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'You may think I am a dreamer': RBI deputy gov expects this for Indian economy

A widely used indicator of the economic progress of a country is the growth of the gross domestic product, which is the value of all the final goods and services produced in an economy during say a quarter or a year (REUTERS)Premium
A widely used indicator of the economic progress of a country is the growth of the gross domestic product, which is the value of all the final goods and services produced in an economy during say a quarter or a year (REUTERS)

  • RBI's deputy governor said, even if the country's growth slows down to 4-5% in 2040-50, India has the potential to become the largest economy of the world by 2060.

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India will become the second largest economy by 2031 if it strikes a growth rate of 11%, as per the Reserve Bank of India (RBI) deputy governor Dr Michael Debabrata Patra. Even if the country's growth slows down to 4-5% in 2040-50, India has the potential to become the largest economy of the world by 2060. Patra believes if India can capitalise on its opportunities and overcomes the challenges, then the country "will bend time". Patra explained four challenges and overcoming them will pave the way for India to achieve an 11% growth rate in the coming years.

During his speech at an event to celebrate Azadi Ka Amrit Mohotsav organised by RBI on Saturday, Patra said, "the Indian economy is a world leader in the production of various agricultural commodities."

Patra explained that in 2021, India has emerged as the world’s Number 1 rice exporter, with more than the combined exports of world Numbers 2 and 3. India has one of the widest manufacturing bases among emerging economies, ranging from the largest producer and exporter of tractors and two-wheelers to among the top 10 exporters of smartphones, cars, and spacecraft. In several services, including shipping personnel and information technology (IT), India is a world leader. In the case of IT, India has come to be known as the back office of the world.

A widely used indicator of the economic progress of a country is the growth of the gross domestic product, which is the value of all the final goods and services produced in an economy during say a quarter or a year, he said.

"GDP growth rose to an average of about 7% till the pandemic arrived," Patra added.

In 2020-21 fiscal, GDP declined to 6.6% due to the pandemic, Patra pointed out, while it recovered to 8.7% in the 2021-22 fiscal -- taking GDP 1.5% above its pre-pandemic level.

RBI has projected GDP to grow by 7.2% for the current financial year, Patra added that "which places India among the fastest growing economies of the world."

Highlighting what are the drivers of India's growth, Patra said, it turns out that the Indian economy is powered by “We", the people – private final consumption expenditure (PFCE) comprising households’ spending on goods, services, rents, insurance, pension contributions and such other expenses that correspond with daily livelihood.

Patra said, "There have been phases of export-led and investment-led growth, which could not be sustained, but they did provide turning points in the growth path. In particular, investment, which is the production of goods that, in turn, produce other goods is seen as India’s game changer, as for most developing countries that are capital scarce. The investment rate (total investment/GDP) is widely regarded as the most important lever of growth in India."

According to the deputy governor, a striking feature in India is that growth is home financed – investment is financed primarily by domestic savings, with foreign savings playing only a supplemental role.

"Another noteworthy feature is that the saving rate has started slowing down since 2007-08 after the global financial crisis," Patra added, "eventually, this pulled down the investment rate which has exhibited deceleration since 2012-13. Reversing this trend is critical to achieve higher growth."

Talking about the current account deficit, Patra said, for India, imports typically exceed exports and hence earnings of foreign exchange are not sufficient for covering import payments. The gap has to be filled by borrowing from abroad which, however, has to be serviced through principal and interest payments.

"If debt servicing exceeds our earnings, we have to either reduce imports and stifle our growth prospects or default on debt payments and face international isolation," Patra advised.

Also, Patra believes that the country's manufacturing sector must adapt to the fourth industrial revolution (automation; data exchange; cyber-physical systems; the internet of things; cloud computing; cognitive computing; the smart factory; and advanced robotics).

Additionally, he advises that India must develop a skilled labour force by stepping up investment in human capital. Also, efforts must be directed to boost international competitiveness that allows manufacturing to find expression in global markets.

"India must raise the share of manufacturing to at least 25% of GDP to become a global manufacturing hub," Patra said.

Furthermore, Patra believes, that raising India’s share in world exports to at least 5% is within reach.

Moreover, Patra highlighted four challenges. He said that the first one is the loss of output and livelihood due to the pandemic.

On the first challenge, Patra said, "the agglutination of supply disruptions, the health crisis, an unparalleled mass migration, and a hostile global environment took a heavy toll on the Indian economy. The combination of demand compression and supply disruption that took hold in the pandemic and in its wake caused severe debilitating effects."

"If a trend line is fitted to the level of India’s GDP and extended up to 2021-22 at the compound annual growth rate (CAGR) of 6.6% that prevailed over 2013-20, a comparison for this trend GDP with the actual GDP in 2020-21 and 2021-22 will give a rough measure of the output lost to the pandemic," he said.

Thereby, Patra said, "recovering this lost output may take several years – this I will regard as the first most important challenge."

The second challenge is India’s infrastructure gap. As per him, the main requirements for the infrastructure drive are transparent and faster regulatory processes; clear, transparent, and efficient land acquisition and climate clearance policies; and viable infrastructure finance that takes into long gestation in infrastructure projects. Building world-class infrastructure is the next big challenge for India’s take-off.

While the third challenge is developing a high-quality labour force. He said, "As India transforms into a manufacturing hub and powerhouse exporter, the workforce has to expand and become more skilled over time. The emphasis should be on increasing the contribution of the quality of growth to GDP rather than quantity. He also added that we must create workplaces that do not stigmatise women at work and instead, encourage them to earn their livelihoods with dignity and satisfaction.

India ranks 178 among 187 countries in terms of the female labour force participation rate in 2020, as per World Bank.

And the fourth challenge is a "greener, cleaner India". He said, "There is a silver lining, however, in respect of renewables. In order to reach 500 GW by 2030, renewables should grow at a compound annual growth rate of 14.2% per annum. At the current average rate of growth at 18.7% (2014-15 to 2020-21), we may achieve the 500 GW target by 2027."

On the fourth challenge, Patra further explains, that India will require adequate energy storage facilities to wedge the gap between the timing of renewable power generation and actual power consumption.

He said, "We have to minimise transmission and distribution losses. We have to address the regional concentration of renewable energy as it is location specific – mostly the southern states – and not evenly distributed. The tariff structure must reflect actual costs while eschewing cross-subsidies that hurt industries and commercial establishments. And we have to find a solution to the problem of legacy debts of DISCOMs."

At present, India is the third largest economy in the world in terms of purchasing power parity (PPP) terms, with a share of 7% of global GDP after China (18%) and the US (16%).

"India’s GDP in market exchange rates is expected to reach $5 trillion by 2027. By that year, India’s GDP in purchasing power parity terms will exceed $16 trillion (up from $10 trillion in 2021). The OECD’s 2021 calculations indicate that the Indian economy will overtake the US by 2048. This would make India the largest economy in the world after China," Patra stated.

In his concluding remarks, Patra said, "If India capitalises on its opportunities and overcomes the challenges that I have addressed in the time available for this talk, it is widely believed that India will bend time. So, revisiting the purchasing power parity projections I alluded to earlier, it is possible to imagine India striking out into the next decade with a growth rate of 11%."

If the 11% growth rate is achieved, Patra said, "India will become the second largest economy in the world not by 2048 as shown earlier, but by 2031. Even if it does not sustain this pace and slows to 4-5% in 2040-50, it will become the largest economy of the world by 2060."

"As I said in my opening remarks, you may think that I am a dreamer, but let me remind you that while history does not repeat itself, it often rhymes," Patra concluded.

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