Story Of The Week

The Arithmetic of $5 trillion Economy

India, as per the World Bank report, achieved the $2 trillion mark in 2014 and at present stands at $2.3 trillion (as per IMF estimate).  Confronted with various stumbling blocks, it took India a period of 60 long years to become a $1 trillion economy but it added another trillion to it in a span of just 7 years. India, today, is considered to be one among the fastest growing economies in the world with the growth rate of 7.5%. If the positive outlook continues, India would become $5 trillion economy in another 10 years from now.

A brief backdrop:

The worth of Indian economy has been calculated on basis of Gross Domestic Product (GDP) in nominal terms. GDP measures the value of total goods and services produced within the domestic territory. It is due to nominal GDP that a country is able to absorb trade shocks of any sort and any change in oil prices is reflected equally on its output as well as inflation. GDP calculations are extremely important for any country as it enables them to forecast their economic progress. At the beginning of the century, GDP of India was about $480 billion but due to subsequent pace of economic reforms, GDP grew five-fold to reach US $2.3 trillion in year 2015. The World Bank report also states that Gross National Income (GNI) per person rose significantly for India. GNI includes value added by all citizens whether in country or abroad. It surged to $1610 a year during 2014-2015 as against $1560 in the previous year. Out of the above two parameters GNI remains a paradigm for assessing the economic performance. The other factor which is significant here is the growth rate of the GDP. India grew at 7.5 % in Jan – March Quarter, 2015, while China grew at 7% only. As per the optimistic policy makers a double digit growth in the near future does not seems to be a far cry.

Talking about the current Economic situation, though the double digit growth rate for India has yet not been realised but the economy is closely competing with that of China, having a gigantic size of about $10 trillion. India sustained through succour the financial crisis of 2008 and managed to double its size during that time and quadruple since the beginning of this millennium.

The milestone of $2trillion has been achieved when the new government assumed office last year. The landmark achievement can be attributed as Modi effect. After-glow of PM Narendra Modi boosted the investor sentiment and the foreign inflow in the Indian economy.

India has recovered from its slump and is the fastest developing economy, specially, among its BRICS counterparts.

 Implications:

  1. Maintaining a steady growth rate of around 8% is an onerous task. This is because the two trillion mark may just be a random number until we realise the significance associated with it and how it has been achieved amidst the untamed inflation and apprehensions of policy paralysis. Also if the economy continues to grow at this rate, economy would double itself in the coming decade which can also be verified by the compounding formula used in statistical analysis.

GDP at the End of nth Year = Current GDP* (1+r)n

GDP at the End of 10th Year= 2.3(1+.075)10

=$4.8 trillion (approximately)

*Current GDP =$2.3 trillion

r = Growth Rate of GDP, currently at 7.5%

n =Number of Years

 

Mr. Jayant Sinha, Minister of state for Finance, in one of his interviews admitted to the fact that India is already on a growth path but should aim to become $5 trillion economy in next 10-12 years. The above calculation is the reason behind Mr. Sinha’s optimism. But the real challenge is maintaining the growth rate of about 8% for the given period.

  1. Secondly, the growth of the Indian economy has lead to certain other significant changes like decline in the poverty levels of the country. But analysts have found that it will take almost another decade to be categorized in ‘Higher income group’ as against ‘Lower income group’ in terms of GNI per person. (Refer Fig. 1)

gni

Fig. 1 GNP Per capita Projections (Source: The Hindu)

  1. Thirdly, People have become aware of the environment around them and the increasing literacy rate to about 74.04%, as per population census of 2011, clearly reflects this. There are indicators of swelling capital investment and spurring consumer demand in the Indian economy reflecting recovery of the economy. The rising growth manifests the increase in purchasing power of the people and tantalizes the flows in the economy so as to foster the infrastructural development in India.

The Road ahead:

Though India has become the part of $2 trillion club but it is now all the more important to grow at a stable rate in order to achieve the dream of becoming a $5 trillion economy in next decade and compete with the developed economies of the world.

  • The new government is coming up with big bang reforms and focussing on to improve India’s goodwill worldwide. The nucleus of government plan is to create ease of doing business in the country and improve current ranking (142) of India in the index for the same.
  • New Initiatives like ‘Skill India’, ‘Make in India’ and ‘Mudra Bank’ may prove to be the building blocks of the economy.
  • The campaign of ‘Make in India’ is a boost not only to manufacturing sector but also to service sectors. The inflow of foreign capital and investments is being emphasised upon.
  • There is expeditious clearance of projects and efficient and effective implementation of policies. Every process to be made as transparent as possible.
  • The pathway of MG squared, that is, minimum government and maximum governance is to be followed for taking the Indian economy to greater heights.
  • P2G2 that is Pro-active, Pro-People and good governance aggregates the efforts put in to develop the economy and take it to the echelons.
  • The vast potential of resources that India has will be tapped and channelized to grow the economy in order to achieve the mark of $5 trillion in the coming decade.

 

References:

http://profit.ndtv.com/news/economy/article-growth-speeds-up-in-after-glow-of-modis-triumph-656226

http://economictimes.indiatimes.com/news/economy/indicators

http://www.livemint.com/Politics/NLnKzVEhjqSDsjtseDMdHP.html

www.thehindu.com/economy

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