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$5 trillion GDP a distant dream

The Prime Minister has laid down a visionary target of making India a $5 trillion economy by 2024-25. This has stimulated debate and discussion among economists and policymakers to seek roadmaps to attain this optimistic economic goal. This discussion garners more significance given the current domestic and global economic slowdown coupled with domestic price instability, the US-China trade war and the current pandemic. Amid such global and domestic challenges, two questions arise: Will India become a $5 trillion economy? What should be done to help Indian attain its goal?

It is necessary to empirically diagnose India’s growth pattern to meet the objective of a $5 trillion Gross Domestic Product (GDP) from the current level of $2.9 trillion. The latest estimate of the GDP for 2019-20 and the exchange rate of Rs 70.39 per dollar (average exchange rate of 2019-20) yield a $2.9 trillion GDP that has to touch $5 in five years. This implies the exchange rate adjusted Compound Annual Growth Rate (CAGR) of about 13.5 per cent, which is close to the Niti Aayog’s projection of 11.5 per cent. However, the $5 trillion GDP target was originally set during the pre-COVID-19 scenario, which has now made this target impossible to achieve owing to the disastrous consequences of the lockdown on the economy.

Amid the macroeconomic shocks and uncertainties, many national and global institutions and rating agencies have been releasing a revised GDP growth forecast for 2020-21. S&P and Fitch Solutions have projected India’s GDP growth rate for 2020-21 as -5 per cent. The World Bank maintained a -3.2 per cent growth outlook. In contrast, Moody’s Investors Services and the International Monetary Fund (IMF) posited non-negative growth numbers of zero per cent and two per cent for the current financial year (FY). On May 22, the RBI postulated the GDP growth in the negative territory. It further released a projection of -1.5 per cent growth for 2020-21 in its Survey of Professional Forecasters report in June. However, most projections predict above eight per cent growth outlook in the FY 2021-22, owing to the fiscal and monetary stimulus and reforms announced by the Government accompanied by the unravelling of the pent-up aggregate demand in the economy.

However, incorporating the adversity in GDP growth, due to the pandemic, it is best to consider a GDP growth rate of nearly -3.2 per cent for 2020-21 relying on the World Bank’s estimate and the RBI’s negative territory forecast. This growth number, while being conservative, hovers around the other negative estimates and thus is a tenable representative of all the growth projections made by various multilateral institutions and agencies. It is inevitable that subdued growth for the initial year (2020-21) of the $5 trillion target trajectory will either devolve the growth pressure to subsequent years or push the target year to a later period.

Realistic estimation for the post-COVID-19 period i.e., from 2021-22 to 2024-25, yields a CAGR of 18.1 per cent, incorporating a -3.2 per cent GDP growth for 2020-21. This estimate indicates that the Indian economy has to grow at an annual rate of 18.1 per cent to attain a GDP target of $5 trillion by 2024-25, which looks more surreal than real. Plus, each one per cent decrease in the growth rate for the current year yields an additional burden of 0.3 per cent in the CAGR for the subsequent years of the growth trajectory. Given the unrealistic-looking projected growth rate of 18.1 per cent, one needs to look at the alternative to attain the $5 trillion target which is, naturally, a postponement of the target year.

In the post-COVID-19 period, the economy is expected to recover and revive as argued by multilateral institutions, rating agencies and economists. In fact, economists have even gone ahead and contemplated that the Indian market will emerge stronger than ever post-COVID-19, given liquidity support and future demand. This revival is attributable to stimulus and reforms announced by the Government for all the productive sectors. However, the effectiveness of these stimuli and reforms would depend on their implementation and thus remains debatable. If not a big bang, a green shoot is expected to knock on the door of the economy in the next FY, replicating a V-shaped recovery to some extent.

Given this, from 2021-22, the economy’s productive sectors, i.e. agriculture, industry and services, will follow their respective historical growth trajectories. Thus, it is expected that these productive sectors, post-COVID-19, will grow at the historical average of the previous five years of about 7.5 per cent, 9.0 per cent and 11.4 per cent, respectively. This looks more realistic and acceptable than the 18.1 per cent annual growth rate, derived and discussed earlier. This consideration and associated analysis revealed that the Indian economy will attain only $3.8 trillion by 2024-25 and reach the $5 trillion target by 2027-28 with a CAGR of 9.97 per cent. This implies that the COVID-19 impact has pushed India’s $5 trillion dreams back by three years.

The ambitious $5 trillion economic objectives intend to provide a stimulus to the economy while raising many pragmatic challenges to achieve it. This objective can be achieved by providing an appropriate fillip to the growth of agriculture, industry and services sectors that are drivers of the Indian economy. However, a data-driven approach reveals that the growth attained by the present GDP patterns is far from the target required to attain the $5 trillion objectives. However, it is possible to attain this target by 2027-28 when there is a recovery in the economy during the post-COVID-19 period coupled with consistent growth in productive sectors over the years.

Historically, the services and industry sectors show a high correlation with the overall GDP growth rate but they need consistent stimulus for growth. In fact, the productive sectors collectively can deliver viable growth rates that may put the Indian economy into the $5 trillion club by 2027-28.

Any moderate shock to one sector may be absorbed by the other sector, but a major shock cannot be tackled and can derail the $5 trillion growth trajectory. Thus, policymakers must focus on all the three sectors equally without focussing on any particular one. Along with the individual growth of a sector, its dynamics with other sectors and its contribution to the economy are evenly important. This could be achieved by attracting Foreign Direct Investment and strengthening the Regional Innovation Systems to encourage local firms to network, innovate and globalise. (MR, Inputs: Agencies).

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