Economy at $5 tn? PM Modi sets mission impossible target?

Prime Minister Narendra Modi, who had said in Davos that India would become a $5 trillion economy by 2025, has now revised it. Last week, he said India would achieve the feat by 2022. Currently, the size of the Indian economy is $2.6 billion. However, economists say the target is over-ambitious, if not impossible, given the global and domestic economic situation.

Though the Indian economy clocked an 8.2% GDP growth in the first quarter of this fiscal, many economists have forecast a slowdown in the second of half of this year in the wake of the global slowdown, trade war, strained fiscal and current account deficits, falling rupee and inflationary pressure.

World Bank has forecast India’s growth at 7.3% in 2018-19 and Reserve Bank of India 7.4%. The rapidly worsening global economic situation has forced a few others to forecast a growth rate of below 7% for India this financial year.

A Confederation of Indian Industry (CII) survey of about 200 companies this week said a majority of 64% of respondents felt that GDP growth will be in the range of 6.5% to 7.5% in 2018-19. In CII’s business confidence index report, about 28% of the respondent companies saw the GDP growth for July-September 2018 at 6.5-7%.

Renowned international economists Nouriel Roubini and Brunello Rosa in a recent article have painted a gloomy picture for the global economy for the next couple of years. They say by 2020 the conditions will be ripe for a global financial crisis because the US is running large fiscal deficits and China is pursuing loose fiscal and credit policies.

They warned that unlike in 2008 crisis, governments lack the policy tools to manage it and the situation would be worse than 2008.

If India were to become $5 trillion economy even by 2025, it will have to grow over 10% and to be precise 10.6%, which, according to NIPFP economist N R Bhanumurthy, is certainly over-ambitious if not impossible.

A simple calculation shows that if India were to grow at 7.4% that is projected by RBI this year and that is sustained over the next 7-8 years, then India will reach $5 trillion by 2027 at current prices. Even this 7.4% growth look difficult this year, and with global recession looming large India might not be able to sustain high GDP growth at least for the next few years.

If India were to become $5 trillion economy by 2022, then India will have to grow by at least 14.2% annually next four-five years, which perhaps no country has achieved so far. Even China has not clocked beyond 12% over a period of a few years.

Given the external and domestic condition even 10% growth is difficult for India in the foreseeable future, Bhanumurthy told DNA Money, adding $5 trillion certainly looks difficult to achieve even by 2025.

India is now that one of the large open economies and hence the contribution of external sector to growth is around 25%. Given any disturbance in the external situation as it is now, will knock out 25% of growth and that is very substantial. I think we need to be a little more careful in projecting such GDP numbers, he said, adding achieving the goal with just domestic spurt is almost impossible.

Also, with the US economy not growing beyond 4% in best of the times, and China now in the process of cooling down its economy by gradually slowing down its growth in the coming years, the chances of India largely depending on foreign trade to boost growth further will be increasingly difficult.

To achieve double-digit growth, which is essential to become $5 trillion economy by 2025, India would have to pursue export led growth like China, where 40-45% of GDP was because of exports. India’s former chief statistician Pronab Sen said India is far from it, at least in the foreseeable future.

Crisil chief economist D K Joshi said Crisil forecast “do not support double-digit growth. On a continuous basis, India can grow at 7.5-8% because of structural reforms carried out by the Modi government”.

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Another former chief statistician, TCA Anant, however, said double-digit growth is in the realm of a possibility and if China has done it, India too could do it.

Source: DNA Money