India's economic roadmap a bumpy ride

THE Modi government has set its sights on doubling the size of the Indian economy to US$5 trillion by 2025. The objective is desirable, but the path to achieving it is not clear because, even for the short term, the leading indicators have been pointing downwards for quite a while.

In its annual Economic Survey 2018-2019 released last Thursday, the government spelt out its economic roadmap. In order to become a US$5 trillion economy, it must grow at a minimum of 8 per cent every year until 2025.

There is a crimp in these plans because India's gross domestic product grew at a five-year low of 6.8 per cent in financial year 2018-19, and the projected growth of 7 per cent for 2019-20 is only slightly better.

The road to 2025 runs through difficult terrain and bad weather. The survey - the flagship document of the Ministry of Finance that reviews the nation's economic performance over the past year - has underscored the fact that private investment is the principal driver of growth that is needed to elevate the country to a US$5,000 per capita income economy and become a member of the club of the upper-middle income economies.

It is easy to talk about stimulating private sector investments, but past efforts have not led anywhere as the Modi government's "Make in India" programme, with a goal of turning India into a global manufacturing hub, has not really yielded results. An overhang of uncertainty in policy-making deters investments, as does the legal system that is bogged down with more court cases than it can handle.

Since its first term, the government has not succeeded in facing down the challenge of reviving a sputtering economy that had grown at an average rate of 7.5 per cent since 2014, but faltered in the fourth quarter of 2018-19 (January-March) when growth tumbled to just 5.8 per cent.

The Economic Survey dispenses the advice that the government's push to revive the economy would depend on its capability to ensure a sustained "virtuous cycle" of savings, investment and exports. But it does not clarify how or when these goals will be achieved.

The government expects economic growth to accelerate based on a series of assumptions that have proved to be mere hypotheses because they have not worked in the recent past: that private investment will rise as banks begin lending more, leading to a rise in consumer demand and wages, which in turn, should relieve distress among farmers, and that eventually the household savings rate would begin climbing from its current low.

India's savings rate (its gross domestic savings as a percentage of GDP) was 29.3 per cent in 2018, ranked below Indonesia's 34.1 per cent in the same year, and China's 46.7 per cent in 2017, going by World Bank data.

There is a lack of clarity on how the government intends to boost savings, and unless the savings rise, there will be no rise in investments.

The government recommends that exports form an integral part of the growth model because higher savings would dampen domestic consumption as the driver of demand. So demand must come from overseas.

First, it is difficult to see exports surging because manufacturing and industrial activity are in the doldrums. The performance of the country's manufacturing sector slowed to an eight-month low in April as new business growth stalled. The Nikkei India Manufacturing Purchasing Managers' Index fell from 52.6 in March to 51.8 in April, reflecting an extremely weak improvement in business conditions since August last year.

A score above 50 denotes an expansion; anything below that means a contraction.

The growth of the core sectors underlying industry - coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity - slowed down to 2.6 per cent in April, due to negative growth in the output of crude oil, natural gas and fertiliser. In April last year, the expansion rate of these eight infrastructure sectors was 4.7 per cent.

Secondly, domestic consumption remains a cause for worry. The survey admits that "downside risks to consumption remain", and that "the extent of recovery in the farm sector and farm prices will decide the push to rural consumption, which is also dependent on the (monsoon) situation". There are new worries because some regions are expected to receive less-than-normal rainfall, which could hurt crop production.

The survey dissects the unemployment crisis, stating: "Job creation is driven by this virtuous cycle. While the claim is often made that investment displaces jobs, this remains true only when viewed within the silo of a specific activity. When examined across the entire value chain, capital investment fosters job creation as production of capital goods, research and development and supply chains generate jobs."

In its second term, the Modi government must get to work on creating jobs as unemployment has hit a 45-year high. The economic philosophy underlying the thrust to attain high economic growth must encompass the uplifting of the poor, who have been bypassed by past growth which has benefited the rich. Growth that is lopsided will further increase the gap between the rich and the poor.

A country that is home to millions of unemployed and poor persons must ensure their basic livelihood. Earlier this month, the government allocated Rs 60,000 crore (S$1.2 billion) for the poverty alleviation programme under the Mahatma Gandhi National Rural Employment Guarantee Act, which had generated the highest number of jobs in the last financial year, at an expenditure of Rs 70,000 crore. The allocation was less than what is needed, with a shortfall of Rs 10,000 crore.

This means that the funds available to the rural job guarantee programme in the current financial year is effectively Rs 50,000 crore, which is insufficient. The scheme that started 14 years ago guarantees up to 100 days' paid, unskilled work to every rural household in a year.

The survey declares that the country is ready to transition from Swachh Bharat (Clean India) - which had been the government's slogan in its first term - to Sundar Bharat (Beautiful India). It would have been more appropriate to employ the phrase Dhani Bharat - or prosperous India - as a goal instead of mere beautification.