A trillion dreams: Is this realistic, or are four states chasing a chimera?

While the Centre has a target to make India a $5 trillion economy by 2027-28 (FY28), delayed by two years from the original plan of getting there by FY26 due to Covid-related disruptions, four state governments have jumped on to the bandwagon by announcing targets to become $1 trillion economies, albeit with different timelines.
 

Uttar Pradesh and Maharashtra want to achieve the feat by FY28, Tamil Nadu wants to do so by FY31, and Karnataka by FY32. All four, in their FY25 budgets, presented this year, gave assumptions of their respective gross state domestic product (GSDP) growth in nominal terms for the year. So, on the basis of their assumptions and record, how realistic is the $1 trillion dream?
 

The exchange rate will play a crucial role in this calculation and some assumptions must be made on this front. For the purpose of this analysis, let us assume the rupee depreciates by 2 per cent each year against the dollar from FY25 onwards. The monthly average of the rupee stood at 82.77 against the dollar in FY24.
 

Now let’s look at one state at a time.
 

Uttar Pradesh
 

“Can Maharashtra and Uttar Pradesh compete to become a trillion-dollar economy? Will the Uttar Pradesh government compete with other states? The more the competition, the more will be the investment. This will result in the creation of more jobs and strengthen the concept of cooperative federalism,” Prime Minister Narendra Modi had said at the Uttar Pradesh Investors Summit 2018 in Lucknow. The state signed a memorandum of understanding with consultant Deloitte India to suggest a roadmap to this. Deloitte submitted a report in January last year and revised it in May after suggestions from stakeholders.  
 

Earlier this year, UP Chief Minister Yogi Adityanath expressed confidence that the state will achieve the $1 trillion target with the right policy and precise implementation as its goals were well defined.
 

Is the state indeed on track?
 

UP has assumed that its gross state domestic product (GSDP) would grow 5.8 per cent in nominal terms to Rs 24.9 trillion during FY25. At Rs 89.6 a dollar exchange rate, the state economy needs to become Rs 89.6 trillion by FY28 -- three years after FY25. This would require the economy to register a compound annual growth rate (CAGR) of 53.2 per cent in those three years in rupee terms.
 

This is a massive task, given the CAGR of around 5.6 per cent recorded by the state during the six years to FY25. At this CAGR, the state could aim to become a Rs 29.3 trillion economy by the target date or $330 billion (at Rs 89.6 against the dollar), leaving a gap of $670 billion for achieving the task. Rahul Ahluwalia, Co-founder, Foundation for Economic Development (FED), says:" We think a target on economic growth is exactly the right challenge for a state like UP to take on, since sustainable improvement in living standards will come only from economic growth. Given the legacy of low growth, UP also needs a sense of urgency, and this bold commitment provides that."
 

Those in the know say when the target was set, the economy was required to register 30-34 per cent growth a year from FY23 to FY28 in rupee terms. "Those were not aspirational numbers. The state is well on the trajectory. The aspiration was built on accelerating growth in primary, secondary, and tertiary sectors," says one of those in the know, adding that the depreciating value of the rupee against the dollar would be offset by higher exports from the state.
 

Maharashtra
 

State Governor Ramesh Bais said in the Assembly in February this year that the target of becoming a $1 trillion economy by FY28 was in line with the country's goal of becoming a $5 trillion economy. State deputy chief minister and finance minister Ajit Pawar, too, said the government was committed to making Maharashtra a $1 trillion economy.
 

“The government is capable of taking bold and necessary decisions weathering all challenges so that the state economy becomes $1 trillion,” Pawar said in reply to the debate on the interim Budget for 2024-25 in the Assembly last month.

In November last year, the Maharashtra Institution of Transformation (MITRA) said the state would require a cumulative investment of $1.53 trillion to become a $1 trillion economy.
 

MITRA, an economic advisory council of the state, in its vision statement spoke about achieving 17 per cent GSDP growth a year. This task has risen to 28 per cent for FY26, FY27, and FY28 in rupee terms after the state economy was projected to expand by 10 per cent each during FY24 and FY25. However, if the state's GSDP grows by the CAGR of the past six years -- 8.2 per cent— the economy could become Rs 54.1 trillion, or around $600 billion (at Rs 89.6 exchange rate). This would require $400 billion more in GSDP in order to meet the goal by the targeted date.

Source: Respective state budgets, PRS Legislative Research, own calculations; Reply to interim 

budget for 2024-25 by Maharashtra finance minister Ajit Pawar in state assembly 

Can Maharashtra's economy grow at a CAGR of 28 per cent in nominal terms for three years starting FY25?
 

"I don't think so. [It is] not feasible for a state to continuously grow by more than 12 per cent," says Bank of Baroda Chief Economist Madan Sabnavis.
 

Tamil Nadu
 

Chief Minister M K Stalin has set a target to achieve the milestone of a $1 trillion economy by FY31. According to a paper by the Tamil Nadu Infrastructure Development Board (TNIDB), done jointly with BCG, a comprehensive “Growth Framework” has been designed to act as a blueprint to achieve this goal.
 

The blueprint says at the heart of the growth framework are growth vectors in agriculture, industry, and services. It talks of seven tenets for formulating detailed strategies and an implementation roadmap. These include driving investments, enhancing human capital, pioneering innovation, developing best-in-class infrastructure, driving market efficiency, and ensuring efficient governance, while ensuring climate sensitive, and regionally holistic and socially inclusive growth, the blueprint says.
 

The blueprint also talks about making the state the "go-to destination" for foreign direct investment (FDI).
 

However, Tamil Nadu was sixth in drawing FDI equity inflows, at $2.2 billion, during FY23, behind Maharashtra, Karnataka, Gujarat, Delhi, and Haryana. Its position remained the same during the first nine months of the current financial year, when it attracted $1.8 billion. The only difference was that Telangana replaced Haryana in fifth place. The state will need a GSDP growth rate of 20.2 per cent to achieve the task by FY31 (at the market exchange rate of Rs 95.1 to the dollar) whereas its CAGR was just 10.4 per cent for the six years to FY25. At 10.4 per cent CAGR, its economy would become Rs 57 trillion, or $ 600 billion, by FY31.
 

State Finance Minister Thangam Thenarasu, in his budget speech, said that in the years subsequent to FY25, the nominal GSDP growth was estimated at 16 per cent per annum. In case this happens, the state economy would be Rs 76.7 trillion, or $806 billion, by FY31, leaving a shortfall of $194 billion.   Former Reserve Bank of India (RBI) Governor C Rangarajan, who wrote a working paper on the subject, tells Business Standard the original aim of reaching $1 trillion by FY31 by Tamil Nadu is not possible. "You have to postpone it by a few more years," says Rangarajan, who is now the Chairman of the Madras School of Economics.
 

Karnataka
 

The new Congress regime wants to make the state a $1 trillion economy by FY32, as the previous government of the Bharatiya Janata Party did. However, Chief Minister Siddaramaiah, in January this year, while arguing for a fair deal in tax devolution, said the state did not have the resources to become a $1 trillion economy by FY32.
 

But, last month, Karnataka large and medium industries minister M B Patil said the state had set its eyes on achieving the $1 trillion task by FY32 by growing at a sustained growth rate of 18 per cent.
 

A report, brought out by the state government and the Federation of Indian Chambers of Commerce & Industry (FICCI), emphasises on the need for a cumulative investment of Rs 152.87 trillion from the government and the private sector over the next 10 years to make the state economy $500 billion by FY27 and $1 trillion by FY32.
 

The state would require its GSDP to grow at a CAGR of 19.4 per cent to become $1 trillion, or Rs 97 trillion (at market exchange rate of Rs 97 against the dollar), over seven years from FY25 onwards. The state economy grew by 9.7 per cent during the six years leading up to FY25. If it continues to grow at this rate, the state economy would be Rs 53.7 trillion, or $550 billion, by FY32 – a shortfall of $450 billion. Bridging this gap would need the CAGR of the GSDP to double over seven years.
 

N R Bhanumurhty, vice-chancellor of B R Ambedkar School of Economics, University Bengaluru, says the goal to make the state a $1 trillion economy is conditional, because if you do policy interventions, you can achieve this goal. "You need to do something, make policy interventions to achieve the target. No state will achieve the target with a business-as-usual approach," he says.