NITI Aayog

The idea that India needs transformation but no longer evolution is captured in the establishment by Prime Minister Narendra Modi of NITI Aayog, the National Institution for Transforming India, on January 01, 2015, as a successor to the Planning Commission which was instituted by India’s first prime minister Jawaharlal Nehru in 1950. Gone are the 5-year plans which have been replaced by a 15-year vision punctuated by milestones at the 3- (Action Agenda) and 7- (National Development Agenda) year marks. The primary purpose of NITI Aayog is the working together of India’s 29 states and 7 union territories toward the realization of one common vision.

If India manages to achieve the ambitious initial 15-year vision of the institution by 2030 - a document currently in its draft stage - farmer incomes are expected to double by 2022 and India’s gross domestic product (GDP) and per capita GDP are seen tripling due to an annual real GDP growth rate exceeding 8% over the next 15 years. India will also then have met all of the sustainable development goals (SDGs) by 2030.

A challenge for India is to limit its imports, in particular as the Indian rupee gets stronger because of solid growth. “Make in India” appears to be one way to limit imports, alleviate the large trade deficit, and to achieve the much belated development of India’s manufacturing sector if not as a factory to the world but at least as a factory for its own vast internal market. The transformation of India would create the millions of jobs that are needed to absorb not only India’s educated youth but also the migrating population from rural to urban areas as agriculture’s contribution to India’s GDP further falls lowering agriculture’s share of employment which currently stands at nearly 50%. Still, agriculture itself would be transformed by becoming more industrialized as small subsistence farms consolidate into large holdings and technology changes seeds and farming methods.

One objective of the 3-year action agenda from 2017-2020 is to assess the funding requirements to implement the NITI Aayog vision. A major initial step in that direction has been the Goods and Services Tax (GST) which is expected to be rolled out on July 1, 2017. Despite the touted revenue neutrality of the GST, the broad-based consumption tax will loop in considerably more tax payers than there are currently and could, in fact, increase government tax revenue.

The higher tax revenues, in both the states and the center, particularly as GDP growth rises, could make available some, but not all, of the needed funds to finance the implementation of the vision of NITI Aayog. One way to finance would be by entering into public-private partnerships for infrastructure (not only roads and rail but also energy and water) and digital transformations.

India’s infrastructure alone would require about USD 2 trillion in investment by 2025 which amounts to more than 90% of the country’s 2016 nominal GDP or an average of about 10-15% of GDP every year between 2016 and 2025. The transformation of India that NITI Aayog has taken upon itself will require at least another USD 2 trillion by 2030. All of this cannot obviously be financed by domestic public-private partnerships alone. India would still need a way to finance its transformation which remains a challenge unless the timelines are less ambitious if monetary policy is not to be coopted by the vision of NITI Aayog.

NITI Aayog is good news for the financial markets. A sustained GDP growth rate above 8% over the next 15 years could see considerable flows of funds into India’s capital markets in the form of Foreign Institutional Investment (FII), Foreign Direct Investment (FDI), and a substantial increase in the market valuation of India’s public companies due to increasing earnings as India’s large domestic market develops together with a rise in exports as the rest of the global economy mends.