Vision 2025: India, An Economic Superpower

V.B. Padode
Founder & Editor-In-Chief
Dalal Street Investment Journal

Thomas Friedman, in his book ‘The World Is Flat’, likened India to a champagne bottle that has been shaken for over fifty years. Once the lid comes off, forces of such vitality will be unleashed that anything that comes in the way will be brushed aside. The time for such reckoning has arrived for India, and beckons it to take its rightful position in the international comity of nations. Post 1991, the aspirations of the Indian people have soared, and it is now commonplace to talk of India as an economic super power in the years ahead. The IMF has also acknowledged India as an effective antidote or a balancing force to the global recession that we are witnessing today.

The 21st century is a knowledge intensive world, where wealth creation is intertwined with knowledge generation. Wealth creation is also a tempered objective, as it has to be sustainable in terms of its impact on the environment. The future belongs to those countries that not only create wealth, but do so in an equitable and eco-friendly manner. India’s social fabric and cultural ethos hold promise of sustaining wealth creation through its emphasis on holistic development. Ecological plunder must be differentiated from economic development.

Prospects

Much of India’s progress in the recent past has been achieved through technological advancement. India has emphasised higher learning, which has enabled it to be a global destination for knowledge, business and process outsourcing. This has contributed immensely to the boom in services exports, especially in the software sector. There is a plethora of world class human talent that is brewing in the multitude of engineering colleges and technical training institutes across the country.

Economic development ought to be accompanied by social harmony. Else, social turmoil and unrest will offset the gains made on the economic front. India has always highlighted the need for inclusive growth, so that the gains made in the economy trickle down to the lower strata of the population. Peter Drucker, the legendary management guru, has paid rich encomiums to the way India has managed rapid urbanisation without the accompanying social fissures that were experienced in countries like China.

According to data from the Center for Monitoring Indian Economy (CMIE), capital formation in India is pegged at 14.6 per cent for 2012 despite the global recession and high domestic inflation. The wages and salaries of corporate India are slated to record a 14.2 per cent growth that significantly increases the purchasing power of consumers in 2012. Further, the private final consumption expenditure (PFCE) is set to grow at a healthy 7.5 per cent. Added to this scenario is the fact that nearly 50 per cent of India’s population is under 25 years of age. This demographic profile is extremely important, as the younger the population, the higher would be the savings potential, and thereby higher capital formation. It is a unique combination of demographics and economics that will shape the future of India and propel it to the status of an economic giant. According to the CMIE report, projects worth Rs 8 lakh crore are set to be completed in 2012 as compared to projects worth Rs 3 lakh crore per year in the preceding three years. This is huge capacity, which will drive industrial production and employment upwards.

CMIE had projected that the agricultural, industrial and services sectors would grow at 3.3, 9.4 and 9.9 per cent respectively. High growth and high inflation are expected to co-exist for some more time. While this may appear paradoxical, there seems to be a complementary relationship between the two opposing trends. High demand is driving inflation northwards, whereas high supply is contributing to greater economic activity and growth. Though the RBI is routing its monetary policy mainly through the banking system in lieu of market interventions, high interest rates have not dampened investments, as most investments have already been incurred and are not dependent on the current interest rates.

Problems

India’s important trading partners are the USA and Europe, which are themselves in the throes of a severe recession. The debt crisis in Europe and the depression in the USA will hammer down the aggregate demand for Indian exports, especially in the IT sector. Given the global nature of our economies, any global problem must have a global solution and not a domestic one.

Another global problem that India will encounter in the future is disruptive capital inflows. The economic stimulus packages of USA (QE2) and other recession-plagued countries have resulted in ‘currency wars’ and ‘competitive devaluation’ of currencies to sustain exports. Capital inflows result in currency appreciation and the distortion of asset values, thereby creating an economic bubble waiting to burst. Nearly USD 50 billion of capital had flowed into India in 2010-11, which amounts to almost four per cent of our GDP. Though these capital inflows do augur well in supplementing investments in infrastructure, the short-term disruptive ramifications are debilitating.

India presently enjoys a sovereign rating of BBB- by Standard and Poor’s, who have cautioned that this rating may be in jeopardy if the country’s fiscal deficit is not brought under check. According to a Goldman Sachs report, India’s fiscal deficit is the highest among those of all growth markets. The World Bank expects it to be 5.6 per cent of the GDP for the fiscal year 2013. The main reasons for this deficit are declining tax revenues and an increasing unbudgeted subsidy bill. Goldman Sachs states that nearly 45 per cent of India’s deficit is on account of shrinking tax revenues and 22 per cent on account of the unbudgeted subsidy bill. The two main items receiving subsidies are fuel and fertilisers. The introduction of the Food Security Bill will further accentuate the deficit.

Challenges arise from the political and social fronts too. In the recent Assembly elections, regional satraps have emerged stronger than national parties. While this is good for grassroots democracy, the passage of certain important pan-Indian economic reform measures like the introduction of the Goods and Services Tax (GST) will suffer a setback, as certain modes of taxation are a state subject in our Constitution. The countrywide tirade against corruption is bound to slow down decision making, and thereby economic growth.

Prognosis

The acid test that India faces in its journey to economic stardom is with regard to policy formulation and implementation. We had witnessed the zeal, vigour and self belief in our policy makers in the early 1990s, when economic reforms were first ushered in. There was a strong political will and a commitment to economic reforms during 1999-2004, as compared to the weak-kneed and knee-jerk policy formulations of the present set of policy makers. The 2012-13 fiscal budget has been a rather ‘non-event’. It neither addressed the core needs of bringing reforms back on track, nor reduced the pressure that the Indian economy has been reeling under for quite some time now. The budget has not only failed to deliver on the reforms front, but the marginal increase in the tax bracket has also led to its failure on the populist front. Fiscal consolidation is the desperate need of the hour, and the Finance Minister must arrest fissiparous socialist expenses in the form of subsidies, waivers and doles. How this will happen is the biggest question of the hour.

What is needed to overcome all these problems is a positive, bold and honest political combination. It requires a strong political will to control the all-round loot of our valuable mineral and other resources and public finances that is presently underway. This will have to be controlled through effective, timely and result-oriented legislations and honest administration of the law.

It has become an imperative today to nip all-round corruption in the bud, and to bring back the black money stashed in the tax havens as well as within the country. This will help to turn our economy around and to put it back on the fast track of growth once again.

History will not excuse India if it is unable to seize this opportunity to pitchfork itself into the league of economic powerhouses like Germany, China, Japan, USA and others. This is the second tryst with destiny that India will make in its post-independence history. Never before in the history of this country has the constellation of factors and forces been as favourable as now for it to make this tryst.