The real Economic Situation of India in 2019 September.

The fact is India’s official Growth rate is 5% for the First quarter of the financial year 2019 - 20. Why is that? What is next? What needs to be done going forward? What is the time line? Will the BJP-Narendra Modi achieve this?

Why is that? The reason for such a meagre growth rate of only 5% in a country like India with such a low base is 3 fold.

1. The essential level of private investment in the economy has not happened for the past 3 years. Some of this was offset by Government spending, but that is never permanent and Government spending should always be complimentary. Most of the investment should be private driven and that has not happened.

Private investments have not happened over the last 3 years because the demand and credit has not been sufficient.

Demand has not picked up because of namely lack of improving pay prospects, high income tax and cyclical global slow down. You cannot have an economy where the working class is severely underemployed or inefficiently employed and expect higher productivity. In India, because of Lack of large scale organised blue collar jobs (Manufacturing), Fragmented MSME, Zero innovation at the white collar level and terrible global economic climate has resulted in poor demand.

Credit environment in India is going through a massive churn and has been so for the past 3 years. This has squeezed the credit available for private investments. This is mostly because of NPA’s accumulated from the 2008 to 2014 period and that is a legacy issue which is coming to its climax.

2. The second part of the problem is the structural reforms. There were some big structural reforms in the indirect taxation (GST), Insolvency and Bankruptcy, Direct Benefit Transfer, Bank Mergers (PSB), tackling Black Money through demonetization and other laws.

Apart from these big reforms all other economic reforms were incremental and too small to have any big immediate impact. Loss making PSU’s, outdated direct tax and labour codes, incorrect tax slabs, disincentive for the rich to invest and relatively high petroleum rates.

3. Worst possible urban infrastructure offered for foreign investment. Not a single city in India matches the standards required to attract big foreign investments directly into industries. Therefore most foreign investments come through the stock market and play only a tertiary role in the economy.

What is next? There are mainly three paths India can follow depending upon the actions of the Indian government.

1. The cyclical downturn in the global economy will turn around and the demand will partially improve regardless. This will boost the economic growth by 0.7 to 0.9 %. Thus, the GDP growth rate could be around 6% next year at the same time. Due to some incremental changes, India would get a temporary boost of momentum in later half of 2022 and reach 6.8% by late 2023. But that would be way below the potential and 5 trillion dollar by 2024 dream can then be kissed goodbye. This is the most likely scenario as of now.

2. Government takes proactive steps and front loads all economic reforms in the winter session of 2019. This should additionally further boost the economy by 0.4 to 0.5% in near term and 0.8 to 1.3% in the medium term.

So, 6 + 0.4 = 6.4 % in 2020 and 6.4 + 0.8 = 7.2 % in 2021; this should push the economy closer to 5 trillion dollar level by 2024. This is possible but not very probable. Considering the lack of world class urban cities in India it would be hard for the country to absorb such prospective benefits, unless you have new green field cities like Gift or Dolera.

3. Spectacular reforms happen on the economic front by early 2020 and global cyclical upturn begins and you might even see India touch 8.6% growth rate by 2024. With Rupee appreciating to maybe even below 55 rupees to USD. This is most unlikely, as the analytical influence behind the Modi Government’s economics, do not seem to be visionaries and are of mostly status quo brand; Unless Narendra Modi is lucky enough to realize such a phenomenon.

What needs to be done going forward? There are 6 things that need to be done on a war footing.

1. India needs major reforms in Labour laws and Direct taxes.

Attractive incentives for private investments have to be brought forth through carrot and stick policy.

State level Land reforms should be initiated and not at central level.

2. Privatise all loss making non strategic PSU’s through auction. It should not be LIC or other Public sector units buying them, but private or foreign investors that should buy them. All dwarf MSME’s should be steered and incentivised into massive consolidation and mergers.
3. Bring down the petroleum rates substantially and boost consumption rate of the masses. Bring in a massive automobile scrapping policy and incentivize new purchases of BS 6 and electric vehicles.
4. Establish a dozen world class Green field SEZ urban centres across the country like Dolera or Gift of Gujarat. Open the gates wide open for foreign players to set up manufacturing, assembly and Maintenance/overhaul units.
5. Merge as many PSB’s as is practically possible and conclude the credit squeeze issue by onetime massive recapitalization.
6. Beg, plead, incentivize, attract, persuade or force France, Israel, Japan and South Korea to invest in India on a never before seen scale.

Agriculture, media and Public sector fields should only have incremental reforms because these are troublesome politically.

But, open the flood gates of Capitalism in India in all most all other fields namely: Oil exploration, real estate, STEM Education courses, electronics & technology, automobile, textiles, semi conductor, aerospace, private cities and cold storage and other sectors. Infrastructure fields should be completely liberated of any intrusive regulations.

The 4 blocks namely: USA, Larger EU, China and oil rich Middle East may be allowed with some oversight, but investments from the 4 blocks have political consequences. A regulated approach here is the right way to go.

Make use of India’s cheap labour and relaxed laws and access to unperturbed sea route and ports, green field private cities as a selling point.

What is the time line? To reach 5 trillion dollar status by 2014 these things need to done soon.

1.      The Privatisation of loss making PSU’s through auction, Labour and Direct tax reforms have to be completed by the end of 2020 March Budget session of parliament.

2.      Petroleum rates have to be brought down by December 2019 by a minimum of 5 rupees across the country. State governments under BJP should do major land reforms and not at the central level.

3.      Initiating the construction of a dozen private world class modern Green field cities should and STEM Universities should commence by 2020 September.

4.      PSB mergers have to happen fast and not more than 10 Public sector bank should exist by the end of 2021.

5.      The government has to invest 500 billion US dollars by 2023 March in the railways and Start up/MSME related infrastructure.       

Make in India has to become existential goal of the government and has to get foreign and domestic entities to invest 1 trillion US dollars into India by 2022 March.

6.      The money for all this has to come from Sovereign Bonds, FDI and private investments. Most importantly directly from foreign governments of France, Japan, Israel and South Korea.

Will the BJP-Narendra Modi achieve this?

1.      Some of this might happen and India may be back to 7%+ growth by 2021. Provided the Indian Rupee remains stable below 71 rupees.

2.      But to get to 5 trillion dollar mark, India needs 8% sustained growth rate with a 3 to 4 % inflation rate. This can only come from 1.5 trillion US dollar investments and that can only come through implementing all the above and not just a few.

3.      The pathway taken by the government as of 31^st august 2019 looks like it will fall short of 5 trillion by 2024.

Can India actually touch 5 Trillion dollars? It is possible but difficult as of now.

Will India cross 4.6 trillion dollars by 2024? Most definitely

Will India cross 5 trillion US dollars? Probable if something extra ordinary happens in Global finances.

4.      Most probably, India will be around 4.85 trillion dollars by 2024.

Mr. Modi has a great opportunity of setting India’s economic destiny unlike any of his predecessors. Front load all economic reforms in the next 6 months, open up the economy completely, cut taxes and Cess, incentivise private investment through carrot and stick policy, flood Indian infrastructure projects and industries with foreign money, push for MSME mergers and go for massive privatization and divestment. Most importantly initiate and complete a dozen new green field world class cities across the nation.