Prime Minister Narendra Modi’s second term in office coincides with a host of economic problems. The financial system continues to suffer with the liquidity crisis led by NBFCs such as IL&FS and DHFL, deterioration of public sector banks, depressed corporate earnings, a dysfunctional power sector, agricultural sector distress, a slump in exports, highest level of unemployment in decades and general recessionary conditions. Add to that, a very recent fund manager survey conducted by Bank of America Merrill Lynch, in which 230 panellists with $ 645 Billion in assets under management participated, revealed that investor confidence in the world economy is at its lowest levels since the global financial crisis of 2008 driven by concerns over the trade war between the US and China, recession and a slowdown of the Chinese economy.
It is against this backdrop that our second-term elect Prime Minister Narendra Modi, addressing the 5th meeting of the Governing Council of the NITI Aayog on the 15th of June in New Delhi, said that the government’s goal was to make India a $ 5 Trillion economy by 2024, which would be the end of his second term as Prime Minister. He went on to say that though such a target is challenging, it is achievable if state governments contribute to the effort.
This is not the first time that the Prime Minister or senior officials in the BJP have spoken about this target. Ex Finance Minister Piyush Goyal, while presenting the interim budget for this year in February also alluded to this figure. However, repetition of this goal does not make it any more likely.
Taking ground level realities and past economic data into consideration, this target seems highly unlikely. Presently, India is a $ 2.71 Trillion economy, which means the total value of the country’s goods and services produced in a year or its total GDP is $ 2.71 Trillion. For us to achieve the $ 5 Trillion mark in the next five years, an 85% increase in total output is required from current levels; this compares with a 44% increase over the last six years.
Looking at it from another angle, getting to the $ 5 Trillion target from current levels would require a compounded annual growth rate (CAGR) of 13% over the next five years. To consistently maintain double digit growth rates over a period of five years requires not only the domestic economy to be firing on all cylinders, but also requires a big push from the global economy. And, the cold hard fact is, economic conditions, both, globally and domestically, are just not conducive.
Global rating agency Fitch Ratings on Monday slashed India’s GDP growth rate to 6.6% for the current financial year from an earlier 6.8% citing persistent slowdown in manufacturing and agricultural sectors. It however, retained its GDP growth forecast for FY 21 and FY 22 at 7.1% and 7% respectively.
To compound worries, The International Monetary Fund (IMF) in April cut global growth outlook to 3.3% from an earlier 3.5% citing the trade war and Britain’s exit from the European Union as the chief reasons.
With this domestic and global outlook dampening the prospects of growth, it’s hard to see just how we are expected to reach the magic $ 5 Trillion figure in five years.
To add fuel to the fire, former Chief Economic Advisor to the Modi government, Arvind Subramanian, who served between years 2014 and 2018, recently wrote a research paper which was published at Harvard University that suggested the country’s GDP growth rate had been overestimated by 2.5% over years 2011 to 2017, thereby bringing into question the nation’s crown of the fastest growing major economy in the world. Mr. Subramanian claimed that rather than growing at about 7% a year in that period, growth was about 4.5%.
The statement stirred up a storm in the country with people from different quarters of the country calling him out on his methodology for calculating GDP. However, what can be said is this; if senior officials who served under Modi in his first term don’t believe the data, how can we trust it?
Hence, all factors considered, the super charged economy that is required to sprint ahead to the $ 5 Trillion target in the stated amount of time, does not seem to be in the offing and perhaps the government should set more manageable targets for itself in the short term, such as achieving an 8% growth rate over the next few years; and, with more preparatory work, who knows, even the ambitious target of 13% growth may be achievable in the future.