RBI governor identifies building blocks for sustainable economic future

25 Aug 2023 , 09:40 AM

Most of us are quite familiar with the now famous India growth narrative. Even the most conservative estimates peg India’s GDP growing from the current $3.5 trillion to $5 trillion over the next 5-6 years. At the same time, the per capita income is also expected to grow sharply, triggering a huge unleashing of purchasing power. But, the billion dollar question, or rather the trillion dollar question is where will this growth come from and how will this lofty target be achieved. It is easy to project the current rate of growth and then extrapolate it over the next 6 years on an excel sheet. However, economic growth rarely adheres to classic excel calculations. The GDP growth of an economy has its own share of eccentricities at play. If excel sheets were the guide, then Japan should have been a $20 trillion economy long back. But that was not to be.

It is in this context that the recent Lalit Doshi Memorial lecture delivered by the RBI governor, Shaktikanta Das, assumes significance. In his address, Das not only dwelt upon the key building blocks of India’s future economic growth, but also connected it with the current macroeconomic backdrop. Let us start with the 6 key building blocks.

Building Block 1 – Why agriculture still holds the key

As Governor Das put it rightly, India is often criticized for its agricultural productivity. However, what most experts overlook is that India has just 2.4% of the global land area; yet it is among the top 5 agricultural producers in the world. That is the feel-good factor, but now for the reality. One of India’s major soft strengths comes from the fact that today, India is substantially self-sufficient in food production. In fact, India is net exporter of foodgrains. Yet, there are challenges. There are productivity gaps, and agriculture needs heavy investments in infrastructure and innovation to modernise the sector. Farm incomes have grown, but it is still far from being the standalone wealth creator. 

The road ahead in agriculture, if India has to achieve the $5 trillion GDP mark is a mix of technology, innovation, and investments. Tough agricultural reforms with focus on agricultural marketing and connected value chains hold the key. The next step is to move decisively towards improving cold chains, preventing wastage, setting up mega food parks and food processing units, which can add value to agriculture. That must be the agenda.

Building Block 2 – Focus on emerging Manufacturing segments

Manufacturing has a multiplier effect on the GDP due to its unique features like economies of scale, backward and forward linkages and integration to global supply chain. Above all, the manufacturing sector is the largest consumers of services and robust manufacturing is at the core of a robust services sector. In a sense, India jumped from agricultural to services and allowed the share of manufacturing to remain stagnant during this period at around 19%. So, what is the agenda in manufacturing?

In a changing manufacturing landscape, India has to focus on emerging manufacturing than on legacy manufacturing. For instance, India has the skills to capitalize on emerging segments like aerospace, defence, low-carbon technologies, electric vehicles, and semiconductors. The PLI (production linked incentives) scheme is directed at creating such biases in manufacturing and that is the road ahead. A major gap in manufacturing is to ensure continuous training and skilling of the workforce and digital compatibility.

Building Block 3 – Services to focus on new segments and new markets

In the last two years, the trade data is getting loaded towards services. While India continues to run a deficit in the merchandise trade account, its surplus on the services trade account is building heft. Ideally, India would prefer a day when the surplus on the services account would fully offset the merchandise trade deficit. That day may not be far off. Since FY15, the share of services in gross domestic product (GDP) has been above 60%. India already ranks as the world’s seventh largest services exporter. India has played a major role in establishing global service networks and has become a global hub for information technology (IT) and business process outsourcing (BPO) services. 

The good news is that the service packaging is improving and Indian companies are starting to provide end-to-end services, which makes their models more sustainable in the long run, even as they get greater wallet share. Today, the big focus is on services like tourism, education, telecommunications, and healthcare. All these sectors have significant potential to not only generate higher employment opportunities, but also earn more foreign exchange. What most people are not aware is that India has emerged as the preferred destination to set up Global Capability Centres (GCCs) by multinationals. The future of services likes in skill intensive activities with  higher margins and greater stickiness. This includes high-end data analytics, AI-related services, digital transformation, internet infrastructure, cloud computing and a lot more. That would be the real agenda for elevating the services sector in India to the next level.

Building Block 4 – In growth, demography is your friend

The current moment is a golden moment for India and it is interestingly poised in a sweet spot. The reason for that is demographics; or the inordinately high proportion of young and working age population in India. It is the situation that the US found itself 60 years back or China found itself 30 years back. India is in that situation today. For instance, India accounts for 67% of the global working-age population and will add 18.3 crore more people to the working age over the next 30 years. By 2030, India’s median age will be just over 30. That is when the significant human capital would be unleased into the production stream. More than that, it becomes a thriving a market which creates demand for a plethora of consumer and investment products. The multiplier effect can be humongous. This can lead to an improved growth differential in favour of India and increase India’s relative size in the global economy. India could even face a reverse brain drain someday in the future, but we will leave that for now.

However, to achieve the best of demographic dividends, there are some prerequisites. There is need to improve labour force participation rate, especially of women. The government must substantially expand investments in education, skill development, and healthcare to capitalise on this demographic advantage. Demographics cannot last for long if the social sector infrastructure and the social security needs are not taken care of. That should be the agenda of the government to make the best of demographic dividends. 

Building Block 5 – Becoming a digital economic powerhouse

That appears easier said than done, but it is not inconceivable. The time is opportunity and it will be a logical extension for the services sector mandate and the demographic dividend mandate. The idea is to make knowledge and skill development scalable at economical costs and that is possible through the combination of technology and digital initiatives. Today, the technological advancements have enabled virtual education, remote work, and contactless sales and they are all working pretty well. The idea is to build on these successes and offer models for scalable growth. 

Indian businesses are starting to adopt AI, but it is necessary to make generative AI central to the organization. It is to the future what the internet and ERP were to business in the last 30 years. Frontier technologies like artificial intelligence (AI), Internet of Things (IoT), Machine Learning and Big Data are the ideas for the future. They may be still looking for a tipping point, but it is going to come sooner rather than later. The idea for India is to be prepared with the necessary trained manpower, skills, and the necessary infrastructure.

Building Block 6 – Innovations and start-up culture

Few things drive long term economic growth as powerfully as innovation does. Look at Europe post the Renaissance or the US in the last 150 years. The story has been all about innovation. India is producing millions of aspiring entrepreneurs, but intent alone is not enough. They need an ecosystem where ideation can thrive, risks can be taken, mistakes can be committed and lessons can be learnt. Today that does not exist. There are several start-up schemes, but the traditional MSMEs are not really getting the benefit of it. Major economies like the US, Europe and Japan have all growth on the strength of small laboratories of innovation called MSMEs. In India, that sector also plays an important role and the onus is on the government as to what best it can do to nurture this innovation and develop this start-up culture. 

The focus has to now shift to targeted development of start-ups in high-tech domains like quantum computing, small modular reactors (SMR), AI-based defence equipment, biotechnology, rare earths extraction, battery technology etc. This is a high risk area, but that is where the backing of government sponsored programs will be crucial.

Why these 6 pillars matter in the current economic context

We have seen the 6 building blocks of future sustainable growth outlined by the RBI governor, viz, Agriculture, Manufacturing, Services, Demography, Digitization, and Innovation. Today, the global paradigm is shifting from globalization to fragmentation. Global supply chains have been under pressure and most economies are looking to spread and hedge their economic bets. Monetary policy has become a potent weapon in the hands of global central banks to tweak global liquidity. In this backdrop, global business flows would be under strain in the near future. The answer is to focus more on domestic businesses. India already has a robust domestic consumer market, but it has to be good enough for the next 20 years. For that; these 6 building blocks will hold the key.

With 7.2% growth, India remains a whiff of fresh air amidst struggling growth. But that cannot happen unless inflation is controlled and that has surged in recent months. With the building blocks, the efficiency parameters would be substantially tweaked and that means many of the domestic inflation related problems would be automatically resolved.

What time India?

That is still a million dollar question, but the good news is that today there is a favourable narrative for India. India is likely to outsmart other large economies for 2 years and that gives the right opportunity to set the building blocks in place. India has limited leeway at its disposal and needs to make the best of it. The growth narrative has surely changed from caution and watchfulness to optimism and exuberance. In the past, there has been a gap between precept and action. Now, the growth edge has given India a good 2 years to put its building blocks in place. How India uses the next two years working on the building blocks, will largely determine how she grows and expands in the next 30 years.