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A Budget For $5 Trillion By 2024

The Budget’s immediate task is to bring about a recovery in our dismal current growth rate. We must not, however, lose sight of our medium-term aspirations.

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The Finance Minister will present her first full Budget in February.  Her primary task is to address our falling GDP growth rate, down to 4.5 per cent in the second quarter, with no recovery in sight.  This will require addressing the stress in the financial sector, a liquidity crisis is driven by the public-sector not paying its dues, a moribund real-estate and construction sector, and a serious trust deficit with industry-driven by tax terrorism.  I have written elsewhere about these issues (Business Standard, 19th December); here I would like to focus on our $5 trillion goals. The key phrase is not “$5 trillion”  we will get to that eventually anyhow but “by 2024”.  That requires a real growth rate of eight per cent plus for five years; given this year’s mediocre growth, each of the remaining four years must see real growth of nine per cent.  That will take investment in technology and research and a focus on exports to the world by Indian industry and in government policy. 

Technology: For various historical reasons, the industry is more skill-intensive and capital-intensive in India than usual for our level of development.  To have a thriving industrial sector we must invest much more in technology.  Indian industry invests 0.3 per cent of GDP in in-house R&D, against a world average of 1.5 per cent.  We must scale our investment five times.  A vibrant R&D sector requires that higher education institutions produce abundant world-class talent.  This needs a manifold increase in research within our higher education institutions: research done in our higher education sector accounts for 0.04 per cent of GDP, against a world average of 0.4 per cent.  We must scale our investments ten times.  Ever since Nehru, the Indian government has been generous in its funding of research (ranging between 0.4 per cent and 0.6 per cent of GDP).

The problem lies with where it is done: we have chosen to fund public research in autonomous public R&D institutes instead of in the higher education sector which is where the rest of the world does.  How do we change this?  Let’s begin in this Budget: the government spends annually around Rs 90,000 crore on public research which increases by around Rs 5 – 7,000 crore annually.

Let us freeze funding to autonomous R&D institutes at their present nominal level and give the entire increase of say Rs 6,000 crore to the higher education sector.  At a stroke, this would more than double total research funding in higher education and we can repeat this measure each year.  Higher education institutes must compete with each other to access this funding, which can be awarded using a peer-review process.  The results would transform the research environment in our higher education sector and with it, the quality of education our students receive and the talent we produce for the country.  

Exports: No country has grown rapidly without growing exports rapidly.  In India too, rapid export growth went with rapid GDP growth between 2003 and 2011.  Indian industry is second to none and has demonstrated its capability to compete with the best in the world. The time has come to decisively address the complete integration of the Indian industry with the world.  The Budget must cap the maximum tariff for raw materials and intermediate goods at five per cent and finished goods at ten per cent.  Exceptions should be rare.  This will force competitiveness across the Indian industry.  We further need to facilitate trade with the most dynamic economies of the world.  We must re-engage with the RCEP negotiations, and work for an early conclusion of the India - EU Free-trade Agreement (FTA).  The rupee must be internationally competitive, and we can use internationally permitted means at our disposal to target an exchange rate of Rs 80 per dollar.  

A technically-vibrant and internationally-oriented Indian industry is the surest path to a $5 trillion economy by 2024.  The policy must support this through investment in public research done in the higher education sector and by decisively integrating Indian industry with the world.  We must begin in this Budget.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Naushad Forbes

The author is Director, Forbes Marshall

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