Modi’s $ 5 trillion financial dream may have to wait a long time; why India’s GDP growth now depends on banks

Prime Minister Narendra Modi’s goal of turning India into a $ 5 trillion economy will now take a few more years. to achieve. If India’s economy grows at an annual average of 11.6 percent over the next six years, the country’s GDP could reach $ 5 trillion by 2026-27, according to an estimate from CARE Ratings. While the 11.6 percent growth seems very optimistic at the moment, as the coronavirus pandemic has disrupted almost every corner of the economy, the inherent potential of the Indian economy remains strong. The attributes that the country possesses in terms of size, political stability, progressive leadership and relatively less exposure to external vulnerabilities are very useful, the report adds. However, on the one hand, it was estimated that the economy could have to grow at a rate of 8% to reach the goal of $ 5 trillion; on the other hand, Care Ratings now expects India to register an 8% contraction in the current year.

The financial sector will take the witness of the economic growth of India

The path of India’s economic recovery is expected to depend on how the country manages its investment in infrastructure. The rating agency said that the new investments needed for the economy to reach the $ 5 trillion goal would amount to almost Rs 500 lakh crores over the 7-year period 2021 to 2027. While a portion of this investment would be borne by the Central and state governments combined, the main enabler will be the financial sector, such as banks, debt capital markets and foreign capital, the report noted.

Are banks capable of investing in infrastructure construction?

However, the amount of investment is likely to continue to depend largely on the ability of the financial system to generate resources. In recent years, Indian banks are struggling with stressed assets and more provisions set aside to make up for the loss. The phenomenon has reduced the capital base of banks, damaging their ability to make loans. In addition to the problems, it is also difficult for banks to make the large investment required for infrastructure creation, as the duration of such loans is long. Therefore, markets must play an important role here, Care Ratings said.

Meanwhile, uncertainty over the control of the pandemic and prospects for economic recovery pose a challenge to economic aspirations. However, the construction of infrastructure can give the much needed multiplier effect, since it would generate employment and demand in all sectors, improve the ease of doing business, improve competitiveness and raise the quality of life.