GDP slump will hit $5-trillion economy target, warns NITI Aayog

GDP slump will hit $5-trillion economy target, warns NITI Aayog

The road to a $5 trillion economy by 2025 is beset with many speed breakers, the NITI Aayog has warned the government.

To begin with, the think tank has said the nominal GDP growth — a measure of growth without accounting for inflation — has to be at least 12.4% on an average if that target has to be reached. The current rate was a mere 8% in the first quarter of the current financial year.

The government is expected to release data for the second quarter (July to September) later this month. Experts estimate that growth will dip in Q2 compared to Q1 in both real and nominal terms. For example, while GDP growth in real terms in Q1 stood at 5%, state-run lender State Bank of India recently estimated that this could dip to 4.2% in Q2, with a corresponding dip in nominal growth as well. Real GDP growth accounts for inflation in its calculation.

The Hindu has accessed a presentation made by the Aayog CEO Amitabh Kant to the Standing Committee on Finance, chaired by former Union Minister and BJP MP Jayant Sinha.

GDP slump will hit $5-trillion economy target, warns NITI Aayog

Finance Minister Nirmala Sitharaman on July 5, presenting her first Budget, had said her government would work to make India a $5 trillion economy by 2025. The claim has often been ridiculed by opposition parties.

Mr. Kant in his presentation said that “domestic investment and consumption” are the only dependable drivers for sustainable re-acceleration [of the economy]. “However a deceleration in investment is visible, primarily in the household sector, due almost entirely to real estate,” he pointed out.

According to data he provided, gross fixed capital formation in the sub-sector of ‘dwellings, other buildings and structures’ fell from 12.8% of GDP in 2011-12 to 6.9% in 2017-18.

The slowdown in the domestic market is also because of limited availability of capital with the banks which are tied down due to high non-performing assets in heavy industry and infrastructure, Mr. Kant said.

As an indication of the “structural changes” that Ms. Sitharaman had also hinted at in her Budget speech, Mr. Kant argued that in the power sector, there is a high cross-subsidisation in favour of residential tariff leading to very high industrial tariffs. The electric power transmission and distribution (T&D) losses in India stand at 19%, higher than that of Bangladesh and Vietnam.

The presentation flagged the urgent need to focus on export of high-value technology and manufacturing goods instead of primary goods currently exported. Citing an example, the NITI Aayog chief said 98% of phones exported by India are in the low-value category, to the Middle East and Africa.

There has been a sharp decline in exports in the textiles from 2017 onwards, according to the presentation. Several financial experts have blamed the decline on the November 2016 decision to demonetise high value currency that drained vital liquidity out of the cash-dependent textile market.

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