Print This Post
19 April 2018, Gateway House

New India @ 2022

In his speech on, ‘New India at 2022’ – Rajiv Kumar, who has just returned from China after a meeting of the Niti Aayog with China's National Development and Reform Commission, says India is at the cusp of sustained, high, inclusive growth because of much greater formalisation of economic activity in the country today

post image

Good morning, everybody.

It is a great pleasure to be here. But I can see that this – a talk on the Indian economy – is a minor issue of sorts compared to the much weightier issues of global geostrategy that have been discussed. So, I do hope you will bear with me and have the patience to listen to what we are trying to do in terms of shoring up the Indian economy.

We inherited an economy on the decline, one where private investment was pretty much on strike, exports were in free fall, employment was stagnating – or declining. Worse still, as a result of the punch bowl that had been kept open during the last few years of the previous government, non-performing assets (NPAs) had risen enormously and banks had stopped lending to industry. They were lending only to those to whom they were, in some sense, being forced to lend.

This economic legacy continued to plague us for a good three years. I said this in July itself –when the data first came out – that we reached the lowest point of economic activity in about July 2017: the first quarter result for 2017-18 came in at a very dismal 5.7%. People started saying, ‘this is it for the Indian economy’ and ‘we won’t ever look up’. I was the lone voice at that time, saying, ‘I think we have bottomed out. We will begin to see growth again.’ Thankfully, that did turn out to be true. The second quarter had the figure at 6.5%, followed now by 7.2% for the third quarter. Economic activity has picked up momentum since then.

We have some good results to talk about now. Those of you who have seen the latest Index of Industrial Production (IIP) figures of January 2018 will notice that it has risen by 7.5%. Manufacturing, which constitutes about 77% of the IIP, has gone up by 8.7%, despite the fact that the tobacco sector has experienced a decline of 46%, which I don’t mind very much actually. The two weak sectors that I noticed, and which must change, are textiles and readymade garments. I’m sure they will do better, going forward, knowing the effort the government has put into them.

There are other amazing figures. The Society of Indian Automobile Manufacturers (SIAM) put out a figure that showed that the production of cars in this country increased by 31% in January; and so did that of three-wheelers. We are a country where people use three-wheelers all the time. Now, we’re getting into electric three-wheelers in a very big way; production has almost doubled. Compared to the previous January, it rose by 99%. And yesterday, when I was talking to Mr. Anand Mahindra here, he said we need more capacity down the line, in components, and so on.

Similarly, construction is up by 4.3% in the third quarter. It’s not very much, but when you compare it to the 1.3% in the previous year, you can see that there is a beginning. These are the two sectors that have some of the largest multiplier effects in the economy, the backward linkages. And once these two start moving, the others will perhaps follow.

Services are up by 7.2%, and growth in exports, according to the Ministry of Commerce, is expected to be 8%. This is not as good as it should be, but nonetheless, it’s much better than the negatives and the declines that you’ve had in the previous three years. Air passenger traffic has seen growth of 27%, year on year. We have also seen incredible expansion in air freight volumes.

The weakness in our case has been private investment. Non-food credit to industry has actually declined, reaching -0.6% last year. That was up by 8.6% in November and is now up by 12%. Therefore, banks are beginning to lend again. One can see a tightening of liquidity for the first time in a long time – as reflected in the rise in both deposit and credit rates in the banking sector – and a growing demand for commercial bank credit.

Gross fixed capital formation is again not the best, but a growth of 7.6% is not so bad. Yet the investment to GDP ratio, which had peaked at 36-37% in our case, is now down to 31%, but up from the 28% or 27% to which it had declined. All this, therefore, proves for once that Moody’s is right for having upped our credit rating, the only agency to do so. I wish the others had followed them because they would have then got the credit for this.

Let me rephrase: Moody’s has said that going forward, the Indian economic activity will pick up steam, and the economic cycle – the investment cycle too – has turned. Private investment –exports – is now looking up. I expect the Indian economy to beat the IMF’s estimate of growing by 7% or 7.1% for 2018-19. I will put my bet at 7.5% going forward this year, and rising. This is what I’ll explain in the next 10 minutes or so.

The title of my talk was ‘India – New India at 2022′. Let me now, therefore, shift gears and tell you what I’m looking at next year. From where I am at the moment, right in the middle of the economic activity in Delhi at NITI Aayog, cutting across a whole lot of silos and sectors, I can be optimistic enough to say that we are at the cusp of sustained, high, inclusive growth.

This growth does come with some downside risk, which I will come to later. If those downside risks don’t matter and we can address them, then growth will continue for a decade, or longer, which is what we need. I wrote a paper in 1984, on my first visit to Japan, when I said, India was a land of “perpetual takeoff”. It kept taking off and falling back. The time has come that we will take off and we will get the required escape velocity.

The reason for that is rather straightforward. For the first time ever, you are seeing a much greater formalisation of economic activity in this country, of parallel economic activity. We said that the parallel economy was 20% 20 years ago: Shankar Acharya, my friend, had done this first estimate of 26%. Some then said 35-40%; that kept rising. This is the economic activity below the radar, below tax compliance.

That’s ended finally and we have turned a corner there. The numbers in terms of tax returns, the Goods and Services Tax (GST) and personal income tax, are showing a buoyancy of more than 2, which is unheard of. It’s a huge increase there. Another friend, Surjit Bhalla, whom you recently heard, said that the fear of a revenue shortfall will be a story of the past.

We will get steady revenue increases, both from direct and indirect taxes, because of the major steps that we have taken: one, improving direct tax compliance, making it all digital and much simpler. Two, the GST is creating an absolute revolution. Nearly 1.8 million new GST tax payers were added in two months’ time. These are some incredible numbers.

Such formalisation means that now, the time has come for Indian small and medium industries to finally become part of global and regional value chains, which was not so until now. So far, these entities – 56 million of them, according to the last census, where the major competitive advantage was – simply dodged taxes. They existed, but never expanded, and therefore, that was the Mystery of the Missing Middle in India, the mystery of our giving birth to not babies, but midgets, in our corporate sector. I think all of that will change because of the formalisation that we have now seen in the last two years.

The second big trend, which is again quite new, is the huge improvement in governance. This means that for the first time, we are reversing the gulf between private and public sector performance. We had taken for granted that the private sector will continue to grow at a rate which the public sector will never be able to match.

So therefore, there were these huge, private, beautiful residential complexes – which matched California’s – built around golf courses, but when one came outside, roads didn’t exist and there was no water supply. Therefore, the middle class, the elite of India, got used to finding private solutions for public problems all the time, and simply said, ‘Oh, the government just doesn’t deliver, it won’t work.’

So, if you didn’t have water, you bored your own wells. If you didn’t have electricity, you got your own generators. If you didn’t have good education, you sent your children abroad. For the first time, I submit to you that this government is about replacing that soft, non-working, sometimes corrupt, government with a development state in India. And the main mandate that it has for itself – which ought to be the primary mandate of any government – is ensuring that the delivery of public services is efficient, transparent, and improving all the time. That is why the Prime Minister keeps talking about not just the Ease of Business Index, but the Ease of Living Index too, which NITI Aayog will come up with in the next six months and in which states and districts will compete.

As a part of this, we have selected 115 ‘aspirational’ districts. They are, in fact, the most backward districts in this country. And we have taken it upon ourselves to integrate the government schemes in such a way that the benefits are more widely distributed in these districts. We will lift these 115 districts up to the national average. This will be the best proof, in some sense, of this government meaning business in terms of improving its delivery of public service.

The third very major trend – and you will have noticed it too – is zero tolerance for corruption in the higher echelons of government. This does not mean that it’s going to be limited to the higher echelons – no, it just takes time for it to seep down to the ground level.

And hopefully, if we have the Ease of Living Index, which will capture the interface of government authorities with common people and we have states competing on this basis, we can accelerate the process of ensuring zero tolerance for corruption as we go down the chain in terms of licences and permissions and so on.

To give you an example: I had a meeting last week with all the principal secretaries of food and agriculture from all the states covered by NITI Aayog. We insisted that each of them legislate a new Agriculture Produce Market Committee Act – now called the Agriculture Produce and Livestock Marketing Act – which will eliminate all restrictions on inter-state transfer of food products. In conjunction with GST, the APLM Act will dispense with border checks and associated corruption.

And last, but not the least, the huge big trend is the use of direct benefit transfer, the Jan (or ‘people’) Trinity, as we’re calling it. The use of Aadhaar is an amazing achievement in the last five to ten years – a very positive legacy of the previous government – for linking all transfer payments directly to beneficiaries’ bank accounts. We have already made 2.7 lakh transactions –or Rs 2.7 trillion in transfers directly into bank accounts – and thus saved about Rs 60,000 crore of the government’s money.

So all those leakages, the gravy train that existed – which Rajiv Gandhi made immortal by saying that only 15 paise or 15% of all the rupees spent on transfers actually reaches the beneficiary – will soon be a thing of the past. These are some of the incredible, new processes – such as the GST – that have been set in motion. Demonetisation came as a shock. But I have been a big supporter of the move.

As for inclusion, it is evident in the emphasis that our Prime Minister has given to all those schemes that will benefit those who have been excluded so far – such as, the 400 million people who have been without electricity and who now have access to the Saubhagya scheme. When we started the electrification of villages, there were as many as 18,000. Now, we have only 1,000 left of which 920 are in Arunachal Pradesh. It requires people to carry loads of equipment to get these villages connected.

Millions of our women, who have suffered from the lack of a commercial cooking medium, will now get free gas connections. Or there is the construction of rural roads under the Pradhan Mantri Gram Sabha Gram Sadak Yojana.

Therefore, when I said that we are at the cusp of a sustained period of rapid inclusive growth, it was not just hyperbole. It was based on facts.

Besides, an important thing that the prime minister has said is that we will not let development be an elite activity, but a mass movement in this country. To give you the historical precedent for this, our independence movement started in 1857, led by feudal lords, kings and queens – and was crushed, of course.

It was in 1888 that the Indian Congress party was formed, again an activity of the elite, working out of the clubhouses of Mumbai. In 1942, Mahatma Gandhi gave the call for Quit India, saying, ‘That’s enough; let’s go’. It was at that point that our independence movement became a mass movement. Every Indian – from the farmer in Champaran to students in Kolkata and Punjab – everybody thought that they were now party to the independence movement. And lo and behold, five years later, we were independent!

Therefore, the Prime Minister is saying that if we make development a mass movement, if we change the process so that every Indian feels a participant in it, if the benefits don’t just trickle down, but are taken to the person directly, we can accelerate the pace of growth even further and make it more inclusive and empowering, and thereby more employment-generating as well.

To convert the nature of our development process, we have put in place many reform measures, such as in agriculture. NITI Aayog has been tasked with finding a solution to how farmers can receive the Minimum Support Price (MSP) that was announced for 24 agricultural commodities: though announced, it was never adequately disbursed due to delays of various kinds. We at NITI Aayog came up with a bouquet of three schemes or solutions that we will offer to state governments. We will start this as a pilot process in the rabi season, the season that has just started, with the harvest beginning to come in, and roll it out by the time of the kharif season, that is, with the produce due in October or November, which is what the Prime Minister promised.

One of these schemes is to permit state governments to act — intervene in the market – without seeking the clearance and permission of the central government, which used to take a few weeks, and farmers faced a lot of distress in those three or four weeks. But now they can go in right away and make the procurement at the Minimum Support Price.

A second scheme that is even more innovative is to have traders within the market do the job of government agents, procuring the produce at the minimum support price for a set of incentives that we offer them. They are thus, for the first time, converted from people who are buying at lower prices and making a killing to those who will be buying at support prices, with the government offering them incentives. This thus lifts up the whole enterprise, enabling the farmers to get the support price that’s been announced.

More importantly, we have also been tasked with announcing measures and rolling out pilots, which will double the farmer’s income in the next five years. I want to assure you that this is not merely a pipe dream. We in NITI Aayog now have ten pilot projects on the anvil. We know we can do this within the next two or three agricultural seasons because the technology is there, and the organisational structures can be created.

The distance between the farmer – or farm gate – and market can be reduced so that he can get a better share of the value that is added. Farmers can also be induced to shift from growing only traditional crops to those of higher value. They can also move into floriculture, horticulture, vegetables and other items. It is doable, we have done it. We have collected maybe more than 50 such examples in the country. The NITI Aayog’s mandate is to replicate and scale them, which is what we will do.

So, we are now focused for the first time ever on agriculture, which has remained our Achilles’ heel. I think in the budget speech, the finance minister did not talk about just raising agricultural production, but about raising farmers’ incomes. And that’s a huge change in the way the government is approaching the whole idea of agricultural modernisation.

On health, you just heard our announcement of the Universal Health Insurance Scheme which will cover 110 million households – about 500 million people – and it will be universal within this year. Many people, including my friend, Mr. Chidambaram, went out of his way to say that this is under-funded and there’s no money for it, etc. I’ve just seen the budgets, the numbers: the total cost for the next two years will be about Rs15,000 crore, of which Rs11,000 crore will come from that 1% cess that the finance ministry has levied on income tax payers. And there is Rs4,000 crore in the budget already. So, any talk of this being an under-funded or non-funded scheme is not to be entertained – and let me end the matter there.

With this, for the first time ever, the poorest of this country, who today meet 68% of their health expenditure out of their pocket and for whom every health episode means a trauma and a slippage back below the poverty line, will find that their health issues and everything to do with non-communicable diseases, etc, will be taken care of by the government to the extent of Rs 5 lakh per family. And you can imagine what an improvement that will be in terms of social security, productivity and so on.

Time is running out, but I want to say a little about Udaan. We had this wonderful viability gap funding scheme, called Udaan, where the government said that they will subsidise air traffic to airfields that are not otherwise commercially viable. It has been amazingly successful. Several airports and towns in the Northeast are now connected. The government, lo and behold, has announced Udaan 2, which will give viability gap funding for Indian carriers to fly from the Northeast to international destinations, such as Singapore and Kuala Lumpur, Myanmar and Thailand, in two hours of flying time. Manila may be the next to be covered by this scheme.

What we’ve discovered under Udaan is that once you start, supply genuinely creates its own demand. And therefore, the risks before the government, the ones I talked about, are much lower than expected.

There are many other examples of the reform measures that the government has announced. But let me end here and say that I do see a few downsides. One, of course, is oil prices. If they go above $70 a barrel, India will face a fiscal crunch. Luckily, the good news last week was that U.S. shale oil has come back to about $65. So, I think the prices will be moderated.

The Saudi oil minister was in town yesterday and I’ve been on board with him: he himself felt that prices are now beginning to moderate although he would much rather have them rise until the Aramco IPO comes through later in the year. I think oil prices will be moderated.

The second risk, of course, is global protectionism, trade wars, and how this will turn out for India. India did escape the Asian financial crisis in the 1990s because we were not so connected with the region. And similarly, here, our growth is not so dependent on external markets. Our net exports have always been negative so far. We’re a domestic consumption and investment-driven economy; so, we might not be too badly affected by a marginal increase in global protectionism. Of course, a full blown trade war between China and the U.S. will badly affect the entire global economy.

Now is the time for India to have a much bigger share of world markets and ramp up its export activity at $243-250 billion. We’re just not in the game at all. I think we should go up: we are currently at 1.6% share of manufacturing trade. We need to expand that. I think the trade protectionism trend will pass. Maybe we will use this time to prepare our supply side, have much better infrastructure.

The third downside risk is something that always existed in a democracy, which is political instability. I can’t comment on it: I would rather have you tell me whether you see India as a politically stable regime, going forward, or an unstable one – because, clearly, I’m in a very biased position here.

The last risk: could India itself slip into a protectionist stance? This year’s budget, for the first time since 1991, announced tariff increases on about 100 commodities. In my view, this is surely a transitory arrangement, introduced to take into account that our Make in India experience was not as big a success as we wanted. It has been forced by the fact that many of our Small and Medium Enterprises (SMEs) have taken a huge beating from Chinese imports and other free trade agreement partners. Besides, the boost to domestic production that this will give will help increase employment more rapidly.

We do want to give some space and respite to our SMEs, but also use this time consciously to improve infrastructure facilities and remove the supply side bottlenecks by reducing costs – of transactions, of energy. If we do this, then the need for this protection – which I don’t agree with personally as I have always believed in global and open orders – will no longer exist in the future.

So the three or four downside risks I mentioned are easily manageable. Let me end on as optimistic a note as I began: in the next five to ten years, India will be on a much higher, sustained and inclusive growth trajectory.

Thank you very much for your patience.

Rajiv Kumar is Vice Chairman, NITI Aayog, New Delhi, India.

This speech was delivered as the Keynote Address at The Gateway of India Geoeconomic Dialogue 2018, held in Mumbai on the 12-13th of March 2018. Click here to view his speech.

You can read exclusive content from Gateway House: Indian Council on Global Relations, here.

For interview requests with the author, or for permission to republish, please contact outreach@gatewayhouse.in.

© Copyright 2018 Gateway House: Indian Council on Global Relations. All rights reserved. Any unauthorized copying or reproduction is strictly prohibited