Don't blame Covid alone: $5 trn economy goal to be delayed by two years

Next three years will have to deliver 17% nominal GDP growth to take economy to $5 trn by FY25; If Budget assumption on growth is accepted, FY24 and FY25 should yield 20% growth each

The Indian economy will have to wait another two years to achieve the $5-trillion milestone, a target the government was originally hoping to meet by 2024-25.

India's economy needs to grow annually by 16.95 per cent at current prices over the next three years if it is to hit the $5 trillion mark by 2024-25. This is an extremely difficult task.  

This is a slightly lower yearly growth than 17.6 per cent, the officially projected figure for the current financial year. However, FY22 is an exception in terms of economic growth.

The projected real gross domestic product (GDP) growth of 9.2 per cent in the year will come on the base of a contraction of the economy by 7.3 per cent in the previous year. Deflators, which measure the rate of change in prices, are projected to grow by 8.8 per cent in the year as per the advance estimates released by the National Statistical Organisation (NSO). This is mainly due to the high wholesale price index (WPI)-based inflation rate for most sectors. Most deflators used in the GDP calculations are based on WPI. The average WPI inflation rate for the economy remained in double digits for each of the first ten months of FY22.

There isn't a single year other than FY22 when the economy grew by 17.6 per cent in nominal terms since 2012-13 which is covered by the new GDP series. The second highest growth was in 2012-13, when the economy expanded by 13.8 per cent at current prices.

If the Budget assumption of 11.1 per cent nominal GDP growth for 2022-23 is considered, the GDP needs to zoom by almost 20 per cent a year in the next two financial years to embrace the $5 trillion tag. This is a near impossible task.

In the current financial year, the economy is projected to grow to Rs 232 trillion, or $3.12 trillion. For the calculation, an exchange rate of Rs 74.27 to the dollar has been considered. This was the average monthly rate for the first 10 months of the current fiscal.

If the Budget assumption is taken for consideration as cited above, and projections for real GDP growth and inflation given by the International Monetary Fund (IMF) are taken into account, the economy will wear the $5 trillion hat by 2026-27. The exchange rate cited above-–Rs 74.27 to the dollar--is taken into consideration for the calculation.  

IMF projected the economy to grow by 6.1 per cent and the consumer price index (CPI)-based inflation rate to stand at 4 per cent during 2026-27. Assuming deflators behave like this inflation rate, this would mean a nominal GDP growth rate of 10.1 per cent, which is a bit lower than the growth rate assumed in the Budget for 2022-23. We have assumed IMF projections cited above for 2024-25 and 2025-26 too.

This would imply a wait of two years beyond than 2024-25, the original deadline set by the Modi government for expanding the economy to a $5 trillion size. By 2024-25, India’s economy may become $4.21 trillion.

It should be noted that only Covid-induced lockdowns are not to blame for this delay. In fact, the economy slowed down in 2019-20 too, when the effect of the lockdowns were felt only in the last week or so of March. It grew by just 6.2 per cent in nominal terms that year. The real GDP growth rate was merely 3.7 per cent.

Though the advance estimates projected the economy to grow by 9.2 per cent at constant prices in the current fiscal year, it would mean just 1.3 per cent growth over the pre-Covid 2019-20. The new gross domestic product (GDP) data put out on Monday would mean real economic growth of 8.8 per cent for 2021-22, which would translate into 1.6 per cent growth over pre-Covid 2019-20.

In this respect, one has to cross the fingers to see if the Budget’s focus on capex-led economic recovery bears fruit or not. 

Table: Road to a $5-trillion economy

Financial year	GDP at current prices in Rs cr	GDP at current prices in $ trillion
2022-23*	25,800,000	3.47
2023-24	28,405,800	3.82
2024-25	31,274,786	4.21
2025-26	34,433,539	4.60
2026-27	37,911,327	5.10

Notes

* Budget assumption

Exchange rate: $1=Rs 74.27 (average of first 10 months in current financial year)

GDP growth taken as 10.1% in nominal terms, based on IMF projections