Towards a $5 Trillion Economy

PROFESSIONAL pessimists”, as Prime Minister Narendra Modi termed them, scoff at the government’s ambition to make India a $5 trillion economy by 2024-25. So is the PM being over-optimistic or are his critics missing the big picture? To answer that question, we need to examine the math.

- Minhaz Merchant

India’s estimated nominal GDP in 2019-20, the base year for our five-year computation, is $3.1 trillion. The nominal GDP growth is real GDP growth plus inflation at current exchange rates and is calculated in precisely this manner by the International Monetary Fund (IMF) and the World Bank for over 190 countries.

In his 2019-20 Economic Survey, Chief Economic Advisor (CEA) Krishnamurthy Subramanian has assumed average annual GDP growth of eight percent from 2019-20 to 2024-25, an inflation rate of four percent and an exchange rate of Rs 75 to the dollar by 2024-25. How credible are these assumptions?

Take the estimate of eight percent GDP growth. This is higher than the average annual economic growth of 7.2 percent in the Modi government’s first five-year term. But keep in mind that GDP growth was impacted in the last two years of the government’s term by two one-off events: demonetization and the introduction of the Goods and Services Tax (GST). Both disrupted growth. In the final two years of the Modi government’s first term, viz., 2017-19, GDP growth fell to below seven percent, dragging the overall five-year growth average down from a putative eight percent to 7.2 percent.

With the shock treatment to the economy administered by demonetization (to digitize the financial ecosystem) and GST (to coalesce multiple state-level taxes) more or less over, GDP growth can be expected to return to its 2014-17 trendline of 7.5-8 percent. Thus the new CEA’s extrapolation of future annual GDP growth averaging eight percent is reasonable in the absence of a global recession.