New paradigm for a $5 trillion growth

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New paradigm for a $5 trillion growth

Strategies for a12% growth over the next five years becomes complex, because it comes at a time when there are radical shifts in the global economic paradigm.

Source: https://www.financialexpress.com/opinion/explained-indias-5-trillion-economy-target-and-challenges-ahead/1617771/

Why in news?

  • Presiding over the 5th Governing Council meeting of NITI Aayog recently, Prime Minister Modi set a goal of $5 trillion for India’s GDP by 2024, saying it was a difficult target but achievable.
  • It will need India to grow annually at 12% over the next 5 years.

How do we assess the current size of the economy?

  • There are two measures of GDP — at constant prices (2011-12) and current prices. Currently, India’s GVA is $1.8 trillion, GDP at constant price $2 trillion, and GDP at current price $2.5 trillion.
  • What growth rates will take us to 5T and how soon?
    • World Bank says India’s GDP is expected to grow at 7.3 per cent in 2018-19.
    • The RBI’s figure is 7.4 per cent. So we can take 7.4 per cent as the base figure.
  • A simple calculation shows that the GDP at current prices will reach 5T in 2027 at this growth rate.
  • So if we sustain the base growth rate of 7.4 per cent, we will become a 5T economy within ten years.

How India can become a $5 trillion economy?

  • The PM clearly wants to galvanise the nation and is setting the narrative for the new government, which challenges the current signals of economic slowdown.
  • However, an ambitious agenda of change can push growth rates upwards.
    • So, India can become a 5T economy in 2024 with 10 per cent annual growth rate.
    • And 14.2 per cent growth will get us there in 2022.
    • But achieving such high growth will require exceptional structural changes in all sectors of the economy.
  • Achieving such an aspirational growth target calls for pulling all the economic growth levers—investment, consumption, exports, and across all the three sectors of agriculture, manufacturing and services.
    • There is a fair amount of consensus that we have to address our inefficient factor markets as the topmost priority for India to achieve its full potential, especially the constraints imposed by our stressed financial and power markets.
    • Without credit flow to support private investment and cheaper, abundant and good quality electricity to power growth, this GDP target will remain an aspiration.

Strategies for 12% growth

  • Formulating the strategies for 12% growth over the next five years becomes more complex because it comes at a time when we are seeing radical shifts taking place in the global economic and value creation paradigm.
  • Shift in global trade: Growth in global trade, particularly merchandise trade, with its multiplier effect has been a crucial part of growth strategies of all developing countries.
    • The trade intensity (ratio of global trade to global GDP) grew from less than 10% at the start of 20th century to over 50% by its end, reflecting the development of global supply chains.
    • However, since the last financial crisis in 2008, trade intensity has stagnated, in particular for merchandise trade from which developing countries have benefited for the last half century.
    • However service trade, especially digitally enabled trade (both service and merchandise) where developed countries are advantaged, is growing much faster, which represents a major structural shift in global trade.
    • While there is a large short-term opportunity in attracting some of the capacity of labour intensive industries that is shifting out of China (if we can make our factor markets and incentive policies more attractive), our growth strategies need to be built in preparation for this paradigm shift taking place in global trading pattern.
  • Emergence of a new ‘factor market’—data: It is no longer an ‘output’ of value added activity to be used to measure its effectiveness (e.g. through MIS), but has become an input into the very design of the activity through growth of IoT.
    • An expert used the analogy that in the 20th century, data was like the ‘exhaust’ of the car, but in the 21st, it is like the ‘fuel’, a critical input to make the car drive better.
    • Creating an effective market for data (through digital infrastructure, regulatory regimes, interoperability rules, robust privacy and security laws) is becoming as important for economic growth as creating more efficient traditional factor markets, and those countries that do it better and faster will reap the benefits and build global leadership in many industries.
  • Emergence of new value pools across industries: For instance, the traditional value pools in the automotive industry (new vehicle sales, components, finance, insurance, parts/service), which is nearly 100% today, can shrink to less than 60% in 15 years as the new pools driven by electrification, digitally-driven data services, ranging from preventive maintenance to restaurant location, and mobility services grow.
    • Whether these new value pools will be captured by Indian or global companies will have an impact on India’s longer term growth prospects, and this kind of radical shift is happening across industries, often faster than what regulatory bodies and/or government can react to. This has to change.
  • Fourth industrial revolution: World over, formal manufacturing jobs are declining as the fourth industrial revolution powered by digital technologies accelerates.
    • However, digital technologies are also powering the emergence of new business models, start-ups and micro-enterprises, and growth of services by driving down costs.
    • One of the major impacts of this shift is the emergence of the rapidly growing gig- economy jobs like the Uber car drivers and last mile delivery boys/girls of e-commerce companies. This poses several policy challenges.
      • First, the nature and types of jobs, and the skills needed are changing. These jobs are not captured in our current laws which can facilitate their regulation and growth.
      • In their absence, these are not captured in formal jobs survey, and are often poorly paying with no social security.
      • In fact, given the growth of such non-formal jobs, many experts maintain that India does not have a jobs problem but a low income problem.
      • The new economic paradigm is needed to facilitate the formalisation and growth of income generation from start-ups, micro-enterprises and of the self-employed.
    • Increasing role of IP and talent as a source of value creation in the 21st century: This is clearly visible by the complete change-over of top-20 market-cap companies in the world in the last two decades from the resources and manufacturing dominated global firms to digital technology based companies driven more by IP, data, and talent. We have to give at least equal focus to growing industries which develop and leverage IP and talent, as to those that physically convert raw materials.
    • ‘Economic problem solving’: Economic development paradigms lag the development of on-ground cutting-edge solutions to economic and social problems.
      • Today, technology, connectivity, financial flows allow more agility, flexibility and ‘micro-solutioning’ at local levels, which become critical in developing a world where government institutions are often weak.
      • Our economic development models are still very much geared to large scale, top-down approach.
      • We have to find innovative ways to identify, include and scale these development efforts in our national planning in the 21st century.

Way ahead

  • Our PM has set the aspiration. It is a bold one, calling for thinking out of the box, breaking the old paradigms of economic growth and development.
  • Our success in doing so will be the difference between it remaining an aspiration and becoming a reality.

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