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Minhaz Merchant

Minhaz Merchant is the biographer of Rajiv Gandhi and Aditya Birla and author of The New Clash of Civilizations (Rupa, 2014). He is founder of Sterling Newspapers Pvt. Ltd. which was acquired by the Indian Express group

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A $30 Trillion Economy?

Who’s right? Neither. As it turns out, India will probably be a $30 trillion economy well before 2052 and obviously long before 2065.

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During a speech in Coimbatore on 26 June, 2022, Commerce and Industry Minister Piyush Goyal declared that India was on track to be a USD 30 trillion economy by 2052. That’s nearly ten times India’s current economy of USD 3.2 trillion.

Goyal’s assertion drew criticism from certain quarters. A columnist in Mint who specialises in negative reportage on the Indian economy sneered that, of course, India would one day be a USD 30 trillion economy – but by 2065, not Goyal’s target date of 2052.

Who’s right? Neither. As it turns out, India will probably be a $30 trillion economy well before 2052 and obviously long before 2065.

Assume real GDP growth in 2022-23 at seven per cent. Given the trade disruptions caused by the war in Europe, that’s a reasonable assumption. India’s GDP pie comprises services (58 per cent), industry (27 per cent) and agriculture (15 per cent). The estimated growth break-up of these three sectors in 2022-23 is broadly 10 per cent (services), four per cent (industry) and three per cent (agriculture). That translates into overall GDP growth of just over seven per cent. 

Caveat number one: this is real GDP growth. Now factor in inflation to get nominal GDP growth which is what the World Bank and the International Monetary Fund (IMF) use in their global data rankings.

Inflation in 2022-23 is likely to stay around 6 per cent. So nominal GDP growth this fiscal is set to be 13 per cent (seven per cent real plus six per cent inflation). India’s GDP in local currency as per the government was Rs 240 lakh crore on 31 March, 2022. Add 13 per cent and GDP on 31 March, 2023 would rise to 272 lakh crore.

Caveat number two: factor in the rupee-dollar rate to convert India’s GDP of Rs 272 lakh crore into US dollars. Assuming a rate of 80 rupees to the dollar, India’s GDP on 31 March, 2023 would be around USD 3.45 trillion.

The mistake analysts like the morose Mint columnist make is to assume the inflation differential between the US dollar and the Indian rupee will always be around three per cent. That differential is what has caused the rupee to depreciate historically against the dollar by around two to three per cent a year.

Also Read: Decoding Piyush Goyal's Dream Of $30 Tn Economy

That assumption no longer holds good. The US is headed towards a higher inflation rate – and not only because of the Russia-Ukraine conflict. The US is a heavily indebted country. It has escaped the ravages of inflation since the end of the Second World War by simply printing dollars, the world’s reserve currency.  It has financed wars in Vietnam, Iraq, Syria, Yemen, Afghanistan, the Balkans and now Ukraine because global investors in times of crisis flee to the dollar, the world’s safe haven currency.  

The rupee may have depreciated against the dollar for precisely this reason from 75 to 79 over the past four months. But it has appreciated against the British pound from 100 to 95 during the same period and held steady against most other international currencies. Thus if India’s GDP was designated in a basket of currencies and not just the dollar, it would likely be closer to USD 4 trillion on 31 March, 2023.

The era of the US dollar’s reserve currency status will not last forever. In 1931, the British pound, then the world’s leading global currency, went off the gold standard. After the Second World War, Britain was bankrupt. Germany was saddled with war reparations. The US dollar’s ascent began.

That supremacy is being challenged by the Chinese yuan and the euro. Even the Russian rouble, hammered in the early days of the Ukraine war, has climbed to a 20-year high against the dollar.

Global trade is increasingly being settled in yuan, roubles, rupees and euros, bypassing the dollar. For India, the relentless pressure to toe the Western line on Russia has been accompanied with subtle threats. None have worked. The realisation has finally dawned on Western leaders that India will not abandon its strategic autonomy to appease Washington, London and Brussels.

But back to our math. With GDP of Rs 272 lakh crore by the end of this fiscal, and an average nominal growth rate of 13 per cent a year for the next decade, India’s GDP would double roughly every five years to around Rs 11 lakh crore in 2032.

From here on, assumptions must change. The GDP growth will moderate to six per cent a year, inflation to four per cent a year. Even at 10 per cent nominal GDP growth, the economy will double every seven years. If the rupee-dollar rate stabilises – as the yuan-dollar rate has stabilised over the past 20 years – India’s GDP in 2039 would be around Rs 22 lakh crore. At 90 rupees to a dollar, that translates into a GDP of over USD 24 trillion. Even at 100 rupees to a dollar, GDP would be USD 22 trillion in 2039.

From there, USD 30 trillion is a three-year sprint. So Piyush Goyal’s USD 30 trillion target for 2052 will likely be met by 2042, a mere 20 years from today. And the morose Mint columnist’s 2065 date will remain wishful thinking. 

Knowledgeable foreigners are more upbeat about India’s economic prospects than India’s perennial doomsayers. In its 2020 report, McKinsey wrote: 

“India is at a decisive point in its journey toward prosperity.  India has a successful track record to draw on: over the past three decades, the country has been one of just 18 outperforming emerging economies to achieve robust and consistent high growth. Pro-growth reforms lifted productivity and helped the country weather shocks and cycles. Real GDP growth has averaged 6.8 per cent annually since 1992, and it has been inclusive; economic prosperity has brought significant improvement in living standards. 

“India needs to leapfrog ahead to achieve the employment and productivity growth needed. Fortunately, it has many opportunities to do so. Global trends such as digitisation and automation, shifting supply chains, urbanisation, rising incomes and demographic shifts, and a greater focus on sustainability, health, and safety are accelerating or assuming a new significance.”

India, however, needs to engage in deep economic reforms to achieve its growth target that will have several collateral consequences: lowering poverty, improving lives and keeping the country’s tryst with destiny.