When Prime Minister Modi shared his vision of making India a 5 Trillion Dollar economy by 2024-25, the whole nation was filled with hope; Hope of better job opportunities, better education facilities, better sanitation facilities, better business opportunities, easy access to loans and much more.
In this article, we’ll not be discussing about the hopes that were given, but the ground reality.
Global Economic Factors
The global economy is facing a downturn recently and its growth rate is expected to fall further to 3.3 percent this year as both advanced as well as emerging economies are expected to decline. IMF’s new Managing Director, Kristalina Georgieva has warned that there’s a synchronized slowdown and 90% countries will observe a sluggish growth in 2019-20. India would also be impacted by the contagion and hence is expected to be hit hard by the slowdown. The advanced economies such as USA, Japan and Eurozone have been observing a downturn in their economic activities, on the other hand economies like India and Brazil are expected to face an even harsh slowdown. The Global sluggishness can be attributed to US-China Trade War and Geopolitical tensions such as Brexit. The recent drone attacks on Iran by USA might prove to be a final nail in the coffin. The world has already started fearing about world war 3.
Major sectors contributing to India’s GDP
The Agri sector’s share towards the GDP has been constantly falling YoY and stands at 15.87% of India’s GDP as per latest records. The government aims the private investment in agriculture sector to increase to Rs 1,40,000 crore by 2022-23 but looking at the banking sector’s hesitance to lend to farmers due to high NPAs, and private investors looking for better returns in other industries, this aim is farfetched.
The Agri sector employs the most and hence the government and private players are trying to invest in this sector despite various farmers quitting every year. This initiative is being taken to improve the economic status of farmers who’re struggling with insufficient returns on their produce. The increasing costs and dependency of farmers on natural means of farming has caused the plight to worsen. The government must understand that it isn’t taking enough measures to safeguard the interests of the farmers as the produce is perishable and due to lack of infrastructure facilities (cold storage and transportation) and financial aid, the farmers observe about 25-30% loss of production in their post-harvest period.
Moreover, Industry has contributed a share of 29.73% with a GVA of 50.43 Lakh crore. The industry sector is also expected to face sluggishness due to weak hiring, distress among rural households and tighter financial conditions. Moreover, the stress among non-banking financial institutions are also expected to slow down the growth in the current as well as coming years due to slow flow of credit to corporates. The overall business sentiments have been cooling and hence the growth is expected to fall. Furthermore, India has been spending about 70000-80000 crores annually on infrastructure, to reach to the 5 Trillion target this investment must be at least double the current trends.
The falling PMI also show’s signs of sluggishness. Another hit on the economy was when the festive sales fell short of expectations. On the other hand, auto sector has also revealed that the passenger vehicles sales have been declining throughout the year. The slowdown in this sector is attributed to government regulations which mandates the auto companies to make their cars BS VI compliant by April 2020 to curb the problems of pollution. Availability of alternatives such as Uber, Ola, Zoomcar, ReVV etc have further reduced the car ownership plans of the people contributing to lesser sales.
The service sector has observed a growth moderation from 8.1% to 7.5% this year and contributed about 48.45% to the GDP. A deceleration has been observed in trade, hotels, transport, communication and broadcasting services to 6.9% and public administration, defence and other services to 8.6%. The tourism industry also saw a sluggish growth from 10.4 million to 10.6 million FTAs (Foreign Tourist Arrivals). Thus, even though the service industry is growing, but the growth rate is way below the expectations.
As per DPIIT, FDI inflows in 2019-20 (till August) stood at USD 19.33 Billion. Data for Q1 shows that telecom sector received highest FDI equity inflow of USD 4.2 Billion, the service sector stood at USD 2.79 Billion, computer software and hardware at USD 2.24 Billion, and Trading at USD 1.13 Billion.
The countries from which India received the maximum FDI equity inflows during Q1 are Singapore (USD 5.33 Billion), Mauritius (USD 4.67 Billion), Netherlands (USD 1.35 Billion), USA (USD 1.45 Billion) and Japan (USD 0.47 Billion).
Besides all that, there’s a fall in the household savings and investments thus indicating a structural economic slowdown. As per RBI data, domestic savings and gross capital formation (Investment) reached a new low of 30.5% and 29.1% of FY18 from 34.6% and 36.7% in FY12. There has been a drastic fall in the physical assets, which indicates that household are selling their physical assets to meet the expenditure needs for health, education, marriage, etc specially in rural and semi-urban areas. Thus, it indicates that the real income is low and even falling to lower levels. As per SBI’s August 2019 study, the growth in urban as well as rural areas have crashed from double digits a few years ago to single digits in FY19.
As per National Statistical Office, the disposable income of individuals has fallen. Thus, with this falling investment and savings rate, its hard to achieve the 5 trillion Target.
If we analyse the political environment of India, we’ll get to know that various things that the government has done weren’t planned well. The demonetization that happened in 2016, affected the economic growth too. It failed to catch hold of the hoarders of black money as RBI reported that 99.3% of the junked Rs 500 and Rs 1000 notes were returned to the banking system. Moreover, a working paper by US-based National Bureau of Economic Research said that demonetization has hit India’s economic activity by at least 2 percentage points. The CAA and NRC are also adding to the confusion amongst the citizens and hence causing problems in the nation.
If the government really wants to pull off the target of making India a 5 Trillion Dollar economy by 2024-25, it must start taking some productive steps. When the citizens themselves are finding a dearth of opportunities to work for, they’re allowing outsiders to be India’s citizens.
Thus, looking at the current scenario, 5 Trillion Dollar target seems like a distanced dream.
There may be many more reasons for that. Let us know in the comments below.