Can India Reach 5 Trillion Economy Mark Post-COVID?
Exactly a year ago, Prime Minister Narendra Modi gave a clarion call for India to pursue challenging yet achievable target of 5 trillion-dollar economy by 2024 as it scaled up to 63 rank in World Bank’s Ease of Doing Business, 2019. Modi Government’s salient empowerment reforms of attempting to pull crores of people out of poverty and creating competitive economy included slashed corporate tax to 22% and 15% for new manufacturing units, Pradhan Mantri Awas Yojana (housing for poor), Saubhagya Yojana (electricity to 99.9% households), Jan Dhan Yojana (banking inclusive and accessible), Ayushman Bharat (INR 5L insurance to 10 Cr poor families), abolished Angel Tax, infused INR 70,000 crores for recapitalization of public sector banks, use of AI and Big Data analytics for good governance.
Government sought to invest INR100 lakh crores in infrastructure, domestic tourism etc. to achieve this target in 5 years before the COVID-19 pandemic catastrophe led to nationwide stringent lockdown in Q1 of 2020, which disrupted supply chain, global trade, spiked the exchange rate to INR 77 from 70.39 per dollar. From MSME to conglomerates, businesses sailed in shambles from aviation to hospitality, real estate to apparel, agriculture to poultry, petroleum to dipping automobile sales, price of goods inflated partly because of trade barriers with China which accounted 45% of electronics and 65% of active pharmaceutical ingredients for India’s imports.
Amidst macroeconomic shocks and uncertainties, rating agencies and institutions like Standard and Poor’s Global Inc, Fitch Solutions Inc, World Bank and Reserve Bank of India (RBI) have released negative growth projections between -1.5 and -5.8% per cent and revised GDP growth forecasts for 2020–21.The National Council for Applied Economic Research projected that Indian economy would contract by 12.6% this fiscal year with consistent decline in subsequent quarters. In September, Moody’s stated that India’s economic growth will rebound to optimistic rate of 10.6% in the 2021-’22 fiscal year.
Analyzing India’s growth trajectory during unanticipated pandemic entailed GDP at constant (2011–12) prices in Q1 of 2020–21 estimated at INR 26.90 trillion, as against 35.35 trillion in Q1 of 2019–20, showing an astronomical contraction of 23.9 percent. Quarterly GVA at basic price for Q1 of 2020–21 is estimated at INR 25.53 trillion which showed a contraction of 22.8% comparable quarter. The experts estimate that to reach $5 trillion mark, the economy would have to grow at above 11.5%. But is that even an achievable target?
The central government announced fiscal and monetary stimulus packages worth INR 20L crore which mostly readdressed supply shock than demand shock and strived to revive growth in productive sectors through Labor, Insolvency and Bankruptcy Code reforms, credit guarantees, disinvestment/ privatization of public sector companies, strengthening National Rural Employment Guarantee Scheme, Contract farming, attracting foreign direct investment in defence, however their implementation remains debatable. Newly coined Atmanirbhar manufacturing aims to bolster investment opportunities thereby boosting consumption and employment by incentivizing around 1000 companies shifting base from China to India. The latest investment alliance worth $10 billion with Google in India’s digital industry together with India ascending as the world’s second largest manufacturer of PPE and the ‘game changer’ hydroxychloroquine drug; Economists, multilateral institutions and rating agencies believe that the Indian market will emerge stronger than ever post-COVID, given liquidity support and future demand.
An average exchange rate of INR 70.39 per dollar in 2019–20 yield a $2.9 trillion GDP and was supposed to reach $5 trillion level by 2024–25 devoid of COVID-19 impact, implying exchange rate-adjusted compound annual growth rate (CAGR) projected by NITI Aayog at 11.5%. Nevertheless, estimation for the post-COVID lockdown period from 2021–22 to 2024–25 yields a CAGR of 18.1% to attain a GDP target of $5 trillion by 2024–25 which looks more surreal than real. Analysis considers that Indian economy may attain only $3.8 trillion by 2024–25 and pursue $5 trillion mark by 2027–28 with a CAGR of 9.97%. This implies COVID-19 pushed India’s $5 trillion dream by three years only when coupled with a consistent growth in productive sectors like agriculture, industry and services sectors in upcoming periods.
With repeated periodic lockdowns and disruption in manufacturing, massive food supply shortages will push up prices of all goods and services, causing annual inflation to hit 15 percent for the next four years. Exacerbating the situation, CMIE suggest unemployment rate currently at 8.35% which dropped from Apr’20 lowest rate at 23.52% reflecting supply shortages accompanied by an even bigger drop in demand. At that rate, we will need a real GDP growth of 14% this year, to stay on target for the 16.4 percent annual growth rate needed to touch a 5-trillion-dollar economy by 2024. A high possibility for India’s real GDP could be to grow by 1–2%, adding inflation to it, nominal GDP growth could result in approximately 4%. That means in rupee terms our nominal GDP will end up at about Rs 213 lakh crore in 2020–21. That will mean that, even if the rupee stays more or less stable against the dollar, we will need to add another Rs.162 lakh crore to our nominal GDP between 2021 and 2024, to reach the USD 5 trillion mark.
With wealth creation reforms introduced by finance ministry viz. tariff adjustments, investment in electric vehicles infrastructure, rural education rather than offering blatant direct transfer benefits and monitoring labor, land and product market reforms, tax compliance can accelerate Government’s plan of long-term economy growth to stage a new ground for the next general election due in 2024. Till recently, it looked like a dream. With the unemployment rate skyrocketing now, it is simply a fantasy. It appears inevitable from tweets of IMF chief economist Gita Gopinath in September, who remarked that “ India’s Q2 GDP growth is at historical lows, can expect rebounds in Q3 but 2020 overall will see major contractions”. This subdued growth of $5 trillion target trajectory in 2020–21 will likely devolve to push the target year to a later period.
References- RBI, Moody’s, Twitter, Ministry of Statistics and Programme Implementation, Fitch ratings, CMIE unemployment data
