That One Economic Target India Must Set And Achieve

Targets come and go in India.

Export targets, GDP growth targets, targets for the size of the Indian economy. Most often these targets are set over such long time-frames that by the time a target is to be achieved, it is all but forgotten. The goal of making India a $5 trillion economy by 2024 is most certainly among them.

But there is one target that India should set and work towards with some resolve – that of increasing per capita income of ordinary Indians. We could start with the objective of doubling per capita incomes and then work towards the growth rates and growth strategy needed to achieve that objective.

Let me first set the context. The Indian economy is facing a sharp slowdown in growth. GDP growth fell to 5 percent in the first quarter of FY20 and is expected to remain weak atleast for the first half of the year. That's worrying enough but what is more concerning are the projections for ‘lower-for-longer' growth being put out by various agencies.

Moody's Investors Service, once a believer in the potential for recent reforms to lift growth, on Friday cut the outlook on India's rating citing prolonged growth weakness. Fitch Ratings expects India to grow below the estimated potential growth of 7 percent for at least the next two years. Nomura Global Market Research expects India to grow at 4.9 percent in the current financial year and pegs potential growth at closer to 6.5 percent for the next five years. To be sure, there are more optimistic projections as well, such as the Reserve Bank of India's forecast for 7 percent GDP growth in FY21.

Going by these forecasts, it looks like India will grow at less than 8 percent—until recently considered a reasonably easy-to-achieve growth rate—at least for four consecutive financial years. Lower growth matters not just because it reduces India's bragging rights but, eventually, because it means lower growth in per capita incomes. At the end of the day, that's what matter most to each individual participant of the economy.

Still ‘Lower Middle Income'

It may be worth recollecting where India stands in the per capita income league tables, just to reiterate the importance of strong economic growth.

The World Bank classifies the world's economies into four income groups – high, upper-middle, lower-middle, and low. India falls in the category of lower-middle income countries, which have a per capita income in the range of $1,026-3,995.

India's per capita income is somewhere in the middle of that range estimated at $2,015.6 for 2018.

Incidentally, there are 47 countries in this grouping with an average per capita income of $2,218.9. India is below that average. In terms of rank, India is at about the 30th country in this segment.

Some of the other Asian emerging economies, even with the lower-middle income segment, rank well above India. For instance, Indonesia has a per capita income of $3,893.6, Philippines of $3,102.7 and Vietnam of $2,563.8. Each of these economies have also seen stronger growth in per capita income than India, at least since the start of the century.

Getting To ‘Upper Middle Income'

India's first objective ought to be to move to the ‘Upper Middle Income' category.

While the precise benchmarks for what qualifies as ‘Upper Middle Income' change from year to year, India has to roughly double its per capita income to get there at current income thresholds.

What will be the math needed to get there:

• If India has to move from a per capita income of roughly $2,000 to $4,000, the size of its economy in nominal terms needs to jump from about $2.6 trillion in 2018 to $5.2 trillion, if one were to assume constant population of 1.3 billion.
• But population will not stay constant. At present, the population growth rate is assumed at about 1.1 percent. At that rate of growth, we add a 100 million to our population every seven years, taking it to 1.4 billion.
• Assuming a population of 1.4 billion and a per capita income of $4,000, which is double the current level, the size of the economy we need to work towards is closer to $5.6 trillion.

The question now is how long does it take us to get there. And that brings us back to GDP growth.

If India's gets stuck in a lower GDP growth range of 6-7 percent, and if we assume inflation at 4 percent on average using the mid-point of India's inflation target, we get a nominal growth rate of 10-11 percent.

At that level of nominal growth, if sustained, it will take us another 7-8 years to double per-capita income and get to the ‘upper middle income' category. That's better than the decade it took us to get from a per capita income of about $1000 to where we are now. But it is far slower than what China saw when it moved up from a per capita income of $2,099 in 2006 to $4,550 in 2010.

India can shorten its journey in the move up to that target of doubling its per capita income only if it manages to move back up the growth curve. A sustained nominal growth rate of about 12 percent will get us there in about 6 years. If we retain our inflation goal of 4 percent, that means we need to try and push back towards 8 percent real growth — some distance away from the forecasts currently being put out.

A Long Road

It is for this reason that India should not be content with a shallow rebound from current growth troughs. Policymakers must first stabilise the economy, repair current damage and then go on to addressing some of the medium term problems.

What those steps are have been articulated by many experts.

The immediate priority is to stop the bleed, by restoring the flow of financing to the economy. With the RBI governor making it clear the there will be no bank-driven rescue of a failing non-bank lender, perhaps the best option continues to be an asset quality review which lifts the veil of suspicion shrouding the sector.

Alongside, a coordinated monetary policy and fiscal policy response is needed to restore consumer spending, which has been the strongest pillar of India's economic growth.

From there on, there is much heavy lifting to be done. Pushing up investments, focusing on jobs and income growth rather than denying that the problem exists, improving competitiveness of exports and under-taking long delayed factor market reforms.

No one said it was going to be easy. But if India's wants to make a leap to double its per capita income rather than crawl to it, it must be done.

Ira Dugal is Editor - Banking, Finance & Economy at BloombergQuint.