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Nirupama Soundararajan

The author is a senior fellow and Head of Research at the Pahle India Foundation

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A Long Road To A $5-trillion India

From where we stand, when consumption is down, credit offtake slow, the financial sector under tremendous pressure ... moving to even a 7 per cent growth is no mean achievement If India has to regain her lost growth momentum, it will not be sufficient to affect changes in sectors in silos ...So far, India has not paid enough attention to the interlinkages between sectors.

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India has set herself a target of becoming a $5 trillion economy by 2025. In nominal terms, this is not such an ambitious target. Basic projections will show that even at five per cent growth, this target is attainable. The real question however, is this a meaningful target? One could argue that even in nominal terms, the GDP of very few economies have breached this golden number, and so it would be important for India to make an entry into this cohort. However we must pause to let it sink in that even if we do reach this target, it does not transfer into any real gain for the economy. 

On the other hand, if we want to reach a $5 trillion economy in terms of real GDP, one that truly reflects growth, then we have a long road in front of us. Only the USA and China have crossed this mark so far, and for India to get there by even 2030, we will need to grow at nine per cent.* 

From where we stand today, when consumption is down, credit offtake slow, the financial sector under tremendous pressure, and employment generation still a big challenge, moving to even a seven per cent growth is no mean achievement. However, to get there, we will have to look to new sectors to lead us there. 

Taking stock, India’s agriculture has not shown any improvement in decades. Even if we managed to double farmers incomes, while it may have a favourable impact on per capita GDP, it is not going to contribute significantly to growth. Manufacturing, on the other hand, merits attention, and our focus must continue, but we must pay greater attention to new sectors in manufacturing that can drive growth while ensuring that the rest are, at the least, not in severe distress. Again, we are not likely to see any significant growth in these sectors either. 

The services sector has always been India’s champion and it is more than likely that it would continue to carry us through this tumultuous period too. What is clear is that we need to approach growth differently.

India has been working meticulously on improving her rankings in the World Bank’s Ease of Doing Business (EoDB) index. Taking their cues from the World Bank, the Department for Promotion of Industry and Internal Trade (DPIIT), the erstwhile DIPP, came out with a more detailed Business Reform Action Plan (BRAP) that ranked states every year for implementation of reforms, across twelve reform areas. 

The outcome of such exercises should be an increase in economic growth. A recent report released by Pahle India Foundation, titled An Integrated Approach to Ease of Doing Business: A Case Study of Sugar, Alco-Bev, and Tourism, states that this is not the case.

Comparing state GDPs and the change in ranking, the report states that change in ranking has had no discernible impact on GSDP. The report cites two reasons for why this may be the case. First, between the implementation of any reform, and for its impact to be felt, there is always a lag. This is natural. 

The second reason the report cites is that most implemented reforms may not have had any real impact on sectors that actually drive growth for a state. For example, if a state’s economy is driven by the tourism sector, easing doing business in say textiles, may not really help the state, unless of course, the state has identified textiles as a potential growth sector for themselves. However, under the current BRAP framework, states do not have the option of picking and choosing the sectors they would like to concentrate on. 

The report makes the recommendation that the next version of the BRAP framework must adopt a sectoral approach rather than a state-wise approach. This way, states will prioritise their sectors for reforms which in turn will lead to more pronounced and quantifiable gains. 

The report goes on to advocate an integrated value chain approach to EoDB. To unlock the potential of one sector, it is never enough to just concentrate on that sector alone. One has to necessarily consider ease of doing business in their respective input sectors and output sectors. 

Taking the case of sugar, the report looks at how the current problems in the power distribution sector, the poor balance sheets of the discoms, have negatively impacted the profitability of the cogeneration sugar plants. That discoms have not been able to honour their long term purchase agreements of power has put more pressure on the balance sheets of the sugar millers. 

Similarly, the stringent regulations around the movement of molasses, a by-product of sugar productions, continues to put pressure on the balance sheet of distillers, and in turn the alcoholic beverages manufacturers. Similarly, restrictions on sale of alcohol in states through prohibition, or by not granting licences to eateries, affects tourism. 

Tourist footfall in Kerala saw a sharp decline with the proposed prohibition, especially the meetings, interviews, conference, and exhibitions (MICE) tourism, which saw a sharp decline in growth rate from nine per cent in 2013 to a negative 0.6 per cent in 2015. Even Gujarat, which has always been a prohibition state, had to alter their thinking and allow for special permits for consumption of alcohol, for domestic visitors and foreign tourists to ensure that their tourist footfalls and foreign exchange earnings are not affected.

If India has to regain her lost growth momentum, it will not be sufficient to affect changes in sectors in silos. A simple cost benefit analysis will help in identifying areas that will have maximum impact on the economy. 

So far, India has not paid enough attention to the interlinkages between sectors and that has led to negative contagion across the economy. It is however, not late for us to recognise the advantages for these interlinkages and device targeted policy measures that capitalise on them for exponential benefits for the economy.