Collateral-free loans in a $5 trillion economy

President Kovind's address to Parliament raises questions on the government's economic policies

The address of President Ram Nath Kovind to a joint sitting of the two houses of Parliament last Thursday stood out for the way it articulated the Modi government’s economic goals. For a better understanding of what one can expect of the Modi government in its second term, it would be useful to examine the salient economic promises made in the speech.
 
The goal of growing the Indian economy to $5 trillion by 2024 has understandably grabbed the newspaper headlines. Questions are obviously being raised on whether this is only one of those catchy slogans or the government is serious about achieving in just five years what is clearly a highly ambitious target.

 
Note that the $5 trillion target was also mentioned by Prime Minister Narendra Modi in his address at the meeting of the governing council of the NITI Aayog on June 15. Modi admitted that the target was challenging, but he also said it was achievable. He added that the “states should recognise their core competence, and work towards raising GDP targets right from the district level”. The President too underlined the role of the states in achieving this target. He said the goal would be achieved in collaboration with the states.
 

It is true that the states growing faster can help the country’s overall economic growth. But putting the onus of achieving that challenging target on the states is significant. It might be a way of the Modi government displaying its faith in cooperative federalism. It could also be an escape clause. If the 5-trillion-dollar target is not met, the states could easily become the scapegoat.

 
Either way, the Indian economy’s growth performance in the past provides some indication of the difficulty in achieving the new target. India’s dollar GDP was nominally estimated at about $2 trillion in 2013-14. It is estimated to have grown to $2.7 trillion in 2018-19, an increase of 35 per cent. If the target of $5 trillion is to be achieved in 2024, the growth during this period should be 85 per cent. This is going to be a tall task. Was this idea adequately thought through before making it an official goal?
 
The President already admitted that India was no longer the fastest growing economy in the world. He said: “Today India is among the fastest growing economies in the world.” The RBI Governor also admits that economic activity in the Indian economy is losing traction. Experts point out it would take a few more quarters before the Indian economy could revive growth. The recent GDP growth numbers do not offer any hope either. So, why was that target set?

 
The President also said that “keeping in view Industry 4.0” the government would soon announce a new industrial policy. The reference to Industry 4.0 as the context of the new policy is significant. The fourth industrial revolution has promoted the use of technology, automation, artificial intelligence and data analytics. At the same time, it has also threatened the existing types of jobs, posing difficult policy challenges for a country like India where unemployment continues to be a major problem. So, what kind of a new industrial policy can the new government formulate?
 
The government’s promise that it would formulate a national retail trade policy is also replete with possibilities. The objective of this policy will be to promote retail business, but foreign investors as well as large Indian companies would be eagerly looking forward to its contours. The Modi government’s policy on organised retail, particularly with regard to foreign investment, has been a little ambiguous. One of its core constituencies, small traders, has remained opposed to the opening up of the retail sector. The advent of large e-commerce players has only increased its vulnerability.

 
The recent disclosure of the Indian joint venture of Walmart having made some improper payments to Indian government officials in 2011 may also influence the Modi regime’s approach to foreign investment in the retail sector. Will the new retail trade policy make foreign investment norms more restrictive to address such concerns or win over the small traders through some other incentives while opening up the sector?
 
Referring to the entrepreneurs’ need for capital, the President said that the government would make available loans up to Rs 50 lakh to them, without any guarantee. Loans of this size, without any collateral, are deeply problematic for the health of the financial sector. Banks have just begun to tackle their non-performing assets. Allowing loans up to Rs 50 lakh without any guarantee can also open the floodgates to politically motivated loans, whose repayments would be highly uncertain. Unfortunately, the burden of such collateral-free loans would have to be borne largely by the already beleaguered public-sector banks. Is the government encouraging loan melas by a different name?