View: PM Modi’s $5 trillion target requires breaking status quo
Modi’s target means the $2.8 trillion economy will have to nearly double in 5 years.
Prime Minister Narendra Modi’s target of a $5 trillion economy by 2024 — he called it challenging but achievable — means the $2.8 trillion economy will have to nearly double in five years. That means from a current GDP growth trend of 6-7%, the economy will have to grow at an annual average of 10-11% over 2019-24 (all growth figures are in real, not nominal, terms).
Commentators have either dismissed this as unrealistic, or listed a large number of difficult policies necessary for sustained double-digit GDP growth. The latter, given the Indian State’s many shortcomings, essentially arrives at the same conclusion as the former, although more politely.
Neither set of analyses is wrong. But a more useful way of looking at the PM’s ‘challenging target’ would be to frame it like this:
1. Acknowledge all current negatives, from a slowing economy in the short term to historically established policy incapacity, from fiscal constraints to constraints imposed by a federal polity that hosts angry politics, from low human capital indices to regulatory failings in high finance.
2. Ask, given all this, what can the government do quickly to change the economic status quo.
3. The status quo is defined by a set of somewhat-same broad policies, in place since the mid-1990s, that will continue to produce GDP growth of around 7%.
4. Since all, or even most, current negatives can’t be turned around any time soon, GoI will have to find a workaround in the short term.
5. If this can be found, it could create the enabling context for double-digit GDP growth, a must for Modi’s ‘challenging target’.
The good news is that there’s a workaround:
1. Identify key areas, each of which will have a well-understood big, defining problem.
2. Start, and quickly implement, a few signature projects in each area that squarely address the big, defining problem.
3. The reasonable assumption will be that these projects will act as motivators and drivers for broader change in each area.
Plant a Plant
Instead of attempting to solve many complex problems, create a few standout solutions. If outcomes are remarkable, incentives for replication will be high for State actors. Let’s explain this with examples.
‘Make in India’ didn’t quite work when the Modi 1.0 administration sought to incentivise a countrywide manufacturing resurrection, that too having given up earlier on land acquisition reform. The Modi 2.0 government should reorient.
The big, defining problem is lack of land for industry. This will act as a constraint even after the current excess industrial capacity is exhausted. So, the work-around should concentrate on this.
Identify the easiest way to make a few very large parcels of land available for manufacturing hubs, for example, by using land assets of big public sector companies. Then, in those few designated hubs, put all administrative energy to incentivise manufacturing.
Target companies, Indian or foreign, with product lines that have assured large domestic demand base or cast-iron export demand.
These manufacturing centres will only be a few in a continent-sized country. But if they take off, they should act as exemplars for State and private sector actors. Then, there may finally be a buy-in for larger reforms across the polity.
Take agriculture, the albatross around the economy’s neck. Even if terms of trade facing farmers improve and all monsoons till 2024 are good, the big, defining problem of inefficient farming on small plots will always make Indian agriculture a sad, third world story. A democracy where elections are won or lost in villages can’t — and mustn’t — mandate large farming by China-like fiats.
What is doable, though, is to set up very few but very, very large farm enterprises and demonstrate through them what efficient farming can do for the economy. Land for those few giant farming enterprises could be taken on short-term lease at super attractive rates and farmer/landowners can be offered employment. To do this nationally in a federal structure, especially given emotive and political issues around smallholding ownership, is impossible. To do this in a very limited scale is entirely possible.
Once the gigantically positive outcome from large, efficient farming is visible, it’s entirely plausible that even in a country where the poor kisan is romanticised to his own detriment, the political-administrative class may find reasons to finally, truly reform agriculture.
Take banking. Or, rather, take the question of who will finance sustained high growth. Banking, as it currently is, can’t do the job. That will be true even after the non-banking financial companies (NBFC) crisis works itself out, and even if the bankruptcy resolution process and/or a one-time balance sheet clean-up take(s) care of the bad loans problem. The big, defining problem here is that India has too few banks — especially too few small, nimble banks — that will lend to small enterprises that comprise the bulk of entrepreneurship.
Bank on Bank
The work-around? Work with RBI and quickly issue a few banking licences for small private banks specifically mandated to lend to small industry.
The unmet demand for credit finance from small entrepreneurs is huge.
These new private banks will have no shortage of borrowers. And once the positive impact of such lending becomes clear, the appalling conservatism that has held back the expansion of the banking system may finally crack.
These are just three of what can be done around a dozen work-arounds aiming to break the policy status quo.
GDP growth won’t hit double digits even after all work-arounds produce their desired outcomes. But a crystal clear message will be delivered.
If GoI can do that, it will put India on the road Modi — rightly — wants it to be.