I-Day Special | Breaking barriers to $5 trillion economy

E ver since the Prime Minister set an aspirational target for India to emerge into a $5 trillion economy by 2025, the vision has been alternately feted and criticised. The pandemic has made its achievement doubly difficult, as the economy now needs to sprint to remain in the same place.

India’s nominal GDP, estimated at about ₹203 lakh crore in FY20 pre-pandemic, shrank to ₹197 lakh crore in FY21. A $5 trillion economy would entail a nominal GDP of ₹375 lakh crore. While attaining this milestone within four years is a tall ask, it is achievable with a slightly longer timeline.

On the 74th anniversary of India’s independence, we take stock of how key segments of the economy are faring and the barriers that need to be worn down to attain this aspiration.

Agriculture: Staying strong

One segment of the economy that has not just survived but thrived through Covid is agriculture. India’s real GDP from agriculture expanded above-trend at 4.3 per cent in FY20 and 3.6 per cent in FY21, with nominal growth much higher. In FY21, India managed record production of food grains (305 million tonnes), horticultural products (329 million tonnes) as well as milk (208 million tonnes). The strong output growth was helped by two consecutive years of monsoons, a supportive procurement and MSP regime and reverse migration of the working population to rural areas during the lockdown.

With fluctuating yields, farmers struggle to make a profit and face income volatility. Yet policymaking on agriculture continues to focus mainly on pro-consumer, anti-inflation measures, rather than efforts to assure remunerative prices.

For farm incomes to improve, markets need to be disintermediated, trade barriers dismantled and policymaking needs to stay off draconian stock-holding curbs or export bans when prices for crops respond to short supply. While some of these reforms (such as APMC dismantling) have landed in political hot water, others can still be attempted.

Industry: Big get bigger

Unlike agriculture, industrial growth took it on the chin during the pandemic. Manufacturing value-added, after contracting by 2.4 per cent in FY20 shrank by another 7.2 per cent in FY21. Mining saw a 2.5 per cent dip in FY20 followed by an 8.5 per cent contraction in FY21, with the dip more severe in nominal terms.

But if pent-up demand helped industry stage a V-shaped recovery after the first wave, it is facing a cloudier demand outlook after the second wave.

After burning their fingers in the previous capex boom, India’s big industrial houses have retreated from capital-intensive sectors and are busy deleveraging.

From a policy perspective therefore, the most viable option to revive industry appears to lie in jump-starting the virtuous cycle of higher investments, leading to employment, incomes and demand. The government appears to be on the right track in rolling out production-linked incentives to woo new investors in key import dependent sectors and announcing the National Infrastructure Pipeline.

While FDI flows into India have continued, domestic savings will need to play a critical role in bankrolling this capex cycle. The pandemic has seen financialisation of savings with households adding to bank deposits and betting on equities on the back of a soaring stock market. To sustain such flows post-pandemic, savers needed to be offered positive, real returns on their staple deposit and small savings instruments.

Services: Bright spots

The services sector is highly people-intensive and thus has suffered heavy reverses from the two waves of Covid. Trade, hotels, transport and communications which expanded by 6.4 per cent in FY20 shrank by 18.2 per cent in FY21. Construction contracted 8.6 per cent in FY21 after expanding one per cent in FY20. Financial services, real estate and professional services shrank 1.5 per cent in FY21 after growing 7.3 per cent the previous year.

But the services sector has had its positive features too. India’s software services sector too has been an unexpected beneficiary of the pandemic, with surging global demand for digital services, reviving client additions, topline growth and most important, hiring.

The other bright spot amid the pandemic has been rising digital and e-commerce adoption. Robust PE/VC flows has kept the start-up ecosystem in fine fettle with the recent blockbuster listing of Zomato at an over ₹1 lakh crore m-cap, opening the doors to an entirely new breed of IPOs from e-commerce, mobile wallet and other tech driven ventures.

Going forward, the biggest favour that policymakers can do in India’s services sector is to expedite the pace of vaccination so that high-contact services can rebound quickly. Regulators must refrain from letting political considerations throw a spanner in the wheel of e-commerce.

Overall, with silver linings visible across agriculture, industry and services, it may not be impossible for the Indian economy to leave behind the dark clouds of the pandemic and to get back on course to its $5 trillion aspiration.

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