Sitharaman’s USD 5 Trillion Economy for India: Growth Driver in Private Investment Sector

By Didhiti Ghosh, Bureau Chief (Kolkata), IOP

• Budget 2019: FM Sitharaman announced a slew of measures to increase investments in the Indian economy
• Based on the Economic Survey 2018-19, India Ratings and Research believes that investment, especially private investment, will be the key driver of accelerating and sustaining GDP growth at or around 8.0%
• The survey made an observation that central bankers in many countries focus on core inflation
• The above could have an implication on future inflation targeting framework

Kolkata / New Delhi, July 7, 2019: India’s Finance Minister Nirmala Sitharaman presented the first Union Budget of the new government in Parliament on Friday. Centred on the growth of the Indian economy and investment-led growth, Sitharaman's Budget speech also talked about tax simplification, start-ups and electric mobility in India. Sitharaman said that the Indian economy will grow to reach $3 trillion in the current year.

FM Sitharaman announced a slew of measures to increase investments in the Indian economy.  Ways to improve infrastructure investments, encompassing roads, railways, aviation, waterways, metro rail network and housing were also announced in the Union Budget 2019. The same also included steps to increase industrial investments in MSMEs, start-ups, Make in India and electric mobility.

Based on the Economic Survey 2018-19, India Ratings and Research (Ind-Ra) on a similar note believes that investment, especially private investment, will be the key driver of accelerating and sustaining Gross Domestic Product (GDP) growth at or around 8.0%, which will aid India in becoming a USD5 trillion economy by FY25. The survey projects a 70bp increase in the total factor productivity compared to the US, a constant real effective exchange rate resulting in USD/INR at 75 in March 2025 (3 June 2019: INR68.79) and 4% inflation. The export growth is hypothesised to come from increased productivity instead of nominal currency depreciation.

The survey states that a virtuous cycle of savings, investments, exports and growth with investment as the central driver will aid India in becoming a USD 5 trillion economy. However, the government needs to focus on investments in infrastructure as it eventually crowds in private investment.

This is easier said than done especially against the backdrop of a significant decline in savings/GDP ratio. India’s current savings/GDP was 30.5% in FY18 (FY17: 30.3%, FY16: 31.1%). The household’s segment, which includes unincorporated enterprises, is the only net saver in the economy as per the institutional classification. The segment’s financial savings net of financial liabilities increased to INR 11.29 trillion in FY18 from INR 6.43 trillion in FY12. However, net central government, state government and extra-budgetary resources borrowings grew at a CAGR of 10.7% to INR 11.55 trillion during FY12-FY18. If the government continues to borrow in a similar fashion, financing both the government and private investments using the domestic savings will become difficult. Clearly, the alternative would be to rely on foreign savings but this would expose the economy to widening current account deficit with its associated consequences. 

The Economic Survey 2018-19 bats for exports and argues that it must form an integral part of the growth model because higher savings would preclude domestic consumption as the driver of final demand. However, Ind-Ra believes exports have been playing an important role in accelerating India’s GDP growth over the past one and a half decades. The share of exports (goods and services) in India’s GDP increased to 25.4% in FY14 from 12.8% in FY01 but declined thereafter to 19.7% in FY19. However, given the external environment has changed dramatically post the 2008 global financial crisis and is now turning into repeated trade frictions, accelerating exports growth would be challenging. Rising protectionism and weak global demand have chiefly been responsible for the decline/low growth of India’s exports during FY15-FY18.

The survey expects Indian economy (GDP) to grow at 7.0% in FY20 (FY19 advance estimates: 6.8%), which looks plausible.

The survey has also introduced a few new themes including behavioural economics, which provides insights to nudge people towards desirable behaviour. However, the use of this concept in the framing and implementation of the policy relating to the social sector remains to be seen. The survey made an observation that central bankers in many countries focus on core inflation; this could have an implication on future inflation targeting framework.

To facilitate the aforementioned, some modifications in the start-up ecosystem were also presented in the Budget Report 2019. In its previous tenure, the Modi government emphasised on strengthening start-ups in India. However, these and their investors faced a troublesome hurdle in the form of angel tax. To resolve this issue, FM Sitharaman announced that the start-ups and their investors who file requisite declarations and provide information in their returns will not be subjected to any kind of scrutiny in respect of valuations of share premiums.

The issue of establishing the identity of the investor and source of his funds will be resolved by putting in place a mechanism of e-verification, Sitharaman said. With this, funds raised by start-ups will not require any kind of scrutiny from the Income Tax Department.

Image Courtesy: Times Now, HT

(Didhiti Ghosh is an India Columnist at La Agencia Mundial de Prensa, and is the Bureau Chief of Indian Observer Post based in Kolkata. She is a Guest Faculty of the Centre for Linguistics, Maulana Abul Kalam Azad University of Technology, WB. E-mail: didhiti.24@gmail.com | LinkedIn: https://bit.ly/2H6gNAv).