Modi's $5 Tn Economy Dream Not Before FY29, IMF Data Hints

After returning to power for the second time with a crushing victory in 2019, Prime Minister Narendra Modi with confidence said that he is optimistic about achieving the USD 5 trillion economy target by 2025, despite the Covid-19 pandemic. 

PM Modi said that the central government has a record of achieving targets well before the deadline. He said that the crisis gave the government a chance to come up with reforms that were waiting to happen for decades. 

However, according to the International Monetary Fund's (IMF) latest data, the gross domestic product (GDP) of India will not achieve the target of USD 5 trillion before the fiscal year (FY) 2029. The data from IMF shows that India's nominal GDP may rise to USD 4.92 trillion in FY 2028.

Last month, the international body (IMF) in its World Economic Report cut down its growth estimates for India for FY23 to 8.2 per cent amid the ongoing war between Russia and Ukraine. The IMF expects the increased oil prices to affect private consumption and investment.

However, its projection remains higher than that of the Reserve Bank of India (RBI), which estimated a growth rate of 7.2 per cent in the current FY and 6.3 per cent in the next.

The union finance ministry in April said that the emphasis on capital expenditure in the budget of the current financial year will give impetus to manufacturing and increase tax revenue collection. With this, India will be on the path to becoming a USD 5 trillion economy.

There are several experts who argued that the target was beyond reach keeping an eye on the ongoing Covid-19 pandemic.

Last year, Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities told BW Businessworld, "A USD 5 trillion economy is possible towards the end of the decade. Any faster progress would require much higher growth which is possible only through a long-term investment cycle." 

He further added that the impact due to the pandemic would shift the economy away from the pre-Covid trend but growth prospects could be better if some of the reforms and measures are undertaken to gain momentum.

According to the ministry, in the last financial year 2021-22, tax revenue increased by a record 34 per cent to Rs 27.07 lakh crore. The figure is above the expected collection. This shows a rapid revival in the economy after three waves of Covid-19.

A statement from the finance ministry said that the central government is focused on making India a global economic power and several steps have been taken in this direction. 

"This is reflected in the gross domestic product growth of the country in recent years. These measures have increased the revenue collection for the exchequer. At the same time, India is on its way to becoming a USD 5 trillion economy," it said.

Goods and services tax has been a big step in taking forward the GDP of the country. According to the statement, "With the emphasis on capital expenditure in the Union Budget for FY 2022-23, domestic manufacturing will pick up and employment will increase in the coming years." This will increase tax collection further.' The total company tax collection in 2021-22 stood at Rs 8.6 lakh crore, which was Rs 6.5 lakh crore in the previous financial year.

It said that this shows that the new simplified tax regime at low rates with no exemptions has been successful. The ease of doing business for companies has increased and the overall economy is gaining momentum and tax revenue for the government is increasing. In the last fiscal, direct tax collections grew by a record 49 per cent to Rs 14.10 lakh crore, while indirect tax collections grew by 20 per cent to Rs 12.90 lakh crore.

The ministry said that this is a result of the steps taken to boost the economy and check tax evasion. Capital expenditure has been estimated to increase by 35.4 per cent to Rs 7.5 lakh crore in the budget for the current financial year with a view to give impetus to the economy affected by the epidemic through investment. Last year in 2021-22, the capital expenditure was Rs 5.5 lakh crore.

PM Modi's effort to make India an economic superpower

Modi’s dream to establish India as an economic power by FY25 received a blow when the Coronavirus outbreak hit the entire country leading to a nationwide lockdown and the infamous migrant crisis, which attracted sharp criticism from international communities.  

The devastating second wave and closure of several businesses acted as fuel to the fire. At times, when things were getting back on track, the nascent recovery witnessed another jolt when Russian President Vladimir Putin invaded Ukraine, resulting in the downgrades in growth estimates for the global economy.

Statics

As per the RBI research report, India is likely to overcome Covid-19 losses in 2034-35. The output losses for individual years have been worked out to Rs 19.1 lakh crore, Rs 17.1 lakh crore and Rs 16.4 lakh crore for 2020- 21, 2021-22 and 2022-23, respectively, it said. 

"Infrastructure and manufacturing are the two pillars that should be used to push the growth structurally. The government has already outlined a clear intent of supporting spending on public infrastructure. Part of the financing is also being looked at through privatisation and monetisation plans," Rakshit told BW Businessworld. 

However, he added, infrastructure building or revival of the investment cycle, in general, would require the private sector to also start contributing. The fundamentals for a revival in private corporate and households’ is emerging with financial institutions, especially banks, in a better position, corporates deleveraging, and low-interest rate regime," Rakshit said.

For the government, ease of doing business for companies has increased and the overall economy is gaining momentum and tax revenue for the government is increasing.

The Centre has taken measures like the abolition of more than 25,000 compliances, a push towards auto-renewal of licenses, transparency and speed in regulatory framework via digitisation and one of the most favourable taxation structures in the world.

To reduce compliance requirements and facilitate ease of doing business, the union commerce ministry has relaxed several processes under the Export Promotion Capital Goods (EPCG) scheme and now imports of capital goods are permitted duty-free, subject to an export obligation. 

On one hand, the target of the USD 5 trillion economy is far from the deadline, on the other hand, the Prime Minister’s Office (PMO) is working on a blueprint for [email protected], as per media reports. The Modi government is eyeing to make India one of the world's three highest economies.