India's Path to a $5 Trillion Economy: Ideal vs. Reality
October 2019
Recently, India's Prime Minister, Mr. Narendra Modi, made a bold promise to transform India into a $5 trillion economy by 2024. If achieved, this would place India as the fourth-largest economy in the world, behind the US, China, and Japan. To put this into perspective, India’s GDP in 2019 was approximately $3 trillion, meaning the country would need to sustain an annual growth rate of 10-12% to reach its ambitious target. Historically, only a few nations, notably China and Japan for a brief period, have achieved such rapid economic expansion in the past fifty years.
Realizing such ambitious growth targets requires significant structural changes across critical sectors, including infrastructure, energy, and human capital. India's demographic advantage—its population of 1.3 billion, with half under the age of 25—could be a key driver if effectively harnessed. This young workforce could fuel both consumption and innovation, positioning India as a potential consumption powerhouse.
However, to achieve these aspirations, India must address several pressing challenges. The government needs to focus on creating an environment that attracts substantial global capital while also leveraging its human capital to stimulate domestic consumption and generate returns for international investors. In essence, India’s long-term goal should be to foster a thriving market-based economy with sufficient liquidity, transparency, and protection for minority investors.
Key Initiatives for Attracting Global Capital
To create a robust investment ecosystem, the Indian government must implement the following initiatives:
Strengthening Financial Reporting Standards: India needs to introduce financial reporting guidelines aligned with international standards. For small businesses, the current approach, which relies on tax filings, does not provide sufficient transparency for investors. The introduction of a balance sheet approach from the inception of a company would enable better tracking of assets and help investors evaluate a company's health more effectively.
Mandatory Financial Audits: New businesses, especially startups, should be required to file audited half-yearly reports with regulatory bodies like SEBI (Securities and Exchange Board of India) after three years of operation. These reports, accessible for a fee, would allow investors to make more informed decisions.
Combating Tax Evasion and Fraud: A major concern in India is tax evasion, often facilitated by incomplete or fraudulent invoicing. The government must mandate digital invoicing and require mandatory tracking and storage of invoices for at least five years. This will ensure greater transparency in business transactions and curb fraudulent practices.
Improving Working Capital and Credit Flow: Working capital remains a major issue for India's Small and Medium Enterprises (SMEs), leading to delays in accounts receivable and fraudulent siphoning of funds. The government should establish regulatory measures for the collection of payments and dues. In addition, clear regulations for the growth of factoring and bill discounting companies, along with oversight to prevent predatory lending practices, must be introduced.
Unlocking Land Banks: Many distressed companies from previous decades own prime real estate that remains underutilized due to legal complications. The creation of a land bank could allow businesses to lease, rent, or trade these assets effectively. Unlocking this dormant real estate could provide a significant boost to the economy.
Intellectual Property Protection: Intellectual property (IP) protection in India is still relatively weak. To address this, IP management should become part of the mandatory annual audit process for companies, ensuring they are compliant with up-to-date filings and regulations.
Expansion of Audit Firms: While the "Big Four" auditing firms dominate the landscape, there is a need for more accessible audit services for SMEs. Financial institutions, including banks, should establish separate auditing arms to cater to this segment, ensuring more businesses are subject to proper audits and accountability.
Expediting Insolvency Proceedings: Insolvency proceedings in India often take years to resolve, which discourages investment. The government should streamline these processes, allowing private markets, such as investment bankers and lawyers, to handle insolvency cases outside of the court system, thus reducing delays and inefficiencies.
Corporate Governance Standards: The government should develop and promote best-practice corporate governance guidelines, ensuring fairness for minority investors. Companies receiving investment should be required to implement these governance structures before accepting external funding. These standards should be assessed as part of the audit process.
While the goal of becoming a $5 trillion economy is certainly aspirational, achieving it will not be easy. India must undertake significant financial reforms to create an environment conducive to growth and investment. By strengthening financial reporting, combating fraud, improving liquidity, and ensuring transparency, India can attract the global capital needed to realize its economic potential. However, the road ahead is long, and while these steps may sound simple in theory, their successful implementation will require time, commitment, and coordinated effort from both the government and the private sector.