India: A 5 Trillion Economy
The new government has committed to make India a $5-trillion economy by 2024. Here’s a brief outline of the idea.
What does a $5-trillion economy mean?
$5-trillion economy refers to the size of an economy as measured by the annual gross domestic product (GDP). GDP is the total monetary value of all final goods and services produced in an economy within a year.
Currently, India is the sixth-largest economy in the world with a GDP of $2.7 trillion. But it has to be understood that India being the sixth-largest economy doesn’t corroborate Indians being sixth-richest people since GDP per capita of India is much lower when compared to many developed countries and developing countries.
Bottlenecks to accomplish the dream
The most critical things India has to grapple to achieve the $5 trillion target are:
- Tax system
- Regulatory laws
- Attitude towards the private sector
But the biggest stumbling block for achieving the $5 trillion target is that each of these factors is working in their own sphere unmindful of the fact that while their actions may achieve their individual goals, they may cause serious damage to the national policy objective.
Foreign Direct Investment (FDI) is the key to achieve the dream of 5 trillion economy. But India’s regressive tax laws and the tax administration which is widely known as anti-industry is pushing the foreign investors to set up manufacturing units in China, Thailand or Vietnam.
The tax authorities are working with the single-minded focus towards achieving their revenue targets, and any method justifies the end. As a result, it is leading to most ridiculous tax demands resulting in extensive litigation. It is a matter of serious concern that India which has less than 2 per cent of global trade, has more transfer-pricing disputes than any other country.
Regulatory and Labour laws
The regulatory and labour laws especially those at the state level, still require multiple licences and permits that make it very difficult to set up an industry.
A large number of these laws must be dismantled if Make in India is to become a reality. The land acquisition laws now require at least 48 months to set up a large project.
The sugar industry is a classic example of the government’s populist policy pushing the entire industry to a crisis. No industry can survive if the state-regulated raw material price is more than the market-driven selling price of the final product.
Attitude towards the private sector
The Private sector is seen more as a necessary evil rather than equal partners in the economy. Private Sector must be seen as an affirmative good. China which was at a similar GDP and population same as of current India a few decades ago is now a $ 13 Trillion Economy. This was made possible because of the Chinese government’s efforts to actively and aggressively encourage the private sector.
Indian Economy is witnessing a tough phase. Several industries are facing an existential crisis and there is an overall slowdown of the economy. The Indian economy requires a serious overhaul if we are to generate large-scale employment.
The task of achieving the $5 trillion goal has to be equally shared by states by actively pursuing reforms.
India has two options in front of it:
- To continue with the current model of focusing on large government-sponsored infrastructure and welfare schemes to drive growth which necessitates massive borrowings, Or
- Actively encourage private investment to make India the second-largest manufacturing nation.
If India continues on the existing path, the $5 trillion dream will remain a mirage. On the other hand, encouraging private investments will enable India to reach the target by 2024. To encourage private investments, the tax and regulatory laws must function in unison and must be designed to become growth-oriented.