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India is the fifth-largest economy in the world, with GDP of $2.94 trillion in 2019 (IMF’s World Economic Outlook). The US, China, Japan and Germany are larger economies than India. It already is the third largest, behind China and the US, when economic size is measured in purchasing power parity (PPP) dollars. In 1980, India’s per- capita GDP of USD 354 was marginally above China’s USD 339.

China is a global manufacturing hub and the world’s largest exporter and second-largest importer. GDP growth rates in China over the past 30 years have averaged 10%; this is evidence that populous economies can sustain continuous high growth. 

India has only seven companies in the Fortune Global 500 list while China has 119 companies !! This also indicates the amount of scale catchup that the Indian enterprises need to do.

We have a huge opportunity for economic enhancement by leveraging our young demographics, domestic consumption market, and a productive agrarian sector which can further improve with efficiency building. 

Our Prime minister had set a GDP target of USD 5 trillion economy in the next five years. To meet this challenge, we have to be globally competitive and would need growth of 15% per annum. While it is a tall-order in the current Covid-hit economic situation, we can use the opportunity to reset the way we function. We need to be on “mission” mode and work on policy development for building world-class infrastructure, developing energised business ecosystem with investor confidence, revamp education and skilling initiatives, and build better quality health care system and cities infrastructure. These in turn, also improve quality of living across the country. 

In it, together

We need to demonstrate policy stability and also encourage policy innovations. Else we will seek precedences, when circumstances or ambitions don’t have any prior precedence !  This growth aspiration will also require deeper public-private partnership. The government should build infrastructure and boost investor confidence with its developmental policies that would attract investments and capital from around the world. The private sector has to rise up to the challenge and bring in newer business models that can cater to ever-changing consumer needs; and to make high quality products / services, that can find takers globally.

However, to enable this, we would need to use liquidity support and domestic lending, to push strong domestic demand and an aggressive investment drive by the government. This can help encourage import-substitution and export-promotion strategies. 

Financing our way to growth and using digital as financial inclusion tool

Capital allocation (investments) will spur growth. This would need our capital markets to raise up to the occasion. A stronger financial markets (debt markets especially) and the regulators intent to bring in higher standards of corporate governance would be a sign of confidence to the global investors. The ability to enforce contracts (on time) and willingness to reform our labour laws are needed to attract investments, especially in manufacturing sector. 

Tackling India’s financing challenge will need multiple initiatives. Currently the total size of the Indian banking industry is about Rs 100 lakh crore (USD 1.3 trillion). Economists and finance experts have broadly agreed that with our blend of services sector being a dominant GDP player, we would need to double credit growth (banking sector size) to help achieve the USD 5 trillion economy. As a market, our finance sector has proven before that high credit growth is possible. 

For a comparative number, the total assets of the Chinese banking system was USD 40.6 trillion, in 2019 with the GDP at USD 15 trillion. The US’s banking system was at USD 18 trillion and helped build GDP of USD 21 trillion.

An important sector where India needs huge amount of investments is infrastructure. Globally central banks are tightening capital adequacy and risk provisioning norms, which necessitates higher capital for banks. India does not have large-sized infrastructure financing institutions. In this context, we must remember the efforts of the public sector banks (PSBs) as they have traditionally funded real-economy sectors. It is essential that the government continues having 2-3 well capitalised large PSBs, as their contribution to lending to infra sectors will prevail. If the old estimates of the government of Rs 100 lakh crore infrastructure investments over the next five years is any indicator, it could well bring in economic impetus and set the tone for positive investment sentiment. 

The digital wave that’s all around us will play a critical role in enabling and improving access to financial products and services throughout India. With digital, information cannot be an arbitrage between geographies or economic might of the customers. We can further enable partnerships between various financial services firms and the new-age digital financial institutions to enable consumer acquisition and having consumer feedback in real time to design suitable financial products for different consumer needs. Digital finance will also improve financial literacy and help expand the financing backbone into smaller markets across the country. In this endeavour, true spirit of collaboration would work on not just plain commercial transactive partnership.

A lot of work has happened in making the ease-of-doing business, especially in the financial sector. Improvements in governance structures like IBC, decriminalising old archaic rules will add to positive sentiment and also enhance financial stability. 

For the “Mission GDP growth”, we need to work for stable yet rapid growth of the finance sector and to work on policy initiatives to deepen our debt / bond / capital markets and to reduce regulatory arbitrage across banks and non-banks.

Early signs of recovery & building on it

In this Covid gloom, there are early signs of economic revival. Data for May & June for economic activity indicators such as Fuel consumption, Electricity usage, volume and value of retail financial transactions, movement of goods across the country, e-way bills, highway toll collections indicate growth in activities. Manufacturing PMI rose to 47.2 from a low of 27.4 in April. CMIE unemployment number for June is about 11% from 23.5% in May. 

With the onset of monsoon across the country and forecast of a “good monsoon”, the mood enhances the agriculture sector’s sentiments. With a good monsoon, it leads to rural demand for products and services, including higher spends in housing and consumer durables. If monsoon and coming festival season can be utilised with adequate positive communication over next 3 months, it could increase domestic consumption.

It is indeed time for India Inc to create newer consumer base with differentiated products and services, at affordable pricing. Indian consumers are evolving in their product & services choice and need high quality output. 

This reset time should be used to encourage the Indian manufacturing sector to increase domestic production as “import-substitution” mission.

For all these, timely availability of finance will be crucial. Create a “mission 5 x 5” (USD 5 trillion in 5 years) for the Indian financial services sector and encourage the institutions to have their contribution to nation’s growth as a mission. We need to offer confidence to entrepreneurs – micro, small, medium, large sized businesses – that the ease of doing of business will be amongst the best in the world; and to give confidence to bankers, to lend.

We need to lend our way to growth !

Disclaimer: The views expressed in the article above are those of the authors’ and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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