India could achieve a real GDP growth rate of at least 7.5 percent for the next 10 years if the right push is given to key sectors such as exports, infrastructure and logistics, says veteran economist and former finance secretary Montek Singh Ahluwalia.

“My view is, in the next 4-5 years, it is quite clear we need to do a better job on infrastructure. We need to do what we say we are going to do on logistics. There are some improvements such as in the turnaround time for consignments, but the gap is still very large. I think they are being fixed and they can be fixed even faster. These should be the top priorities,” the former Deputy Chairman of the Planning Commission told Moneycontrol in an exclusive interview.
Ahluwalia said India needs a better export strategy to tap into the shift in global demand away from China. “…we have to recognise that Bangladesh and Vietnam are doing better than us, so we need a serious look at what is constraining our export performance,” he said.
In this freewheeling interview, Ahluwalia spoke to Moneycontrol on a range of issues, including the merit in joining the RCEP trade bloc, the need to lower import duties to increase export competitiveness, and the country’s food inflation conundrum.
Excerpts from the interview:
Former RBI Governor Raghuram Rajan recently said that it is virtually impossible for India to become a $5-trillion economy by 2025 unless a “miracle” happens, as the country will need a 12 to 15 percent real growth rate over the next two years to get there. What, according to you, is India’s potential real growth rate and do you agree with the former governor’s observation?
I don’t think Rajan’s statement is a controversial statement because even government representatives have modified the earlier target. We are at $3.75 trillion currently, and to get to $5 trillion by 2025, we would have to grow at about 13 percent in nominal terms, which would be well over 10 percent in terms of real GDP growth. That is frankly not feasible.
Part of the problem is that we have no official statement about what the growth targets are beyond the present year, which is about 7 percent according to the RBI, though others may think it lower. And, there is a statement by the Chief Economic Adviser that real GDP may be about 6.5 percent in the next financial year, which is pretty close to the forecast put out by a lot of international agencies. Beyond that, what we do have is a statement by BVR Subramaniam, Chief Executive Officer of NITI Aayog, that the government is going to bring out a Vision 2047 document with the aim of making India a $30 trillion economy by 2047. If we do the math on that, the real GDP growth required to achieve that aim is roughly around 7-7.5 percent between now and 2047. But even 7-7.5 percent is a very high growth rate to maintain over a 25-year period, because in that process we are supposed to have transited from being a bottom middle-income economy to more or less the top.
International experiences tell us that as countries reach higher levels of development, growth rates slow down. If you want to grow at 7 percent on an average over the next 25 years, then it makes sense to think of a growth rate of around 8 percent for the next 10 years, slowing down to maybe little over 7 percent for the next (subsequent) 10 years, and then slowing down to a little over 6.5 percent for the remaining years.
Given that India today is the fastest growing economy among middle-income economies does suggest that the country has developed a momentum, a result of 30 years of reforms, which have very often been very slow. To my mind, continuing high growth requires a continuation and deepening of the economic reforms process. If we are determined to do the right thing and we have the capacity to push ahead in those areas, I think a growth rate of at least 7.5 percent for the next 10 years is feasible.
If we are determined to do the right thing and we have the capacity to push ahead in those areas, I think a growth rate of at least 7.5 percent for the next 10 years is feasible
What worries you about India’s economy? Is unemployment and K-shaped growth recovery a concern for you?
I think India had an impressive recovery from the pandemic. Most of the information I have or seen does suggest the recovery was K-shaped. The more dynamic and modern parts of the economy have done well; the rest of the economy hasn’t done quite well. This part could be debated or disputed. On agriculture, we haven’t done as badly as people might think, but we haven’t done what we targeted, given that at one point of time we had talked about doubling farmers’ income, which could translate into much higher real GDP growth.
As far as employment is concerned, the pandemic led to a huge shock. Available data suggests that we have recovered from that shock as the rate of employment has gone back to normal. The important thing is the available data on real wages. That data suggests that though jobs have been created, the quality of those jobs is not all that great. Job prospects are good, if you are a software engineer, or if you are working on artificial intelligence, or in electronics, etcetera. But, if you are a modestly skilled person then the part of the economy that will provide jobs for you is not doing well. This has been a challenge for the last 10-15 years.
During the UPA regime, the growth of jobs in the organised sectors didn’t do badly. But, even within the organised sector there was a tendency to informalise, so the number of people hired on contract work actually expanded. We do need a better and deeper set of data on employment.
We are seeing a larger formalisation of the economy, which is a good thing since the formal economy is doing very well. Digitalisation, GST, widening of the tax net gives a preferential advantage to the formal sector. However, this means if the formal sector is doing well, some of it is at the expense of the informal sector. So, one cannot assume that the informal sector is doing as well as the formal sector.
My view is, in the next four-five years, it is quite clear we need to do a better job on infrastructure. We need to do what we say we are going to do on logistics. There are some improvements such as in the turnaround time for consignments but the gap is still very large. I think they (gaps) are being fixed and they can be fixed even faster. These should be the top priorities.
My view is, in the next four-five years, it is quite clear we need to do a better job on infrastructure
How can India create more jobs?
The best way to create jobs for medium to low-skilled people is to have an expansion in that segment of manufacturing, which is potentially an export segment. I think we need to find out why that is not happening. I have no problem with creating some jobs via measures like urban job guarantee schemes; but long-term sustainable employment growth for young people will be created by boosting the productive side of the economy.
We have schemes like social security for the old, transfers to women, and employment schemes such as the rural employment guarantee scheme, which is very important. In fact, I have no objection if you want to start a similar urban employment scheme for unskilled labour. But, believe me, that is not the demand for employment. The demand for employment is that people who have degrees are not looking for unskilled jobs. So, you may have these schemes, but it won’t meet the demand. What will meet the demand is a booming exports sector. And we must work towards that.
There are concerns around India’s export performance given the lukewarm global demand. What is your take on this?
Our export performance in the last four-five years has been poor. Growth rates have been falling, India’s share in world trade has been falling. That reverses the previous 10-15-year trend of a steady improvement.
The fact that export growth is decelerating year after year and India’s share in world trade is going down should be a matter of focus. There is a recognition that supply chains are being redesigned away from China, which creates an opportunity for India to tap into. But we have to recognise that Bangladesh and Vietnam are doing better than us, so we need a serious look at what is constraining our export performance. Some of what I think needs to be done is controversial. In my view, Indian import duties are too high. We cannot latch on to global supply chains if we insist on maintaining higher import duties compared to other East Asian countries. We are moving towards becoming a middle-income economy, so our duties cannot be higher than what is in Malaysia, the Philippines and Indonesia. If we want to protect domestic industry, it should be done through government support systems rather than elevated import duties.
If we want to protect domestic industry, it should be done through government support systems rather than elevated import duties
The support for WTO-style multilateral liberalisation has gone down. So, all the major countries are setting up bilateral FTAs. At one stage, I was hopeful India may join the RCEP (Regional Comprehensive Economic Partnership); I believe Indian businesses lobbied hard against it because they were afraid of competition from China. So, we have to ask ourselves, if these other countries are able to compete with China, why can’t we? I think it is too easy an assumption that India can’t compete with China. I know the government is trying to clinch FTAs with the EU and the UK but the centre of trade and economic growth is going to be Asia, not Europe. And, if we can’t join the RCEP, why don’t we join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)? The demands of this agreement are deeper than a typical trade deal, but we have to address that issue since that is the way the world might move. And, a big advantage of the CPTPP is that China is not a member and is unlikely to become one. We need to have a better export strategy.
Did India make a mistake by not joining the RCEP?
I had hoped we would join. I would not call the decision a mistake, since the invitation to join is still open. However, the present position is, we have decided not to join and we haven’t altered that position. If somebody asks me, should we join, I would say yes, with a reasonable transition period. If Indian industry objects to RCEP because China is a member then India should put joining CPTPP on the agenda since that is a large FTA that doesn’t include China. So, we should do one of those two.
Do you think trade deals with blocs work better than the kind of bilateral FTAs that we are pushing for with the UK and the EU?
Individual FTAs are not a solution, since they do not provide enough freedom. The idea of a bloc is that since imports have to have a value-added requirement, as long as that requirement is met within that bloc, it qualifies. When you do trade deals with individual countries, one rules out too many things. And, in a world that is increasingly characterised by interlinked supply chains, individual FTAs simply don’t solve the problem, according to me. More importantly, you cannot join blocs or individual FTAs without lowering your average duties. You are providing a disproportionate benefit to the party you sign the FTA with if your external duty is higher than theirs. The first thing we should do is to lower our import duties and Indian industry must be persuaded on that. Only when they are persuaded, can there be political movement on the deals.
Food inflation continues to stay elevated due to a spike in pulses, and vegetables. How do you see India’s inflation trajectory playing out? The government has taken a slew of price control measures, including export curbs, to tame prices. Recently, agricultural economist Ashok Gulati said measures such as export bans are outdated. What is your view on this?
I completely agree with Ashok Gulati. Export curbs on food items are simply anti-farmer. But, for the past 40 years, that is what we have been doing. They are not just outdated; they are just wrong. There are other things you can do to protect consumers, but it should never be at the cost of farmers. There is a tendency to think that these export curbs only hurt traders, not farmers. That assumption is wrong. If you create an expectation on the part of traders that they may be clobbered at any minute, then how much they buy from farmers, and at what prices, will get affected. If inflation in some food items is low, but shoots up in the case of onions, that does not justify banning the export of onions. That is a mistake. If inflation in some food items has gone down, and on some, has gone up, the government should point out that the overall food basket, therefore, hasn’t gone up.
When do you see inflation falling within the RBI’s 4 percent target?
It is not difficult to bring inflation down if you don’t care about anything else. In some countries, the challenge put out to the central banks was: Do not bother about anything else; just bring inflation down, as in the case of New Zealand. It is easy to do that by just jacking up the interest rates. Then what will happen is that the rest of the economy will suffer and then the Reserve Bank could say that it is not their problem. But that is not how economic policy works. The notion that one instrument can be made the exclusive instrument of one institution is not valid. The truth of the matter is, we are in a world where the economy is being impacted by a lot of external influences, volatile crude oil prices, and local disruptions as economies recover from the pandemic, among others. I would not take the view that the preeminent role of interest rate policy is to bring inflation down. That is one of the most important ones, but that has to be done in the context of the economy as a whole. Somewhere there has to be a shared understanding between the finance ministry and the RBI on the instruments that need to be moved in order to tackle inflation and act accordingly.
Somewhere there has to be a shared understanding between the finance ministry and the RBI on the instruments that need to be moved in order to tackle inflation and act accordingly
In the runup to elections, we have seen the noise around freebies rising. The Congress party has been banking on guarantees, while the BJP is also offering a slew of freebies. How do you see this discourse panning out? What’s the danger of guarantees-based politics?
We need to create an awareness that politics is a competitive business and politicians will promise whatever gets them votes. The question really is: what is the discipline of whoever wins power? Are they going to drive the fisc crazy? I think, so far, in the last 10-20 years, our record on the fiscal front does not suggest that any government will allow the fiscal situation to go crazy. We haven’t achieved the fiscal targets we set, so I would not say our record is very good. Investors abroad probably assume that irrespective of what is said in elections, whoever is running the government is sensible enough and will not allow the kind of fiscal collapse that leads to an economic crisis. In an interconnected world, with the economy being open and money coming in and going out, the cost of that sort of fiscal indiscipline can be very high. I think the government realises that. Political parties don’t.