Cognitia 2.0 #2 India’s Race to a 5 trillion Dollar Economy
India’s Race to a 5 trillion Dollar Economy –
A Dream
of 1,400 million, translated into a Goal
We conducted a writing competition on the occasion of Republic Day 2022 and asked our participants to pen down their thoughts and opinions on chosen topics. Here are the entries that won our hearts.
Written By: Shashwat Singhai, MBA(IB), Batch of 2021-23, IIFT Delhi
India is buzzing with the phenomenon of aspiring to become a part of the USD 5 Trillion economies exclusive club. There were heated debates over how, when and whether ever it is going to become a reality. The most memorable moment was when most of the office-bearers in government were found scratching their heads that how many ZEROES are there in a Trillion! Let us delve deeper into when India can realize this dream.
PHASE 1 – From the ages of history till 1991
The history of India began from the dawn of the Indus valley civilization which dates to 3500 BC. From the era where economic estimations of economic output began, the Indian subcontinent commanded 25 to 33 % of world GDP over centuries. In 1700, India’s contribution to world GDP was estimated to be a whopping 27%. But over time, due to the ordeals of colonization, it plummeted down to less than 3% of world GDP in 1947 when India became an independent nation. Moving out of the claws of colonization, India chose to be a closed economy, thwarting foreign investments. Till 1991, India had a stagnant growth rate (3.5% on average when other Asian tigers grew at more than double than this rate in the same timeframe) and the government kept a closefisted control on the economy.
PHASE 2 – The Golden Run followed by a Wobbly Revival (1991-till date)
In 1991, India found itself at the brink of economic collapse as its foreign reserves depleted and were in dire straits. At this juncture, India finally agreed to open its economy and from here on the golden run of growth began in India. From 1994 to 1997, India grew at 7.5% (the highest since its independence). Further, from 2005-08 India grew at an average of more than 9% (which was only second best to China). Post the 2008 global economic crisis, India’s average GDP growth rate fell to 7.5% in 2016. Since 2017, the growth rate has seen further decline continuously (with the annual growth rate falling to a 4.04% in 2019, which is way below par for recent Indian growth benchmarks), with parallel global economic growth meltdown.
PHASE 3 – Beginning of New Era and a Vital Decade
Covid-19 has been a harsh reality for an entire global community. Despite it, India is projected to grow at 6-6.5% over this decade (which is going to be one of the fastest growth rates globally). Based on a comprehensive analysis of various think tanks across the globe, it has been a unanimous forecast that India is expected to grow at 5.5-6.5% in this decade (Real Growth) and Inflation in India has hovered around an average of 3.5-4% (RBI in its Bi-monthly report, monitors inflation within an acceptable band of 2-6% range). Now, this means that the Nominal Rate of Growth for India’s GDP is projected to be within the 9-10.5% band. At this rate, India is slated to achieve the elusive $5Tn benchmark in around 2027-30. Hence, it is inevitable that India is going to achieve this feat within this decade itself. But the million-dollar question is that can this timeline be truncated – can India add 100- 200 BP in its average real GDP growth rate in the coming years, which can make this dream come multiple quarters before than current estimates.
Below is the graphical representation of 3 different scenarios for the timeline of achievement of 5 trillion-dollar target. The Blue line represents the benchmark growth rate as predicted by IMF. Green and Red line represents 100 Basis points above & below benchmark estimates respectively. This graph provides a hawk-eye view of the timeline when this ambitious Indian goal is going to be realized.
Source: IMF Growth Projections
Levers that will push Indian Economy
Lever 1 – Infrastructure Blitzkrieg
Recently, the finance ministry rolled out an aggressive infrastructure spending outlay of Rs.102 trillion (approximately $1.4 trillion) in the next 5 years. (National Infrastructure Pipeline) This is an ultra-ambitious initiative, but the financing of this project is laid out on a 39:39:22 model among Central, State government and private investments respectively. But the catch lies in whether how much inclined will be state governments and private investors will be for this initiative. Major infrastructure projects generally have a long gestation period which blocks liquidity. For instance, BMC - the municipal corporation of Mumbai has a surplus of more than $10 billion but it will prefer to channel this investment in improving its poor drainage, potholes and a plethora of other issues needing immediate remedy rather than in an infrastructure project which will freeze their funds for years.
(ISAS Working Paper – Roadmap to 5 trillion USD Economy)
Lever 2 – Rise of India Inc. – Focus of Industry Development
Post-independence, India majorly skipped to the service sector and missed the bus like its counterpart China – which focused more on the industry. Coming late to the party, India has rolled out PLI (Production Linked Incentive Scheme) which has earmarked 13 sectors to boost local manufacturing and make India a preferred export hub. (Production Linked Incentive (PLI) Scheme)
Now the success of the PLI scheme hinges on the government's ability to augment the supply of factors of production available in the country. Realizing this, the government has taken certain steps that complement PLI schemes, such as –
Introduction of 4 Labour Codes to reduce complexity and compliance related to labour
Promotion of REIT’s and INVIT’s to boost capital availability
Land Reforms – Swamitva scheme for digitalization of land records
Due to these steps, India Inc has responded enthusiastically – For Instance, recently Ministry of Heavy Industries concluded its bidding application for the ACC Battery PLI scheme in which the bidders were behemoths such as Reliance, Hyundai, Ola, TVS, Exide, etc PLI scheme is expected to generate production if $ 504 billion and add around 1 crore jobs till FY 27. (ACC Battery PLI | Credit Suisse - Outlook on PLI Scheme)
Lever 3 – Rise of Tech Ecosystem
As per the latest HURUN – Global Unicorn Index, India has replaced the UK as 3rd biggest Unicorn producer (54 within India and 65 outside India founded by Indians). With this news, India has announced its grand arrival in the club of major technology giants.
More fascinating insights from the report were as follows –
Founders of gaming start-up Zupee – are aged just 25 years!
The average age of Indian start-up founders is 39
Indian unicorns are now worth $168 billion – i.e., greater than the GDP of Telangana
And the accolades go on and on. Further, India’s Union Commerce and Industry Minister have set a target to add 75 new Indian unicorns in 2022. Elated from the rising stature of the Indian start-up ecosystem – GoI declared 16th January as National Start-up Day from 2022 onwards, on the auspicious occasion of the 6th anniversary of the Start-Up India initiative. (HURUN - Global Unicorn Index 2021 | HURUN India Report)
Lever 4 – Surge in Foreign Trade and Inking of FTA’s
Union Minister Piyush Goyal has set a target of $ 1 trillion in merchandise exports by India in 2030. India has almost achieved 50% of its 400 billion merchandise exports in the first 6 months of FY 22 and is well on course to clock its target. (India’s merchandise exports stood at $ 197 billion for April-September 2021). But upon deep diving, India’s high-tech exports are merely 10% of its exports. India needs to diversify its export basket rapidly and focus on high-tech exports to trigger the value of exports in coming times.
On FTA (Free Trade Agreement) front, India has finally begun to blow away the deadlock, as UK’s International Trade Secretary visits Delhi for a new ambitious Free Trade deal with India. For starters, both countries agreed to an Early Harvest scheme, where tariffs are agreed to be lowered on small sets of goods (Except on Sensitive goods such as Agriculture and Dairy sectors). This FTA aims to double bilateral trade to GBP 35 billion by 2035. At the start of 2022, India has FTAs with 10 countries and PTA (Preferential Trade Agreements) with 6 countries. Apart from the UK, India is in process of negotiating FTAs with Canada, the EU, and the US.
(gov.uk - UK India Trade Negotiations)
Conclusion At this juncture, we can safely conclude that India is on course to become a 5 trillion-dollar economy and even surpass the US to mark its status as an economic superpower in coming decades. But the question is that at what rate of growth are we going to proceed over the next 2 decades – an expected 5 to 6.5% as predicted by various think tanks based on current Indian potential. Or can India grow at 7%+ over the next 2 decades to truncate the time frame of our journey to economic glory? Only time will tell and as the saying goes “Time is of the essence”, the world watches us out closely.
About the writer
Shashwat believes that Music is one's best companion, which makes you feel euphoric when you get immersed in it. He personally believes that to add icing to the cake, exploring songs in different languages makes it even more exciting and can be an effective way to learn a new language.