Getting GDP to grow by 10 per cent in real terms, though not impossible, is quite challenging. As a nation we need to aim for a high target and then set the house in order to enable various elements to deliver this kind of growth. This has been the goal of the government and a lot has been done to provide the right environment through a series of reforms.
Given that in the last three years growth has come down from 8 per cent to 6.7 per cent, it looks unlikely there will be big-bang growth in the next couple of years; it is more likely to be gradual.
In the absence of any major disruptive policy in the coming years, the path looks to be more like 7.5-8-8.5-9 per cent. The 10 per cent number will still be some time away.
Interestingly, if one looks back to see whether this number has been reached, it can be observed that during 2005-08 India had recorded an average growth of around 9.5 per cent, which was just before the financial crisis.
Subsequently, the spliced series reveals that during 2009-11 growth came in at just below 9 per cent. Therefore, getting to 9 per cent does not look too ambitious, though 10 per cent would be psychologically satisfying. The situation today however is different in statistical terms as the size of the economy is quite large at around ₹130-lakh crore and a higher base makes it more challenging to record high growth numbers. But the reason for being more than sanguine is that there is plenty of spare capacity in the economy.
Spare capacity can be defined as large investment opportunities, especially in infra space where the lacunae present scope for higher doses of capital formation. Even today, the US does pump prime the economy by spending on infra, which has come down in quality and requires renewal.
If a country has perfect roads, power, water supply, telecom and ports, then there would be less scope for fresh investment. But with large gaps in most of these sectors, India has opportunity for leveraging the same to grow just like China did in the 1980s and 1990s to reach the position it is in today.
The second is consumption. Low income is still prevalent in the country and has come in the way of spending. In the last decade or so, growth has benefited households at higher income levels where consumption tends to be satiated and hence does not provide the impetus for consuming more goods, except at the margin where the households go in for higher branded products.
Therefore, if this gap can be plugged by creating more jobs and hence incomes, there is vast potential for bringing about accelerated growth in consumption which is a prerequisite to higher GDP growth.
While this sounds good, what needs to be done? Broadly speaking, there are three segments that have to grow at high rates on a continuous basis.
The first is agriculture, which has to be resilient and grow continuously to keep the economy moving in an upward trajectory. Past experience shows that high GDP growth has been associated with years when agriculture grew by 4-5 per cent.
For this to materialise farm output has to be resilient and grow in an unhindered way. Every time agriculture slips, it has a ricocheting impact on other sectors as rural spending comes to a standstill. Therefore, while agriculture has a 15 per cent share in GDP, it has to be kept moving independent of monsoons on a sustained basis.
Also, a single crop failure leads to high inflation which has an impact on overall spending, interest rates and investment ultimately. Such supply-shock led inflation has always come in the way of higher growth.
Building on industry
The second is industry, where the two building blocks would be manufacturing and construction. This segment has to register 10 per cent growth continuously for the overall growth number to clock 10 per cent. The present growth rate has been volatile with IIP growth in the sub-5 per cent category and GDP growth in the 6-8 per cent region.
This has to change for which support has to come from investment and consumption.
Also, a greater role has to be played by the private sector. But clearly we need to resolve the NPA (non-performing asset) issue and grow the bond market as funding is a major necessity for growth.
The NPA problem, along with the requisite capital requirement, will take another two years to resolve and hence achieving the 10 per cent mark is still some distance away.
Construction, which is part of industry, would however be the easier goal to achieve as the focus of all governments has been on developing infrastructure, especially roads and urban development.
Add to this the emphasis on affordable housing, and one can see acceleration in growth which will bode well to linked industries such as steel, cement, machinery and metals.
The service sector has three parts which have to necessarily grow by over 10 per cent each, which again is not impossible given that such growth rates have been witnessed in the past.
Individually, various components such as trade, transport, finance, real estate, and public administration have registered over 10 per cent growth in different years. It is, therefore, important that all of them should be clocking this kind of growth in a year to get a headline number of above 10 per cent.
Two challenges remain on this front. The first is that the banking sector has to be in order before growth can pick up. In fact, along with real estate this segment has been an under-performer since RERA and the NPA recognition norms kicked in.
Second, the government sector has to play a progressive role on a continued basis, but this is becoming difficult given the fiscal path that has been chosen. In the past when this sector grew rapidly, growth was enabled by higher fiscal spending, which is not possible today.
The expectation of a double-digit growth rate in GDP is definitely well-founded. But it will take another three to four years to get there. The larger base will make the climb steeper.
Also, while touching 10 per cent is okay the goal must be to sustain this level for at least five years to generate jobs and move the poor out of the trap. Else, the 10 per cent number will not be meaningful.
The writer is Chief Economist, CARE Ratings. Views are personal.