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What will it take to achieve the vision of making India a $5 trillion economy by 2024? CW has some answers Every great dream starts with a dreamer. But it takes an achiever to translate that dream into reality. India's Prime Minister Narendra Modi is determined to make the transition from dreamer to achiever with his vision to make India a $5 trillion economy by 2024. This ambitious target has triggered a host of interesting debates. While some contend the Prime Minister may be aiming too low, more people view it as mere wishful thinking, especially considering the prevailing macro indicators. But as they say, ‘The greatest danger for most of us is not that our aim is too high and we miss it, but that it is too low and we reach it.� Thus, naysayers aside, at CW we believe it is more prudent to discuss the different ways to achieve such a target than the target itself! The Prime Minister’s aspiration is a bold one that calls for thinking out-of-the-box and breaking old paradigms of economic growth and development. The government’s success in doing these will be the game-changer. For economic development, aiming big is essential � historically, only a target-based approach backed by a solid roadmap has delivered in economies that have achieved great scale. Naturally, looking at the current economic scenario, India will have to get its act together to unblock stalled projects (because of policy issues or financial unviability) and eliminate policy shortcomings. Thus, with our core focus on the construction and infrastructure sector, we will elaborate upon our thoughts on how infrastructure can contribute to achieve the $5 trillion target. To understand the future, though, it is important to analyse the past and examine how the Indian economy has performed and what contributed to its growth. From past to present There is no denying that India has made its mark on the global map, consistently featuring on the list of the fastest growing economies in the world. In fact, it also managed to enjoy the top slot for a few years among large-size economies. Not surprisingly, the country became a favoured destination for foreign investors with its length, breadth and depth in consumption demand. A few reforms on the policy front also helped the economy recover quickly at a time when global economies were struggling. The chart on 'India GDP', in the following page, clearly indicates that it took India almost 60 years after Independence to reach the first US$ trillion mark. This was despite the fact that the country opened its economy in 1991 with liberalisation, privatisation and globalisation with the goal of making the economy more market and service-oriented, and expanding the role of private and foreign investment. This surely helped the Indian economy come back from the abyss but the $1 trillion mark was still a distant dream. It was only in the year 2000 that the government planned one of the biggest and boldest infrastructure reforms: The Golden Quadrilateral project. Although it faced a lot of hurdles, it gave the economy a much-needed impetus to move towards the $1 trillion mark. It took another seven years, following slowdown and some amount of policy paralysis, to actually reach the goal in 2007. In 2014, after another seven years, India became a $2 trillion economy. In simple words, the first trillion took 60 years; the second was added in just seven. Today, India is almost a $3 trillion economy; this means it has added another $1 trillion in just five years, despite momentous events like demonetisation and implementation of GST. With the time taken to add $1 trillion constantly reducing, it begs the question: Can another $2 trillion be added in just five years? One needs to understand that simple arithmetic won’t work here! There are two aspects to achieving the $5 trillion target: First, inflation should remain under control. And second, as the target is set in US$ terms, the rupee-dollar exchange rate needs to be in check to make India reach the desired target. The Indian rupee has depreciated a bit recently and if it depreciates further, it will adversely affect India's GDP growth in dollar terms. However, if it starts appreciating against the dollar, it will make it easier to reach the target. With regard to inflation, the rate in India is just above 3 per cent and even global inflation is not very high. Thus the outlook for inflation looks largely benign, increasing India’s chances to achieve the target. The three segments of the Indian economy Now, let’s understand sectoral contribution to India’s GDP. It is a known fact that if an object in mounted on three legs (even of different heights or lengths), it remains steady. Similarly, the Indian economy has three major segments � their contributions are different but, together, they keep the economy stable: Agriculture, Industry and Services. Obviously, there are sub-segments under these three but to keep things simple, thisbroader segmentation is useful. While services constitute various sub-segments like trade, hotels, transport, communication, broadcasting, IT, financial services, public administration and defence, the industrial segment comprises mining, manufacturing, electricity, capital goods, infrastructure, construction and other utility services. If we take a look at thehistorical data points, we see that the contribution of the three main segments has changed significantly from FY1951 to FY19. The chart above clearly shows how India has managed to move from an agrarian economy to a services-led one. Thanks to exports like IT and IT-enabled services and growth of financial and other data-oriented services, the services segment contributes more than 50 per cent to the Indian GDP today. Meanwhile, agriculture,which was contributing over 51 per cent in 1951, has now come down significantly to touch around 15-16 per cent. One peculiarity about India’s growth record is that it is the only large global economy that has grown without a significant manufacturing base. Policymakers have tried to address this; for instance, the Make in India initiative is an attempt to attract manufacturing investments. However, its success has been patchy at best � industry accounts for just 27-28 per cent of GDP, way behind services. There is now a view that India’s policymakers should not try and emulate the time-tested path of moving first to manufacturing and then to services-led growth. Focus on industry segment To maintain growth momentum in a fast-moving world, India has to develop its industry and infrastructure. As an emerging economy, the scope for this is enormous. To experience the potential of the perfect blend of industry and next-generation infrastructure, it is necessary to clear the decks that are obstructing the way forward. It is true that industry focus (manufacturing) requires more capital, which is scarce at present. However, we believe the capital will find its own way if there are viable industrial projects. Further, while the government is taking steps to keep the liquidity flow abundant, public investment alone cannot fund our entire infrastructure investment requirements. Also, private players are usually eager to bring their capital into developed Indian states compared to less developed ones. Therefore, the real challenge lies in bringing adequate private investment across the country with the collaboration of the public sector. If we look at the revenues oflarge firms as a share of GDP, it is around 40 per cent in India while, in China, it is about 70 per cent. For India to be a $5 trillion economy, we need an increase in the number of large companies contributing to GDP. Even simple maths suggests that India needs to generate another 2,000 large firms to really establish the kind of economic growth rate required to achieve the target. This will only happen if more MSMEs become bigger, and more mid-sized firms become large firms. Why industry and infrastructure? Remember, industry encompasses automation in industrial sectors whereas infrastructure brings physical infrastructure together with technology like Internet of Things (IoT) and automation together to maximise its efficiency. For smooth and fast travel, India needs adequate and timely investment in quality infrastructure. Further, to create a $5 trillion economy by 2024, we need robust and resilient infrastructure, as it is infrastructure investment that has guided the growth of developed countries. There is a thumb rule that a country must spend at least 8 per cent of its GDP on infrastructure. China has been doing this for two decades and the results are apparent, even helping the country post doubledigit growth in the past. In India, infrastructure spending (construction, utilities and other infra) as a percentage of GDP was less than 5 per cent till 2006. It was eventually increased after 2008 and has remained above the 7 per cent mark. (If we only consider construction and infra, the figures are still less than 5 per cent).However,we need to increase spending further to achieve the $5 trillion target. Underlining the strong relationship between the economy and infrastructure, data suggests that the correlation of investments in inland, road, rail and airport infrastructure to GDP is higher than 0.90. India needs to spend 7-8 per cent of its GDP on infrastructure annually, which translates into an annual infra investment of $200 billion currently. However, India has been able to spend only about $100-110 billion annually on infrastructure, leaving a deficit of around $90 billion per annum. This huge investment gap needs funding through different and innovative approaches. Private capital and participation required! In India, infrastructure has historically been financed by the public sector. Given the fiscal constraints that leave less room for expanding public investment at the scale required, there is an urgent need to accelerate the flow of private capital into infrastructure. With the aim to boost investment in infrastructure, the National Investment and Infrastructure Fund has been created with capital of about `400 billion to provide investment opportunities to commercially viable projects. In addition, a Credit Enhancement Fund for infrastructure projects to increase the credit rating of bonds floated by infrastructure companies is going to be launched in the country. A new credit rating system for infrastructure projects, based on the expected loss approach, has also been launched that seeks to provide an additional risk assessment mechanism for informed decision-making by long-term investors. Further, measures like infrastructure investment trusts and real-estate investment trusts (REITs) have been formulated to pool investment in infrastructure. This has helped attract private participation to some extent. However, there is still a larger need for funding. Private capex is yet to increase; hence, steps are required in this direction. Apart from this, the government's decision to consolidate 10 public-sector banks (PSB) into four mega state-owned lenders will act as a building block to achieve the $5 trillion target. As the Finance Secretary stated, “We will now have six mega banks with enhanced capital base, size, scale and efficiency to support the high growth the country requires to break into the club of middleincome nations.� Other notable actions planned by the government include a push to the digital economy, private investment, fiscal discipline, structural reforms, provisions for credit growth and, most important, financing by the capital market. The government is also committed to clear the mess in the financial system (rising NPAs), which would commence the virtual investment cycle. As the cycle starts, a few segments are likely to be focus areas in terms of public and private expenditure. Focus on roads, railways, aviation and ports Former US President John F Kennedy once famously said, “American roads are not good because America is rich; America is rich because American roads are good.� Undoubtedly, roads are part of an integrated multimodal system of transport that provides crucial links to airports, railway stations, ports and other logistical hubs. Road infrastructure acts as a catalyst for economic growth by playing a critical role in supply chain management, especially in India where the dependency of logistical movement on roads is higher than other countries. It is the dominant mode of transportation in comparison with rail, air traffic and inland waterways and accounts for about 3.14 per cent of GVA and 69 per cent and 90 per cent of countrywide freight and passenger traffic, respectively. Thus, significant investment is being made in the roads segment by public and private players. That said, road development faces challenges like availability of funds for financing large-scale projects, lengthy processes in acquisition of land and payment of compensation to beneficiaries, environmental concerns, time and cost overruns owing to delays in project implementation and lesser traffic growth than expected. These are increasing the riskiness of projects and resulting in stalled or languishing projects and shortfall in funds for maintenance. However, increase in the pace of construction has been achieved by introducing a proactive sector policy to respond to these major challenges. This includes process streamlining, enhanced delegation of approval limits, inter-ministerial coordination and innovative project financing for leveraging private and public funding. Even the streamlining of land acquisition processes has been a positive step. Huge investments have been made in the sector with total investment increasing over three times to Rs.1,588.39 billion in FY19 from Rs.519.14 billion in FY15. In India, investments in roads have been financed from budgetary support, internal and extrabudgetary resources (IEBR) and private-sector investment. Budgetary support accounted for 48 per cent of investments in 2018-19 and IEBR accounted for 39 per cent, with private investment accounting for 14 per cent. Private-sector investment has been tardy as investors are interested in shortterm investments while NHAI and NHIDCL were looking for long- term borrowing arrangements keeping in view the long gestation period of road projects. Once the economic scenario starts providing positive signals, we expect the roads segment to witness a lot of traction. In addition to roads, investment is being made in the railways and aviation sectors as well. The bullet train project in railways and UDAN in aviation are milestones in this regard. Apart from this, the ports sector is crucial for the development of the economy as ports handle around 90 per cent of export-import cargo by volume and 70 per cent by value. To meet the ever-increasing trade requirements (larger exports with a focus on manufacturing), expansion of port capacity has been accorded the highest priority with implementation of wellconceived infrastructure development projects. Even inland waterways can be utilised to save costs and investment are being made accordingly. Housing is one of the fastest moving sectors in the country. With urbanisation becoming an irreversible process, housing is an important determinant of economic growth. The process has been characterised by an increase in the number of large cities, although India can be said to be in the midst of a transition from a predominantly rural to a quasi-urban society. Many reforms have been implemented in the housing sector with RERA being a prominent one. In addition, the Pradhan Mantri Aawas Yojana (PMAY) was launched on June 25, 2015, with the objective to provide housing facilities to all eligible beneficiaries by 2022. This will also give a lot of impetus to allied sectors like cement and steel. Considering the above projects, the government estimates infrastructure investments worth `100 trillion over the next five years � an average of Rs.20 trillion a year. This is far greater than the current infrastructure spend, which is barely one-third of what is estimated. The key question is where the money will come from. India does not have powerful institutions that can fund longgestation infrastructure projects. Banks do not have enough long-term liabilities to match such loans. Lenders have gone terribly wrong in the past by not following healthy lending practices. Without credit flow to support private investment and cheaper, abundant and good quality electricity to power growth, this GDP target may well remain an aspiration. Current economic scenario � not looking bright In terms of the current domestic economic scenario, a slowdown in investment activity, tighter funding conditions, decline in consumer confidence, high real interest rates and Central Government expenditure and the monsoon are some factors that have contributed to overall sluggishness. Corporate financial performance is not improving, automobile sales volumes are on a decline and FMCG sales are also sluggish. Add to all this, issues like the NBFC liquidity crisis and banking NPAs, and it appears nothing is going right. Further, corporate taxes are yet to decline and the move of taxing high net-worth individuals and FPIs have actually resulted in capital outflows from Indian markets. Although the government has taken a few steps to smooth things over, these do not seem to be sufficient. Making matters worse are the weak global macroeconomic conditions and a negative fiscal impulse. However, this is a phase of transition where the cleaning of books is happening and is expected to eventually lead to better and faster economic growth. The government has constituted a high-level task force (headed by the Economic Affairs Secretary) to identify infrastructure projects for Rs.100 trillion investment by 2024-25. It will draw up a National Infrastructure Pipeline of Rs.100 trillion, which will include greenfield and brownfield projects worth over Rs.1 trillion each. The task force will comprise secretaries from different ministries. Each ministry and department will be responsible for monitoring projects to ensure their timely implementation within budget. In conclusion While the debate continues about whether the $5 trillion target can actually be achieved, the focus should be on getting on with the job ahead. India requires a nominal growth of over 11 per cent to reach the target.In conclusion From focus on industrial growth and improved services exports to participation of private players in infrastructure projects, we have listed a few factors that would help the government achieve its aim. In tandem, managing inflation and currency movement should also play a vital role. All considered, increased infrastructure spending will be the key. If financing for infrastructure is arranged and managed well, a dream that looks distant now may become attainable. And, even if the target is not achieved, such a focus will put the country on a faster growth path. It’s high time all stakeholders participate and contribute to building a brighter future for India.In conclusion Few Factors Towards the Roadmap to the US$5 Trillion Target India still faces a spending gap in infrastructure, and hence, there is an immediate action needed to double the infrastructure spending. Considering the current fiscal scenario it is difficult for the Centre alone to meet such project spending, and hence, increased private participation is the need in terms of capital infusion as well as project execution. Many projects are stalled due to non-availability of finance and a few have become financially unviable. More and more funding avenues must be provided through innovative financing instruments. Although the mega mergre of PSU banks is one step towards the same, an appraisal system needs to get an overhaul. Services growth has been good over the years, but it is high time that the government focuses on industrial growth. Manufacturing base should be expanded. ‘Make in India� was one such project but more efforts are required to make India a global manufacturing hub. Increased participation by the states is the need of an hour. Currently, only a few states are participating. No economic growth is possible unless poverty is reduced, and hence, more social stability reforms (without affecting the fiscal prudence) are required. Reduced tax burden on Corporate (or reduced tax terror � in a raw language) is what Indian Inc expects from the government. Unless the large businesses feel comfortable and chart out expansion plans, the US$5 trillion target will be a distant dream. Increased digitisation � India has moved towards digitisation in terms of payment, money transfers and a few other limited segments. But the complete adoption of digitisation could add about a trillion dollars to India’s GDP by 2025.