The NITI Aayog has given a target of 8% average growth rate in GDP for the period of 2018-2023. The period gap is a reminder of  decommissioned Yojana Aayog’s “#panch varshiya yojana”. For this purpose it has set the following benchmarks within the newly launched strategy for new India@75;

• Raise the economy’s size in real terms from USD 2.7 trillion in 2017-18 to nearly USD 4 trillion by 2022-23.
• Besides having rapid growth, which reaches 9-10 per cent by 2022-23, it is also necessary to ensure that growth is inclusive, sustained, clean and formalized.
• The investment rate should be raised from 29 per cent to 36 per cent of GDP which has been achieved in the past, by 2022-23.
• Exports of goods and services combined should be increased from USD 478 billion in 2017-18 to USD 800 billion by 2022-23.

 Challenges

• The share of manufacturing in India’s GDP is low relative to the average in low and middle-income countries. It has not increased in any significant measure in the quarter century after economic liberalization began in 1991.
• Within manufacturing, growth has often been highest in sectors that are relatively capital intensive, such as automobiles and pharmaceuticals. This stems from India’s inability to capitalize fully on its inherent labour and skill cost advantages to develop large-scale labour intensive manufacturing.
• Complex land and labour laws have also played a notable part in this outcome. There is a need to increase the pace of generating good quality jobs to cater to the growing workforce, their rising aspirations and to absorb out-migration of labour from agriculture.
• India’s tax-GDP ratio of around 17 per cent is half the average of OECD countries (35 per cent) and is low even when compared to other emerging economies like Brazil (34 per cent), South Africa (27 per cent) and China (22 per cent). To enhance public investment, India should aim to increase its tax-GDP ratio to at least 22 per cent of GDP by 2022- 23.

Opportunities

1. Expenditure management

In 2016-17, the share of government (central and state combined) capital expenditure in total budget expenditure was 16.2 per cent, and government’s contribution to fixed capital formation was close to 4 per cent of GDP. This needs to be increased to at least 7 per cent of GDP by 2022-23 through greater orientation of expenditure towards productive assets, and minimizing the effective revenue deficit.

• States could also undertake greater mobilization of own taxes such as property tax, and taking specific steps to improve administration of GST to increase tax collections.
• Two areas in which higher public investment will easily be absorbed are housing and infrastructure. Investment in housing, especially in urban areas, will create very large multiplier effects in the economy.
• The government has taken significant measures to attract foreign direct investment by easing caps on the extent of permissible stake holding and the norms of approval. By 2022-23, the government may consider further liberalizing FDI norms across sectors.
• Domestic savings can be complemented by attracting foreign investment in bonds and government securities. Regulatory limits can be relaxed for rupee denominated debt.
• The government should continue to exit central public sector enterprises (CPSEs) that are not strategic in nature. Inefficient CPSEs surviving on government support distort entire sectors as they operate without any real budget constraints. The government’s exit will attract private investment and contribute to the exchequer, enabling higher public investment. For larger CPSEs, the goal should be to create widely held companies by offloading stake to the public to create entities where no single promoter has control. This will both improve management efficiency and allow government to monetize its holdings with substantial contribution to public finances.
• Private investment needs be encouraged in infrastructure through a renewed public-private partnership (PPP) mechanism on the lines suggested by the Kelkar Committee

2. Macroeconomic stability through prudent fiscal and monetary policies

• Sustained high growth requires macroeconomic stability, which is being achieved through a combination of prudent fiscal and monetary policies.
• The government has targeted a gradual lowering of the government debt-to-GDP ratio. It will help reduce the relatively high interest cost burden on the government budget, bring the size of India’s government debt closer to that of other emerging market economies, and improve the availability of credit for the private sector in the financial markets.
• But even as lowering of debt and limiting fiscal deficit are important, the government should be flexible in its approach towards setting annual targets based on prevailing economic conditions. This approach is enshrined in the existing Fiscal Responsibility and Budget Management (FRBM) architecture that has built in flexibility in the form of adequately defined “escape and buoyancy” clauses. Targets should take cognizance of the stage of the business cycle and fiscal deficit and borrowing targets should not be set in isolation.
• The effective revenue deficit should be brought down as rapidly as possible. Capital expenditure incurred for the health and education sectors, which in effect builds human capital, should be excluded from estimates of revenue expenditure. This will increase government savings.
• One of the major institutional reforms of recent years has been to statutely mandate the RBI to maintain “... price stability while keeping in mind the objective of growth”. Inflation needs to be contained within the stated target range of 2 per cent to 6 per cent. Inflation targeting provides a reasonably flexible policy framework which is in line with global best practices and can respond appropriately to supply shocks.
• Policy should be directed to minimize volatility in the nominal exchange rate.

3. Efficient financial intermediation

• Efficient functioning of the financial markets is crucial to maintain high growth in the economy. There is a need to deepen financial markets with easier availability of capital, greater use of financial markets to channel savings and an improved risk-assessment framework for lending to avoid a situation of large-scale nonperforming assets in the banking sector.
• Governance reforms in public sector banks require, apart from the establishment of independent and commercially driven bank boards, performance assessment of executives and increased flexibility in human resources policy.
• The Gujarat International Finance and Tech City (GIFT) should be leveraged to push the envelope on financial sector liberalization. It is an opportunity to onshore trading in rupees and other derivatives, which currently happens outside India for regulatory reasons. If GIFT succeeds, liberalization can be extended to the rest of the country.
• Enable alternative (to banks) sources of credit for India’s long-term investment needs. The bond market needs deepening through liberalization of regulations and continued fiscal consolidation.

4. Focus on exports and manufacturing

• India needs to remain globally competitive, particularly in the production and exports of manufactured, including processed agricultural, goods. The following reforms would help in improving the competitiveness:
  • A focused effort on making the logistics sector more efficient is needed.
  • Power tariff structures may be rationalized to ensure global competitiveness of Indian industries.
  • Import tariffs that seek to promote indigenous industry should come with measures to raise productivity which will provide the ability to compete globally.
• Improve connectivity by accelerating the completion of announced infrastructure projects. Enhancing physical connectivity will help reduce delivery times and improve global connectivity and the reach of our exporters. By 2022-23, we should complete projects that are already underway such as the Delhi-Mumbai Industrial Corridor (DMIC) and Dedicated Freight Corridors.
• Work with states to ease labour and land regulations. In particular, we should introduce flexibility in labour provisions across sectors. All state governments should speedily implement fixed term employment (FTE) that has now been extended to cover all sectors.
• The government has recently established a dedicated fund of INR 5,000 crore for enhancing 12 “Champion Services Sectors”. Among others, these include IT & ITeS, tourism, medical value travel and audio visual services. Given the significant role of services exports in maintaining India’s balance of payments, the government should continue to focus on these sectors.
• Strengthen the governance and technical capabilities of Export Promotion Councils (EPCs) by subjecting them to a well-defined, performance-based evaluation. Performance evaluations of EPCs could be based on increasing the share of Indian exports in product markets covered by these EPCs. Those EPCs unable to achieve mutually agreed upon targets for increasing market shares could be closed down or re-structured.
• Explore closer economic integration within South Asia and the emerging economies of South East Asia particularly Cambodia, Laos, Myanmar and Vietnam, using the existing Bangladesh, Bhutan, India, Nepal (BBIN) and 11 the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Co-operation (BIMSTEC) frameworks.
• Building the physical infrastructure and putting in place measures to facilitate seamless cross-border movement of goods in the North-East region would help accelerate integration and promote exports.

5. Employment generation

• The necessary condition for employment generation is economic growth. Achieving the growth targets by implementing the development strategy outlined in this document can generate sufficient jobs for new entrants into the labour force, as well as those migrating out of agriculture.
• A large part of jobs would hopefully be generated in labour-intensive manufacturing sectors, construction and services. In addition, the employability of labour needs to be enhanced by improving health, education and skilling outcomes and a massive expansion of the apprenticeship scheme. 

Overall, the outline of the plan is crisp, all that remains now is to operationalise the same within the vividness of Indian policy quagmire.