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Jul 22, 2022

The $5 trillion indian dream

The $5 trillion indian dream

In his recent speech to the chief ministers of Indian states, Prime Minister Narendra Modi made it clear that he wanted India to be a $5 Trillion Economy by 2024. This could be a tough challenge, with re-election looming over. But Modi has always been known as someone with great ambitions.

With visible consequences on global economies all over the world post pandemic, India’s goal to grow its GDP to $5 Trillion in 5 years looks like it’s going to be a steep trek. As of now, India’s GDP is close to 2 trillion dollars with a growth rate little less than 6% in the last quarter. To reach $5 trillion, we have to at least attain a nominal growth rate of 12% annually. PM Modi laid down the path to growth by implementing the “Made in India” and “Vocal for Local” reforms where the prime goal is to attract more investment in the production-linked investment sectors. This is evidenced by India’s rapid and consistent rise in the global ranking of “ease of doing business”. This budget presented by Nirmala Sitharaman follows the same pattern. Here’s a run-down of the same:

Diversify Across Asset Classes

Significant money has been set aside in the budget for infrastructure like Roads, Railroads, Metro Railways, and the National Rail Plan for India – 2030 (Metro rails in Tier 1 and Tier 2 cities, and public-private-partnership-based operational administration of major ports).

  • The proposed capital spending of Rs.5.5 lakh crore for 2021-22 represents 2.5% of GDP, or 3.4% if we add allocations for capital expenditure for states and autonomous organisations.
  • A new asset reconstruction company and an asset management company will be set up to clean up NPAs in the banking sector. This will enhance credit flow into the corporate sector, as removing troubled assets will relieve pressure on capital for banks.
  • India has been one of the most attractive destinations for global investors in the recent years. Even during the pandemic, this trend was maintained, with India receiving $28.1 billion in FDI in the second quarter of 2020-21, the largest among all major global economies.
  • The budget has proposed an increase in the FDI limit in insurance companies to 74% from the present 49%, recognising the importance of core equity capital in the financial sector and providing a further boost to FDI inflow.
  • The budget has proposed to create an institutional structure to address liquidity concerns in the secondary corporate bond market that have risen due to Covid-19.

Here are some numbers which will simplify this entire read for you.

  • China took 5 years to go from $2 trillion to $5 trillion (2004-2009) – the Hangsang went from 8500 to 32000 at that time – (A 4x Gain)
  • The Dow Jones climbed from 700 levels to 12000 levels between 1977 and 2000, taking 11 years to go from $2 trillion to $5 trillion in the United States (1977-1988) – (A Gain of 15x)
  • Japan Took 8.5 Years to go from $2 Trillion to $5 Trillion (1978-1986) – Between 1978 and 1991, the Japanese Stock Market went from 2000 to 37000.
  • Historically, the mother of all bull markets in any country begins with a value of between $2 and $5 trillion! Even if these are only historical evidence, India is only getting started.

Some Points India Should Focus On:

Diversify Across Asset Classes

The pace of growth in India should be in the double digits. And without it, there’s little hope for the country to employ the roughly 1 million young people entering the workforce every month. India will never become an upper-middle-income-economy with a successful and vibrant middle class until its starts making use of its existing, favourable demographic.

  • There are no supportive markets for land or labour. Energy supply and infrastructure are significantly better than they were, but they are still insufficient to support the development of a world-class manufacturing sector.
  • How will the world react to a country with the size and ambitions of a potential superpower, but whose politics, state, and capabilities have stayed mostly unchanged? It won’t be simple. Other countries have graduated from their status as developing countries in one way or another. What happens if India becomes one of the world’s top three or four economies in terms of dollars?
  • The macro-fiscal data is transparent, which is one of the budget’s pillars. Income tax rates are not going up. Most crucially, the fiscal deficit and off-balance-sheet borrowings have been rationalised in the budget. Despite the challenges, the budget offers the right policy environment for our $5 trillion GDP goal based on Aatmanirbhar Bharat’s strong foundation.

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