India’s $3.7-trillion economy can absorb capital inflows comfortably, but needs reforms: CEA 

India’s $3.7 trillion economy is well-positioned to absorb (the expected flood of) capital inflows than ever before, but reforms are necessary, says V Anantha Nageswaran, the Chief Economic Advisor to the Government of India.

Nageswaran credits India’s growing absorptive capacity, at least in part, to the production-linked incentive (PLI) scheme for which 14 sectors, including the capital intensive ‘semiconductors’, are eligible. 

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However, the economist underscores that to be able to take in capital inflows and not end up with a problem of plenty, India should undertake “granular reforms”, particularly in land and labour, which calls for cooperation of both the Centre and State governments. 

Nageswaran was answering questions posed by businessline’s Editor Raghuvir Srinivasan, at a breakfast with businessline meet —a gathering of Chennai’s business community organised by businessline and the event was at ITC Grand Chola hotel. 

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“Today there are many areas where the capital can be productively absorbed,” Nageswaran said, responding to a question on how prepared India is to take incoming capital, which would happen especially if the US started lowering its interest rates.

India is estimated to have received $40 billion of foreign portfolio investments in 2023-24, a trend that is likely to sustain. 

The CEA cautioned that unabsorbed capital could create problems by leading to credit allocation to non-productive areas. 

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Asked if the Viksit Bharat target of $30 trillion (GDP) by 2047 is realistic, he said, “Is it realistic? Yes; Is it achievable? Yes; Is it easy? No”. He further said that the “global backdrop” now is very different than when China was growing between 1980 and 2010.

China had it favourable in terms of globalization, opening-up of markets and the narrative on climate change not being there. But the $30 trillion target is not unachievable and the target factors in the inevitability of growth rate coming down due to base effect. “It is possible for us to grow 9-10 per cent in the next 8-10 years. That will take us to $7 trillion by about 2031,” he said.

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But the large base could also work in India’s favour as “size gives heft, and more trade will happen”. However, it is important to bring about “factor market reforms” (land, labour, etc.) which are under the ambit of both the Centre and State governments, he added. 

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