Rangarajan sees $5-trn GDP by 2030

Dr C Rangarajan, former Governor, RBI, and former Chairman of PM Economic Advisory Council (EAC), has stressed that growth spurred by reforms must be combined with equity.

He further stated that eight to nine per cent growth is a must for India to ensure equitable growth and improve the standard of living for the bulk of the population in the country.

He emphasised that, high rate of growth of the Indian economy on a sustainable basis at the rate of eight to nine per cent in next few years is needed to take the economy from the current level of $2.7 trillion economy to $5 trillion economy by 2030. The Modi government has a set target to achieve $5 trillion economy by 2025.

Rangarajan further added that even by then India will still be a Middle-Income Country. He was speaking in the webinar organised by ENQUBE Collaborations on the subject of 'Indian Economy by 2025/2030 - Looking Forward'.

Experience of 1991 Reforms:

Recalling the experience of 1991 reforms, Rangarajan said that 1991 stands out as a watershed year for India. India faced a severe balance of payment crisis which triggered reforms. India utilised this opportunity to restructure and modernise the economy by bringing reforms which made a break with the past in the following three ways:

1. Dismantling the vast network of licences, controls and permits that dominated the economic system.

2. In redesigning the role of the state and allowing the Private sector a larger space to operate within.

3. In abandoning the inward-looking foreign trade policy & getting integrated with the world conomy and trade.

The last was the opposite of what we normally did when we were faced with a balance of payment crisis.

Rangarajan further narrated that the objective of 1991 Reforms was to improve the productivity and efficiency of the system by creating a more Competitive Environment. Thus, barriers to Entry and Growth were removed.

Impact of Reforms on Growth:

He further dealt with the impact of the reforms on growth. Between 1992 to 1993 and 2000-2001, GDP at factor cost grew annually by 6.20 per cent.

Between 2001-2002 and 2010-2011; it grew by 7.69 per cent and the Growth rate between 2011-2012 and 2019-2020 was 6.51 per cent.

The best performance was between 2005-2006 and 2010-2011 when GDP grew by 8.7 per cent showing clearly what the potential growth rate of India was. This is the highest growth experienced in India over a sustained period of five to six years in spite of the Global crisis of 2008-2009.

Recent Decline in GDP growth:

Rangarajan brought the point that India witnessed a recent decline in growth as the Economy started sliding and growth fell to 4 per cent by 20019-2020 even before Covid-19.

It calls for understanding the reasons for decline in growth rate. It is natural for countries to experience boom & downturn, a part of the business cycle. Boom is characterised by increasing output and income and reach a peak followed by a recession. The cyclical nature of the Economy requires that the downturn is well managed.

He stated that one of the important variables to be watched during the boom phase is the credit growth. We saw credit growth at a high level in 2003 to 2007. We saw the outstanding credit growing by three times and two times later in the next four years. As the saying goes, bad loans are sown in good times. Credit to infrastructure sector grew phenomenally. The cyclical factors combined with credit boom resulted in decline in GDP growth in the recent period. The decline was also aggravated by decisions like demonetization.

Investment rate of Growth:

GDP is driven by investment. The investment ratio of Indian economy declined from a level of 38.9 per cent in 2011-2012 to 32.2 per cent in 2019-2020. Rangarajan stated that the role of the both central and State government is to create a favourable investment environment particularly for the private sector.

Role of Reforms in the coming years:

Rangarajan added that the nature of reforms varies from time to time. In the current juncture, we do not need big bang reforms. Reforms are in the words of economists, only a necessary condition, but not sufficient condition. Reforms normally create a natural climate for investment. But 'Animal Spirits' are also influenced by non-economic factors such as social cohesion. Reforms supplemented by careful nurturing of the investment climate are needed to spur growth again.

Rangarajan called the policy makers to identify the sectors which need reforms in terms of creating a competitive environment and improving the performance efficiency. Some of the sectors we need to relook at financial system, power sector, agricultural marketing and governance.

Rangarajan has called for Centre and States as joint partners in this effort. The recent three agricultural marketing legislations should be left to the discretion of States and later assess and study the impact. This will be a case of experimental economics.

Impact of Covid-19 on Indian economy:

Rangarajan stated that due to Covid-19, India witnessed for the first time in recent years a contraction and negative growth of 7.3 per cent in the year 2020-2021. Prior to the Covid-19 pandemic, India's growth rate was at 4 per cent for 2019-2020. He also said that the rate of growth of the Indian economy was expected to be at 12.5 per cent for 2021-2022 and this has been now revised to a level of 9.5 per cent due to second Covid wave.

There are several high frequency indicators which point to recovery and revival in the Indian economy particularly in July 2021 like increase in GST collections and substantial pick up in exports. Rangarajan indicated that the current situation is unique as a non-economic factor has contributed to the decline in economy. Hence, the pickup in the economy is dependent upon how the lockdown imposed to protect from Covid-19 is relaxed.

Rangarajan further added that there are other Issues to be faced like climate change, environmental issues and strengthening of the financial system. The banking system is undergoing structural change with fin-tech and massive digitalisation.

Crossing the Goal of crossing $5 trillion economy:

India wishes to reach the level of $5 trillion economy from the current level of $2.7 trillion Economy. The low growth witnessed in 2019-2020 and negative growth of 7.3 per cent in 2020-2021 have resulted in pushing out realising the goal of $5 trillion economy by several years. India needs a sustained growth of 8 to 9 per cent for 5 to 6 years to accomplish this goal. Along with growth, Rangarajan is of the view that India has to tackle lot of social issues like health & education. It may be recalled, at the peak of the second wave of Covid India experienced inadequacy of health facilities.

He concluded by reiterating the need for economic growth with equity. Reforms are needed to improve the productivity of the Economy and achieve higher output. Achieving 8 to 9 per cent growth in future is the only solution to bring down further the poverty ratio and improve the standard of living at all levels. To sum up, we need to grow at 8 to 9 per cent for a sustained period and that must be our objective. For achieving this, the investment rate must go up by 4 to 5 percentage points. He further said equity is important and it can be achieved only in an environment of high growth.