What Can Make $5 Trillion Economy Possible For India?

With predictions of India's economy likely to grow by 8.3 per cent in the current Fiscal Year (FY) 2021-22, the conversation again arises, whether the $5 trillion economy dream for India is possible or not?

The World Bank in the report named 'Shifting Gears: Digitisation And Services-Led Development,' said that economic prospects in India for the upcoming FY will be determined by the pace of COVID-19 vaccination and successful implementation of agriculture and labour reforms. 

Prime Minister Narendra Modi led the BJP Government, after 2019, aiming to make India a USD 5 trillion economy and global powerhouse by 2024-25. Last year, he said that the Indian economy is getting back on track faster, as a timely nationwide lockdown and several relief measures by the Centre helped address issues faced by Indian society and all economic sectors because of the Coronavirus pandemic.

The truth is the Indian economy is facing many hurdles, especially after the slowdown in economic activity due to the ongoing COVID-19 pandemic. However, agriculture and labour reforms can drive change, which can ultimately contribute to the economy.

Suvodeep Rakshit, Senior Economist in Kotak Institutional Equities, said, "A $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. The impact due to 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."

The World Bank also said that the Gross Domestic Product (GDP) of India went up by 20.1 per cent in the first quarter (April-June) of the current FY due to the significant base effect, strong export growth, and limited damage to domestic demand.

India’s GDP had shrunk by an unprecedented 24.4 per cent in the first quarter of the previous FY as the entire country was under coronavirus lockdown.

Talking about whether the current domestic and global economic slowdown, including domestic price instability, is hindering the economic growth of the country, Rakshit said, "The pandemic was expected to impact growth. However, the revival in growth has been swift. While it was feared that there would be a collapse in demand, the bigger impact has been on the supply side. The kind of pent-up demand seen after the lockdowns have petered out and growth will be reverting to the usual trend in a few quarters. However, friction in the supply chain and consequently higher prices would disrupt if it continues for a few more quarters. From a long-term perspective, now the risks would be greater of a slowing consumption cycle too, especially as the middle and lower part of the consumer pyramid would have seen much severe impact." 

The disruption in the Indian economy at the time of the deadly COVID-19 second wave was limited, compared to the first, however, if the estimates are to be believed, economic recovery in several sectors has been unequal.

On one hand, the sectors like manufacturing and construction recovered steadily in 2021, on the other hand, low-skilled individuals, women, self-employed people, and small firms were left behind. 

"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 been looked at through privatisation and monetisation plans. However, 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. 

The recovery of the Indian economy in FY22  totally depends on how steadily household incomes recover and activity in the informal sector and smaller firms normalise, amid the possible speculations of the third wave, which is likely to hit us in upcoming weeks. 

Rakshit added, "The real estate cycle is also seeing some incipient signs of revival. Along with the investment cycle, the PLI scheme if properly executed, could create significant positives for the manufacturing sector and non-government jobs. Employment would also see support from the investment cycle. While these could be the building blocks, easier compliance and approvals system, faster resolution of legal disputes, early implementation of labour codes, and streamlining of IBC and GST would be the key essentials."

If India indulges in the third wave, as deadly as the second, it will further risk the worsening of the financial sector, higher-than-expected inflation constraining monetary-policy support, and it may also lead to a slowdown in vaccination. This ultimately put the idea of a USD 5 trillion economy in a dark spot.