Home/ Budget 2019 / Budget Expectations/  Reviving banking will be key to sustainable growth

New Delhi: Shortly after becoming India’s Prime Minister in 2014, Narendra Modi declared that his dream was to make India a $20 trillion economy. At that time, economic commentators lauded his ambition even as they pointed out that the task would be daunting.

Five years later, Modi has declared a much more modest target: $5 trillion by 2024, only slightly higher than where the International Monetary Fund expects India to be that year ($4.7 trillion).

Yet, even this target has surprised many economists, who consider it to be overly ambitious. What has happened to the economy in the intervening five years perhaps explains the scepticism.

Growth has slowed down. Fresh investments have dried up even as banks remain wary of lending, saddled as they are with a huge pile of toxic assets.

Even the flow of foreign direct investments has slowed down significantly. India continues to remain a darling of foreign institutional investors, but the funds they provide can be fickle.

Runaway inflation or a sharp appreciation in the currency can help India reach the $5 trillion goal even with a modest real gross domestic product (GDP) growth rate. However, assuming that the government intends to reach the milestone without compromising macroeconomic stability, it will require it to re-engineer an economic boom in the country.

Over the past five years, the economy has grown at a nominal rate of 11% in rupee terms, and roughly 8% in dollar terms, as the rupee has depreciated sharply over this period. If India continues to grow at a nominal dollar rate of 8% per annum on average, it will take India seven years to reach the $5 trillion target. If India grows at 11% in dollar terms, it will come close to that target by fiscal 2024 ($4.6 trillion) and reach the $5 trillion mark in fiscal 2025.

Given that the size of the economy at the end of fiscal 2019 was $2.75 trillion (at year-end exchange rates), the required growth rate for the target works out to be 12.7% in nominal dollar terms.

This would mean real growth rates in the range of 7-8% per annum, if inflation has to be limited to the 4-6% range and if the rupee-dollar rates are to remain stable.

It is worth noting that India grew at a much faster pace in dollar terms (14% per annum) during the boom phase of 2004-09, when the size of the economy doubled in five years to reach $1.4 trillion.

However, that boom also left its deep after-effects on the economy. The intemperate lending of those years created the toxic assets that banks and firms are still struggling to clean up.

A sustainable economic boom is possible only with sustainable finance. Around the time, Modi first became Prime Minister, a committee led by the former banker P.J. Nayak submitted a report outlining reforms in the way state-owned banks were being managed. The government failed to act then and the economy has paid the price.

The banking sector continues to remain the biggest hurdle to growth and bankers remain wary of the risks associated with long-term projects.

Shadow banks, which had stepped in to fill the void created by struggling banks, are now facing a crisis of their own.

Little wonder then that promoters cite the lack of funds as one of the biggest reasons for stalled projects as opposed to lack of clearances five years ago, data from the capex-tracker of the Centre for Monitoring Indian Economy (CMIE) show.

The investment lull in the economy can only be addressed if the wheels of finance start moving again.

Once India’s investment engine roars back to life, the road to $5 trillion won’t be very difficult.

View Full Image
Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Updated: 04 Jul 2019, 12:41 AM IST
Recommended For You
Get alerts on WhatsApp
Set Preferences My Reads Watchlist Feedback Redeem a Gift Card Logout