PM Modi must invest and rebuild India’s economic security in the new world order post Covid-19


The Covid-19 pandemic has morphed into a global economic crisis. All activity is grinding to a halt with unemployment on the rise. Stock market value has declined by more than USD 27 trillion. The United Nations predicts that the world economy will go into recession in FY’21 with an anticipated loss of trillions of dollars of global income. IMF has announced a negative-growth forecast. Oil prices have fallen to historic lows. The world order is in flux.

The GOI has taken a bold decision to prioritise the lives of its citizens and face the consequences of the economic fallout. This leadership has undoubtedly helped mitigate the spread of the infection in the country. Many other countries have delayed this decision with debates on compromising economic activity in the face of higher infection risk. Regardless, it is evident that all nations will face an unprecedentedly different global economic paradigm than the one merely two months ago.

Most governments are now delivering unprecedented economic relief programs by raising debt-capital and increasing deficits to provide liquidity and keep citizens going until the pandemic subsides. The GOI must lose no time in taking decisive steps to protect its citizens from the longer-term effects of the epidemic on our economy. It must view this as a generational opportunity to systematically realign the rails of New India. Bold steps taken over the next five years will reshape the country, facilitate the New India of our dreams and realign our economic trajectory for the next decade.

Along with a 21-day lockdown, the GOI also announced various economicrelief programs. Hopefully, packages to protect job creators, small businesses and direct-impact industries are assembled soon, as discussed here. Including distressed situation loans made during this crisis, the ultimate cost of tackling Covid-19 might amount to INR 10 lakh crores or 5-6% of India’s Gross Domestic Product. This may seem extra-ordinary, but it is far lower than other large economies. While the GOI has taken leadership in dealing with the health dimension of this crisis, it must also assume an equally serious stance in the economic dimension.

It is uncertain how much of industry will survive after this lockdown and reduced economic activity, and what the future level of output will be. What is certain is the gig and informal economies, and MSMEs are deeply wounded due to the discontinuity of income and liquidity. They are directly bearing the costs of the shutdown without relief support. Direct-impact industries like aviation, travel, tourism, hospitality, airports, and entertainment have suffered unmitigable damage. This fallout will extend as it will take at least 3-9 months for the economy to stabilize, and people will be cautious about spending on non-essentials after lockdown-induced income (and job) losses.

India’s FY’21 growth is expected to be at 2.5-3%. The agriculture sector may continue at 3% growth if the monsoon is normal. Industry may go down to negative growth as it recovers and rebalances labour. Services, averaging ~7% real growth for twenty years, might slow down to 3.5%. An economic analysis shows that only the government sub-sector within services will continue without a blow as taxes and borrowing will finance government spending.

FY’21 might be resigned to low growth; but if the government does not take bold measures after the March 2020 crisis, FY’22 may also follow this grim trajectory. Instead, this is a golden opportunity for India to revive economic growth through large scale investments so that FY’22 through FY’25 and beyond will see accelerated growth. As many have opined, this is a one-time opportunity for the GOI to invest and create capacity that will firmly establish India as a sustainable and reliable alternative within global supply chains. As a nation, we cannot miss this window to take decisive action and aggressively capture our position in a realigning world order.

India needs undaunted action by PM Modi at this juncture. We must fearlessly avail 20/30 year long-term loans and bonds raised globally to finance this next decade of growth, with much of it maintained as a special program outside the budget. Sticking to the conventional notion of a 3-3.5% fiscal deficit is inadequate to execute this grand vision of New India. Other nations are already approaching this as a war-time scenario and raising long-term bonds. Their views are clear—they will spare no efforts to prevent economic disaster and compromise national economic security. We must also not spare any efforts to protect India’s economic security and realign India to its $5 trillion GDP target.

What action must India take to return to 6.5-7.5% real growth between FY’22-FY’25? The answer is extensive five-year programs such as:

  1. National Infrastructure Pipeline 2.0: A large-scale five-year infrastructure program is essential to boost the economy, reduce supply chain costs, bolster industry and construction sectors, and increase jobs. The National Highway ministry has an investment program of INR 15 lakh crores over five years. The Railway Ministry has a similar program to improve access and quality, including a part-privatisation strategy. The Finance Ministry has devised an inspired INR 102.5 lakh crore National Infrastructure Pipeline (NIP) with allocations to energy, roads, railways, and others, as shown in Table 1. FM Sitharaman has announced that INR 42.7 lakh crore (41.6%) worth of projects is under implementation, INR 32.7 lakh crores (31.9%) under conceptualisation, and the rest under development and classification.

Table 1Table 1: Allocation of NIP funding to different sectors.Source:

The NIP in its current avatar is not ambitious enough for New India. Sectors like urban infrastructure and MRTS (INR 16.3 lakh crores), education (INR 1.56 lakh crores), health and family welfare (INR 1.69 lakh crores), industry (INR 3 lakh crores) and others need bolder investment; the current allocation is inadequate. Some increased investment opportunities are analysed below to the tune of INR 33.5 lakh crores.

The fiscal situation of India will be weak in FY’21 with diminished tax collections; new modes of financing for the NIP have to be arranged during FY’21 so implementation can start in FY’22. The existing INR 102.5 lakh crore NIP is a pivotal starting point for the reconstruction of New India. An NIP 2.0will actually deliver the results in a post-pandemic economy.

  1. Urbanization: Development and urbanization go hand-in-hand. Urbanization concentrates human activity, leading to specialization, and specialization to improved productivity; enabling greater availability of goods, services, and job opportunities. The village-centric model doesn’t work in this new era of specialization-led growth. India is only 34% urban compared to the world-average at 55% and China at 59%. India must urbanize rapidly and more systematically.

5,000 census towns can be developed all around India to become the new engines of growth. Today, ten large cities are reeling with overpopulation and an inability to cope with immigration, while rural areas provide meagre growth and upliftment opportunities. India must develop at least 5,000 census towns across the country by proactively building infrastructure connectivity (pt 1), mass transit (pt 4), facilities like water, power and sewage, healthcare (pt 8) and education (pt 7) infrastructure, and industrial clusters (pt 3). An extensive housing program for INR 15 lakh crores (of which the government can subsidize INR 5 lakh crores through an extension of PM Awas Yojana) can create low-cost housing for three crore low-income families sold at INR 5 lakh per house in the 5,000 semi-urban centres.

Labour costs will be cheaper in small towns than in large cities, and workers can easily travel from neighbouring villages; thus finding quality employment prospects close to their villages as is happening in Ranchi today with garments industries. An INR 15,000 salary in a small town fetches 3x what it can in a large city, and many rural workers will opt to stay or commute to work at these industries than migrate to a city as contract labour. A significant reason for women’s low workforce participation despite higher levels of education is the inability to migrate and work, unlike men. Women are an untapped productive resource in our country and taking employment prospects to their doorsteps with this massive urbanization plan will unlock this potential.

An investment of INR 20-50 crores per year is suggested in each of the 5,000 towns averaging INR 25 crores per year per town or 100 crores over four years. This amounts to a minimum of INR 5 lakh crores over four years to transform India’s urbanisation. An additional INR 15 lakh crore for housing as discussed at a subsidy cost of INR 5 lakh crores. This investment will pay off handsomely and enable millions to multiply their earning power at the industrial clusters.

The GOI must believe in the inarguable link between urbanization, higher wage earnings, and the resultant accelerated shift of its citizens out of poverty. This is an opportunity to invest and reap multi-variate benefits that cannot be ignored.

  1. Labour-intensive industries are imperative to provide quality mass employment prospects and boost India’s export capabilities. We can leverage our 137-crore population, just like China did, to establish a comprehensive manufacturing base that caters to global needs. As the world emerges from this crisis, economies will look to diversify manufacturing and supply chains away from China-centric dependence. By planning in advance with special economic zones, industrial clusters, high-speed infrastructure connectivity between the clusters and ports, facilities (power, water, sewage, storage) and tax benefits to job creators, India can position itself as a viable alternative to China.

An analysis of China’s top ten exports in 2018 valued at USD 2.5 trillion (INR 177 lakh crores) gives us an indication of which industries to set up and cater to global demand, and capture market share:


(% of total exports)

  • Electrical machinery & equipment: INR 47 lakh crores (26.6%)
  • Machinery including computers: INR 30.5 lakh crores (17.2%)
  • Furniture, bedding, lighting, signs, prefab buildings: INR 6.8 lakh crores (3.9%)
  • Plastics, plastic articles: INR 5.7 lakh crores (3.2%)
  • Vehicles: INR 5.3 lakh crores (3%)
  • Knit or crochet clothing, accessories: INR 5.2 lakh crores (2.9%)
  • Clothing, accessories (not knit or crochet): INR 5 lakh crores (2.9%)
  • Optical, technical, medical apparatus: INR 5 lakh crores (2.9%)
  • Articles of iron or steel: INR 4.65 lakh crores (2.6%)
  • Organic chemicals: INR 4.2 lakh crores(2.4%)


India needs at least INR 5 lakh crores over four years to build export-quality industrial estates. This will yield large-scale job creation and long-term internal sustenance for essential manufacturing. India can also claim an indisputable hold on a top 5 ranking in industrial output and exports as a result. The GOI cannot ignore this opportunity to secure India’s long term interests along these critically interlinked parameters—it must tolerate no compromise to its national economic security and invest aggressively to empower labour-intensive industries.

  1. Increasing urban mobility and fuel independence: India currently has 53 cities with 10 lakh+ populations, of which approximately 7 have populations over one crore. People are increasingly migrating to large cities that are buckling under the strain of insufficient infrastructure. The biggest challenge is urban mobility. People spend 3-4 hours/day in traffic, causing mental stress, physical drain, and reduced quality of life. The lockdown has demonstrated that reduced traffic quickly translates to improved quality of air and decreased pollution. This lesson must be operationalized quickly and yield mass transit infrastructure.

It is suggested that Metro capacity be rapidly increased to 5,000km from the total sanctioned 1,400km today. This extra 3,600km at an average of INR 300 crore/km will cost about INR 10.8 lakh crores over four years.

Apart from this, electric buses must be commissioned under the Make In India scheme. India needs a minimum of 2 lakh electric buses in our big cities to make urban commute easier at the cost of INR 1 crore per bus for a total of INR 2 lakh crores. The electricity surplus from the grids as well as solar technology can power this, with the added advantage of reduced dependence on fossil fuel imports. This will also spur large-scale battery and EV component manufacturing in the country—an inarguably essential supply chain for the future of mobility globally.

Increased urban mobility will require a total of INR 12.8 lakh crores over four years. The NIP scheme (pt 1) has already allotted base capital towards MRTS and must be expanded.

This is a unique opportunity for the GOI—oil prices are at historic lows and India must build up strategic reserves urgently. However, prices will bounce back and India must not fall into foreign oil dependence as before. We must use this opportunity to invest in EV mass transit and emerge with lower oil dependence. This has a double bottom-line effect of also making our urban agglomerates more efficient and productive—large economies do not see such opportunities align very often. The GOI must take full advantage of this convergence and invest aggressively to protect its citizens’ future.

  1. Overdependence on agriculture must shift: India’s biggest economic challenge is that 43% of the workforce depends on agriculture contributing only 17.6% to nominal GVA. 33.5% of the workforce depends on services providing 55% to GVA, and 23.8% depends on the industry, contributing 27.4% of GVA (Table 2). An agricultural dependent earns about INR 55,600 annually compared to INR 1.55 lakhs in industry and INR 2.21 lakhs in services. The income differential is very high at a ratio of 1:3:4. The differential will keep widening as the growth rates for all three sectors are divergent at 3%:5%:7%.

Table 2: Nominal GVA and sector-dependence analysis for 2019-20.

Source: MOSPI, World Bank, Census, CRS. * denotes authors estimations

The only sustainable way to address this inequity is to accelerate the shift of workers from agriculture to other sectors. Over the last twenty years, roughly 1% shifted every year—from 60% in 1999 to 43% in 2019, per World Bank. We must accelerate this to at least 2% per year amounting to 10% of Indians shifted by 2025. Agricultural production can manage and streamline with a lot fewer people, like China.

GOI cannot miss this opportunity to provide its most vulnerable citizens the opportunity to increase their earning power and long-term financial security. It is critical to invest in NIP 2.0 and accelerate infrastructure development (pt 1), and in labour-intensive manufacturing (pt 3) which are the only two sectors that can absorb crores of low-skilled workers from the transitioning agricultural workforce. A deliberate strategy for urbanization in the 5,000 towns (pt 2) is necessary for this to work as villages cannot cater to growing economic needs anymore.

It is clear that investments by the GOI in each of these three strategies—manufacturing, construction and urbanization—will yield highly beneficial second and third order consequences in jobs and earnings potential. This is further fuel for the urgency with which the GOI must aggressively pursue large-scale investments that will directly benefit its most vulnerable citizens.

  1. Jobs: India’s policy must focus on building massive manufacturing and construction companies. They alone can handle the world’s manufacturing needs (pt 3). As seen in Fig 1, more than 50% of China’s manufacturing workforce is employed by large firms of 200+ workers. Small firms employ 25% of the workforce and medium firms under 25%. This is the template India must focus on and replicate—the China model has proven resilience at this population scale.
Fig 1: Distribution of manufacturing workforce among firms across scale in India and China.

Source: NITI-Aayog

India currently operates with 80%+ workers in small firms of under 50 workers and only 10% in large firms like Mahindra or Tata. GOI has to focus on enabling the building of large firms to leverage the economies of scale and develop global players. Private business alone does not have the reach or means to execute this; GOI has to be main driver. Similarly, GOI has to invest in infrastructure (pts 1 & 5) to spur construction and help the labour segment earn consistently. The opportunity for wage consistencyover5-10 years in a factory or a construction project is a luxury for workers now; let us make this New India’s modus operandi.

Apart from investing, GOI’s duty to its citizens, both workers and job creators, is a complete policy overhaul to facilitate large manufacturing and construction. India is buckling under the weight of 70 years’ worth of archaic tax rules and regimes. It is the sovereign duty of government to simplify this for its citizens.

None of these ideas are novel or unprecedented. What matters now is the serious urgency with which decisive action must be demanded from the administration to remove friction to job creation and secure India’s economic interests via bottoms-up and top-down change.

  1. Development of human capital: As we set up a reinvigorated manufacturing economy, skills development programs are required to train the workers shifting over from the agricultural sector (pt 5). China progressed from labour-intensive industry to light manufacturing, then heavy manufacturing and hi-tech industry. We foresee India will also follow this trajectory but with the added advantage of an established hi-tech industry network. By planning skills development through this loop, India can accelerate economic growth.

The Union budget currently allocates INR 3,000 crores annually to skills development. It is suggested the annual budget ramp up to INR 15,000 crores amounting to INR 60,000 crores over four years.

In parallel, higher education needs focused investment to design world-class universities. Our report on Human Capital Development in India (Nov 2019) demonstrates that India has built the soon-to-be largest education system in the world. Rapid brownfield expansion to improve quality, access and affordability is the need of the hour. We currently graduate 40,800 PhDs a year and must ramp up by an additional 50,000 high-quality PhDs annually. To develop human capital on par with the US and China, India needs to invest in state-of-the-art laboratories, specialized PhD programs in keeping with future requirements, and developing world-class curricula to train our young population for a technology-first future. This investment has the added advantage of retaining more students who are today going abroad in search of better opportunities.

FICCI estimates that an investment of INR 8 lakh crores is required by 2030 to improve quality and increase gross enrolment ratio to 50 (from 26.3 today). The NIP includes about INR 1.18 lakh crores (pt 1). Another INR 3 lakh crores is needed by 2025, and a further INR 4 lakh crores by 2030.

At this time of crisis, the GOI must re-establish its commitment to its citizens and take their long-term resilience seriously. Such investment is a strong signal that the administration can deliver upon its duty to strengthen our collective capacity and prepare the next generation to be stronger than the last.

  1. Healthcare infrastructure in India needs reinforcement, as the pandemic has demonstrated. Of 718 districts, at least 500 require a large 500-bed multidisciplinary hospital that can cater to the needs of the community. These hi-tech facilities will also attract doctors and medical staff to work in small towns instead of moving to large cities in search of good hospitals. Building these hospitals at the cost of INR 50 lakh per bed for (500 x 500 beds) could cost INR 1.25 lakh crores over the next four years.

Today, India graduates about 51,000 MBBS, 14,000 PG specialists and 70,000 nurses a year. The number of MBBS seats has increased to almost 80,000 and PG seats to 36,000. The WHO estimates there is a deficit of 6 lakh doctors and 20 lakh nurses in India—which can be remedied with focused investment over 4-5 years. Rapid brownfield expansion of existing colleges can double the graduates to reduce the shortfall.

Medical colleges over 20 years old with a proven track record can be provisioned to increase capacity by 50% over the next five years with government assistance. They have facilities and human capital to produce high-quality medical staff. Similarly, the training capacity for health technicians in radiology, pathology, anaesthesiology, and other critical functions must increase. Doctors in India perform many small tasks that can be handed over to other staff to optimize the utilization of doctors for specific specialized tasks.

We also need primary health centres in every taluk/tehsil. Today, rural citizens travel needlessly for tens of kilometres to access basic healthcare. Primary facilities can cater to 60-70% of their needs. An investment of INR 1 crore per year for each of the 5,650 taluks amounts to a total of INR 22,600 crores over four years.

Unfortunately for India’s citizens, the country’s best medical students are continuously poached to fill shortfalls in medical staff of more mature economies. This is an intolerable brain- and talent-drain of essential skills that compromises the country’s ability to react to crises such as this. Unless there is a coordinated shift in how we build our health infrastructure, the GOI will leave its citizens susceptible to future epidemics and continue to suffer trained staff shortages. The administration can make India the best place to work for her doctors, nurses, and trained medical staff by prioritising such investments and fortifying its systematic response capacity in the interests of its citizens.

  1. Startups to leverage the knowledge-economy: With 40,000 startups and 33+ unicorns, India is home to the third-largest startup ecosystem, behind only the US and China. They have created a combined value of INR 11.4 lakh crores and employ 7.5 lakhs collectively. Projections indicate that by 2025, India may well have 1,00,000+ startups, employ 32.5 lakh people, and produce 100+ unicorns, with a total market value north of INR 35.5 lakh crores. The rise of startups in India in 2014 was accelerated by PM Modi’s strong push to build the world’s most sophisticated digital banking and payments system. Now a second push for urbanisation, industrialisation, high-quality infrastructure, and tax regimesimplification will enable the next wave.

As India emerges as a gravitational centre of a burgeoning knowledge economy, it is unfortunate that only 10% of total investments in Indian startups is by Indian capital —a dangerous position. With 90% capital coming in from countries like the US, China, Japan and Singapore, India is on track to becoming a captive digital colony. If we are to command our digital destiny, more Indian capital is required. To accelerate investment into this sector, we suggest that the government increase allocation to INR 50,000 crores via the SIDBI Fund-of-Funds and Funds run by banks like SBI, HDFC and ICICI.

The 2019 NDA election manifesto included a promise of INR 20,000 crore seed capital for startups. In the light of the coronavirus pandemic and the unconditional support lent to the government by many startups during this trying time, we recognise the value of enhancing allocation to INR 50,000 crore. This should enable investment into at least 500 funds; if each fund invests in 25 companies, this will create capacity for 12,500 new startups.

Once the world recovers from the pandemic, it will realise the digital era that we have irreversibly shifted into during the lockdown. People who have been locked in the world over have used digital infrastructure for their every need—payments, food and grocery delivery, communication, health and medicine delivery, teleconsultations, education, entertainment, and more. This has transformed people’s habits and will accelerate immigration to the digital dimension. India has the basic building blocks in place to now turbocharge into this new digital reality, fuelled by this INR 50,000 crore investment.

  1. Poverty eradication: The development and digital push by NDA-I have undoubtedly empowered the poor to weather this crisis, as discussed here. The recent outflow of migrant labour from Delhi has also demonstrated that people migrate long distances in search of work. Staying power and liquidity in hand is low; they live day-to-day. India’s poor require minimum income support to sustain themselves in times of crisis.

It is evident India needs a new approach to eliminate poverty and increase purchasing power by 2025. While the government has many schemes for the poor, the system is unsustainable in times of crisis. The JAM trinity, which has enabled many productivity improvements including Direct Benefit Transfer in India, can be leveraged further and that requires a separate analysis.

With these spend items over NIP’s 102.5 lakh crores, an additional INR 33.5 lakh crores (USD 470 billion) is required. This INR 136 lakh crore is India’s Grand Reconstruction Budgetfor FY’22 through FY’25.


Financing India’s Grand Reconstruction Budget

India’s Grand Reconstruction Budget, above the current budget,will elevate India to a Top 3 economy. It is suggested that India borrow USD 500 billion globally for this purpose.

Internal savings in India is inadequate to fund India’s reconstruction. Financial savings through households is only 11% and 7-8% from the corporate sector. Adhering to the 3-3.5% ceiling on fiscal deficit may have served India well in a high-inflation environment. Over the last five years, however, the Modi government has kept inflation below 4%. In this low-inflation environment, the government can afford to boldly invest more and maintain additional borrowing as a special situation development-linked line item.

India must now tap global capital markets to raise long-term debt of USD 500 billion. With India’s stellar reputation as a financial stalwart that doesn’t default on loans, overseas markets will engage with the opportunity to lend long-term 20/30 year loans to us. If the government is uncomfortable raising debt directly, capital can be raised through parastatals like the National Highway Authority of India, Indian Railway Finance Corporation, National Housing Bank, NABARD, Power Finance Corporation, Higher Education Finance Corporation and others for the respective sectors, and Indian commercial banks for on-lending to infrastructure. These parastatals have raised money in the past and must now avail 20/30 year loans.

Long term debt is optimum, so there is no repayment pressure on the principal for 20 years by which time India might grow to a USD 15-20 trillion economy with the ability to repay these loans with ease. In the meantime, interest can be easily serviced. India’s debt-to-GDP ratio has steadily decreased from 60% in FY’08 to 48% in FY’20, aggressively pursued by the Modi government since FY’15, as seen in Fig 2. Undoubtedly, India is in an optimum position to take on long-term debt. Moreover, the Finance Ministry estimates India’s FY’25 GDP at INR 365.5 lakh crore or USD 5 trillion. The USD 500 billion borrowed is an additional 10% of our projected FY’25 GDP—very respectable for special development debt.


Fig 2: Debt-to-GDP ratio of GOI. Source: RBI


Suggestions on where to raise capital:

  1. 20/30 year long-term loans from multilateral institutions like World Bank, Asian Development Bank, Asian Infrastructure Investment Bank, New Development Bank, and others
  2. Raising global bonds outside India is better than inviting foreign capital to invest in local bonds. Global bonds will have to be redeemed only on maturity 20 or 30 years down the line. In contrast, foreign-owned domestic bonds can be sold at any time and dollar proceeds redeemed immediately, making them a vastly riskier proposition.
  3. Foreign markets with surplus capital like Tokyo. The Japanese have significant capital reserves but not enough high-growth investment opportunities within Japan. The bond market in Japan is predicted to generate negative returns. They are exploring beyond their borders for better opportunities. For example, in March 2020, Japan’s Government Pension Investment Fund increased portfolio allocation to foreign bonds to 25% from 15% (with total AUM of USD 1.45 trillion). Capturing a share of that 10% of USD 1.45 trillion is an excellent opportunity for India.
  4. Float 20/30 year bonds in the Indian market with tax-exemption regimes so citizens with savings can partly fund their country’s development at 6.5% interest p.a.
  5. Pension funds and endowments manage over USD 15 trillion worldwide. The GOI must build a concerted engagement plan with these asset allocators, hold investor summits, and incentivise long-term allocations over the 20/30 year view.

A very bold vision is required to remake India after this crisis. The New India that PM Modi aims to usher in will have world-class infrastructure with extensive investments in human capital, no poverty, and a very highly skilled productive workforce assembled in a short time frame. This calls for an enhanced strategy and large-scale investment for five years.

The additional spending suggested above has to be maintained outside the budget as a special development program over the next 4-5 years to remake India. This investment will increase jobs, decrease poverty to near-zero by 2025, create significant opportunities for young Indians to rewrite their future and make India a USD 5 trillion economy by 2025 on the way to a USD 10 trillion economy by 2030.

T.V. Mohandas Pai is Chairman, Aarin Capital Partners) and Nisha Holla is Technology Fellow, C-CAMP.