raise investment through external sources and the private sector if it wants India in the league of $5 trillion economies. Major changes are also needed in land and labour laws apart from ensuring continuity in economic policies if the so-called “animal spirits” of the economy are to be unleashed to attain higher growth rates. The Economic Survey acknowledges that meeting the $5 trillion target will need “a virtuous cycle of savings, investment, exports and growth with investment as the central driver”.
The dream of doubling the size of the economy in five years is a laudable one. But it is imperative that the Modi government carry out bold reforms and work at breakneck speed to achieve it. As Ruchir Sharma writes in his book, Break-out Nations: In Pursuit of the Next Economic Miracle, ‘No nation can hope to grow as a free-rider on the tailwinds of fortuitous global circumstances. They will have to propel their own weight and the breakout nations of the new era will take their mantra from a Latin proverb [which translates to]-“If there is no wind, row.”‘ Row, India, row.