India’s Post-Pandemic Pathway To A $5 Trillion Economy

Economists of a certain persuasion declare that the Covid pandemic has ruined India’s chances of achieving a $5 trillion economy in the near future.

They’re wrong. Let’s do the math.

According to the 2021-22 Union Budget, nominal GDP on 31 March 2021 is projected at Rs. 195 lakh crore.

The Budget projects a 14.4 per cent growth in nominal GDP (real + inflation) in 2021-22. According to the Budget document, this will result in a GDP of Rs. 223 lakh crore on 31 March 2022.

So far so good. Now assume an average real GDP growth of 7 per cent per year in the six-year period between 1 April 2022 and 31 March 2028. Add average inflation of 5 per cent a year.

These assumptions are based on the large capital expenditure in the Budget that will drive growth. Borrowings will keep inflation at around 5 per cent.

Thus average nominal GDP growth between 2022 and 2028 will, on a conservative estimate, average 12 per cent a year. Hence the projected GDP of Rs. 223 lakh crore on 31 March 2022 will double in six years to Rs. 450 lakh crore on a compounded annual growth basis.

Now consider the rupee-dollar exchange rate. Historically, the rupee has depreciated by an average of 3 per cent a year against the dollar or 20 per cent compounded over six years. This translates into the rupee sliding from 73 to a dollar today to around 90 to a dollar by March 2028.

Converting the projected GDP of Rs. 450 lakh crore in 2027-28 to dollars, we get a GDP of $5 trillion.

There are three caveats.

One, the INR-dollar rate is difficult to predict but the flood of foreign investment into India – both FDI and FII – augurs well for a better than expected foreign exchange rate in future.

Two, real GDP growth at an annual average of 7 per cent will need the government to double down on structural reforms. Privatisation, if implemented without bureaucratic sabotage (as happened with Air India in 2018), can be a significant growth driver.

Three, micro-reforms like the Production Linked Incentive (PLI) scheme have enormous potential to shift global production to India. This will also make India an export hub for mobile phones, cars, electronics, IT hardware and pharmaceuticals as foreign companies seek the four-six per cent PLI advantage by manufacturing in India for the world.

Economists drowned in negativity argue that the core sector is still flat and jobs are not being created. Coming off a pandemic, however, the economy has shown great resilience. Corporate profits for the October-December 2020 quarter have rebounded strongly.

This is what the global CEO of Unilever, Alan Jope, said about India’s growth prospects: “84 per cent of (our) Indian business has seen growing volumes and there is significant opportunity for growth.”

India is Unilever’s second largest market after the United States which accounts for 18 per cent of global sales. India accounts for 10 per cent of Unilever’s worldwide sales, ahead of China (6 per cent).

The Indian government is sometimes the country’s biggest obstacle to progress – from retrospective tax legislation to a refusal to implement the direct tax code (DTC) and simplify the GST into a two-rate tax.

The Centre seems to have finally recognised that it should get out of the way of business and focus on its job: governance. The decision to privatise a large majority of India’s 300-plus PSUs and PSBs indicates that economic wisdom has dawned on the government.

What could go wrong with India’s growth story over the next few years?

The principal concern is political. With several key elections due in the next three years, motivated agitations could hamper growth.

Assembly polls in West Bengal and Assam in March-April 2021 are especially critical. They will set the tone for the bellwether Uttar Pradesh election in the summer of 2022 – a precursor to the 2024 general election.

It has taken Prime Minister Narendra Modi six years to shed the yoke of Congress leader Rahul Gandhi’s suit-boot ki sarkar taunt. Full-throated privatisation is the best answer to the Gandhis’ povertarian economics.

Reforms must now be accelerated. A new generation, born in 2000, is coming of age and moving into their first jobs. Startup entrepreneurs in their 20s reflect a new spirit of can-do rather than geriatric economists in their 60s and 70s who revel in can’t-do. Thousands of staff in startups like PhonePe are receiving ESOPs, making them millionaires overnight. A consumption boom is around the corner.

Professional pessimists like Mahesh Vyas, CEO and MD of the Centre for Monitoring Indian Economy (CMIE), regularly provide mournful news of job losses in urban India while grudgingly admitting the reverse in rural India.

The nature of jobs though has changed, partly due to the pandemic and partly because of new technology. It will take a while for equilibrium to be established in the jobs market.

Foreign investors with skin in the game through large equity holdings in Indian companies look at India dispassionately, without a jaundiced eye. They exude confidence in India’s future. Indian commentators who have no skin in the game in contrast thrive on doomsday prophecies.

It is wise, however, to take some of these prophecies into account. India’s economy is like a car being driven with its handbrake on. Regulators, bureaucrats and agitators all have their hand placed firmly on the brake so that the economy moves forward only by fits and starts.

It’s time to take those hands off the brake and step on the accelerator towards a delayed but near-certain $5 trillion GDP in 2027-28, making India the fourth largest economy in the world behind the United States, China and Japan and ahead of Germany, Britain and France.

Matters shouldn’t rest there. At a real average annual growth rate of 7 per cent and 5 per cent inflation, nominal GDP will double to $10 trillion in 2034. Only the US and China will have larger economies than India.

This is when India will move into the orbit of the three Great Powers. In the intervening years, the Modi government and its successors must ensure that the quality of governance rises in tandem with the growth of the economy.