The Indian economy has shown considerable underlying strengths. It has largely remained outside the contagion effects that have affected the East Asian economies. The underlying strengths are reflected in the fact that the economy is likely to remain insulated from international developments due to a small size of the external sector (exports-GDP ratio of only around 10%). India’s reliance on external short-term debt is small. Only 7.4% of the external debt is short-term in nature, largely due to government regulations.

The fact that India has remained insulated from the global contagion effect should be viewed as an opportunity to initiate major reforms. India can afford to set longer term goals in terms of much higher GDP growth rates and structural changes in the economy - a comfort which is not available to the crisis ridden economies where the economic goals have to be specifically short term in nature.

2.2 DOUBLE DIGIT GDP GROWTH IMPERATIVE

If India sets course on a 7% GDP growth rate, she will have to wait 68 years to be on par with the GDP of the developed world. India’s growing population, with over 350 million Indians coming into the work force from now up to the year 2025, will not wait this long. India has the potential and must set its sights on achieving and maintaining double-digit growth rates in GDP.

The Indian economy needs to target a GDP growth rate of about 12% p.a. in five years, to be supported by a robust industrial and service sector growth rate of around 15% p.a., and agriculture growth rate of around 5% p.a. On the fiscal side, the government needs to target a fiscal deficit to GDP ratio of around 3% to reduce the preemption of funds by the government from the system and utilisation of domestic savings for more productive asset creation. The target for inflation should be set at around 6%.

To achieve a GDP of 12% per annum, India has two options:

1. Achieve and maintain investment levels at 48% of GDP with an incremental capital output ratio (ICOR) of about 4.

2. Lower ICOR to the 2.5 to 3 range (through greater productivity and efficiency of capital) and mandate investment levels at 30% of GDP.

2.3 INVESTMENT, PRODUCTIVITY AND EMPLOYMENT ELASTICITY

India is an investment driven economy with a large social imperative of creating employment opportunity for its teeming millions. Therefore, India must focus on higher investments, higher productivity of capital and higher employment elasticity. This can come about only if there is a scope for large quantum of investment, flows of investment are smooth and there are no inefficiencies in the financial system.

Three sectors can make this happen – agriculture, information technology and financial services. These areas have the potential for investment and growth, enjoy lower ICOR, provide scope for higher productivity within their sector and for the economy as well and have higher employment elasticity.

2.4 AGRICULTURE

Agriculture enjoys a lower ICOR of 2.5 to 3 and is one of the few sectors where India enjoys an international competitive advantage. A dynamic and progressive agriculture puts purchasing power in hands of millions of people and provides maximum employment, more than any other sector in the shortest time. In fact, Indian agriculture can easily employ another 120 million people just by concentrating on developing 40 million hectares of wasteland. Modernisation of agriculture will reverse the present unending migration to the cities and thereby improve the quality of life in the country’s urban areas also. India has 329 million hectares of land area. Nearly half of it is arable. India is also blessed with sunshine, rain, varied agroclimatic conditions and a farming community open to innovation.

2.5 INFORMATION TECHNOLOGY

Likewise information technology has the potential to place India on a higher trajectory of growth. India has an extensive network of institutions of science and technology and millions of young people conversant with work in the English language who relate very favourably to information technology. One million young men and women, employed in the information sector, can easily bring in 20 billion dollars into India. In the next 20 years, it should be possible to employ 50 million young people in the information sector. This means an income of about a trillion dollars. And these people will help create demand in the secondary and tertiary sectors of the economy.

2.6 FINANCIAL SECTOR REFORMS

Critical to this effort of re-orientating India’s approach and emphasis on these three sectors in order to create a self-sustaining cycle of prosperity and growth, would be a set of policies and funds to make them happen.

As the economy would require a substantial amount of funds, domestic sources may not be adequate and hence the need to tap external sources. Consequently, India would have to attract more FDI flows into the economy.

Reforms in the financial services sector, apart from ensuring that transaction costs are minimised through competition and better productivity, lead to lower and more stable interest rate structure in the system. They have the added benefit of bringing about better flow and efficiency of capital. They channel funds efficiently from savers to users.

To sum up, a focus on investment, productivity, employment elasticity, agriculture, information technology, financial services and financial sector reforms and a double digit growth would be the cornerstones of a new India.