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Last Updated : Jan 15, 2020 07:52 PM IST | Source:

Will Budget 2020 set the tone for the govt's $5-trillion economy target?

The upcoming budget is the event where we can expect reforms to manifest, which will set a path for the economy to achieve this target of a $5 trillion economy over the next five years.

Moneycontrol Contributor @moneycontrolcom

Abhishek Bansal

In the current financial year, the RBI has reduced the GDP forecast from 7.2 percent in April 2019 to 5 percent in December 2019, mainly because consumer spending has dropped significantly.


In Budget 2019, the Finance Minister had pegged India's nominal Gross Domestic Product (GDP) growth rate at 12 percent for 2019-20; now, the nominal GDP growth is expected at about 7.5 percent.

In the last Budget, the FM had revised the fiscal deficit target to 3.3 percent of GDP, but now it's probable that the government will miss this target.

Due to a shortfall in tax collections, the government is expected to cut spending to meet the fiscal deficit. The total indirect tax collections were estimated to be Rs 11.19 lakh crores in 2019-20. Direct tax collections, as of November, crossed only Rs 5 lakh crores against the target of Rs. 13 lakh crores.

The Central GST collections, as of November, stood at Rs. 3.26 lakh crores, against the government's goal of Rs. 5.26 lakh crores.

We can probably see incremental growth in tax collections in the remaining months of the financial year, but the government is likely to miss the target.

The unemployment is at a 45-year high, whereas consumer confidence and GDP growth is at a 6-year low. India needs a sustained growth path over the next five years to achieve the $5 trillion economy target.

In a recent statement, Prime Minister Shri Narendra Modi affirmed that a five trillion dollar economy is not a sudden development, and it is based on a deep understanding of the strengths of the country.

According to him, sectors like tourism, urban development, infrastructure, and the Agri-based industry have a high potential to take forward the economy and result in massive employment generation. It's not possible to grow over extended periods without major structural reforms.

The upcoming budget is the event where we can expect reforms to manifest, which will set a path for the economy to achieve this target of a $5 trillion economy over the next five years.

Attract more FDI:

Several fundamental and path-breaking reforms have been undertaken in the form of the Insolvency and Bankruptcy Code, GST, and corporate tax cut. Continual liberalization has resulted in unprecedented inflows of FDI into the country.

Just one month after announcing a surcharge on FPI in Budget FY19-20, the government repealed it. Despite a slowdown in the global economy, foreign investment inflows have not been impacted.

India received $26.096 billion of foreign investment in the first half of FY2019-20 in comparison to $22.664 billion for the FY 2018-19. In 2018-19, total FDI into the country stood at $62 billion, an increase from $60.1 billion in 2017-18.

India mainly attracts investments from countries like Mauritius, Singapore, Japan, the U.K., the Netherlands, the U.S., Germany, Cyprus, France, and the U.A.E.

The sectors that received maximum FDI include services, computer hardware and software, construction development, trading, automobile, pharmaceuticals, chemicals, and power.

Support Export and Manufacturing:

In the latest data for the current FY, the cumulative value of exports for the period April-November 2019-20 was $211.93 billion as against $216.23 billion for the same period in 2018-19.

India's exports declined for the fourth successive month in November. India's manufacturing activity also slowed down during October and November. The average quarterly PMI for the third quarter is the lowest, since the three months up to September 2017.

However, looking at the breakdown, manufacturing activity improved in December 2019 to 52.70 relative to 51.20 in November 2019.

Still, higher exports and manufacturing growth is crucial for India's goal of becoming a $5 trillion economy by 2025. India's share of global exports is less than 2 percent.

RBI's focus should be on reducing the cost of capital by further lowering the repo rates and ensuring that benefits should be passed on to the consumers.

The cost of logistics should be brought down in the upcoming budget, and the economy should be opened to global investors in a range of areas such as real estate, defense, insurance, pension funds, etc.

The focus of the Government should be on signing multiple Free Trade Agreements (FTA’s), which would improve the value chain and will give India an edge over non-member countries.

India needs to create a freer autonomous economic zone where concentrated manufacturing activity could be developed without the fear of labour laws, land laws or any other obstructions.

Increase ease of doing business:

In this budget, we expect the government to focus on more reforms towards achieving a better rank for the ease of doing business.

Sustained business reforms over the past several years have helped India jump 14 places to move to 63rd position in the global ease of doing business rankings in the World Bank's Ease of Doing Business 2020 Report.

Still, our challenge is that in the next two years, we must reach the top 50 and in the next five years, reach the top 25. India still lags in areas such as enforcing contracts (163rd) and registering property (154th).

It also takes 1,445 days for a company to resolve a commercial dispute through a local first-instance court, almost three times the average time in OECD high-income economies.

Agricultural Reforms and Urbanization:

Structural agricultural reforms in India is the need of the hour as 58% of India depends on this sector. The government is spending a lot on agriculture subsidies, but not much has been achieved.

India needs robust physical markets, technology upgradation, and contract farming, among others. Most farmers do not have the capacity or means to benefit from the existing schemes. Therefore, it is better to adopt an out-of-the-box approach.

We need to develop a new model where farmers learn to be productive by working in association with a professional firm that takes care of farming, marketing, and exports. Allowing contract farming will resolve many of these issues. Urbanization at a faster speed will also help India increase the optimal use of its resources.

Under the census definition, 31 percent of the Indian population lived in urban areas in 2011. Major world cities account for 82 percent of the global GDP despite being less in number.

America and Europe have already completed urbanization, while China is nearing the completion. India has just begun urbanization, and there is much scope to develop megacities.

This will solve unemployment issues and will also allow the optimal use of natural resources. Singapore is the best example of urbanization which uses water resources more optimally.

(The author is Chairman and Managing Director, Abans Group of Companies)

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First Published on Jan 13, 2020 01:21 pm
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