US$ 5 trillion economy, A dream or a reality?

Prime Minister Narendra Modi while addressing the World Economic Forum on January 23, 2018), first expressed his ambition to make India a US$ 5 trillion economy by 2024-25. Drawing a blueprint for the target, Economic Survey, 2018-19 assumed an average real annual growth rate in gross domestic product (GDP) of 8 % from 2020-21 to 2024-25 with an inflation rate of 4 % which implied 12 % as a nominal growth rate. Further, it assumed an exchange rate of Rs 75 per dollar in March 2025. Presently, India which is fifth largest economy in the world having the GDP of around US$ 3 trillion in 2019-20. If the US$ 5 trillion target is translated into reality, the country will leave behind Germany to become world’s fourth largest economy in 2024-25, only behind US, China and Japan.

India is considered to be the fastest growing major economy in the world. However, after earning this title, India has decided to walk on its ambitious plan to become a global economic powerhouse that could rival with the likes of countries like China and The United States. However before attaining an ambitious goal there are many milestones that need to be covered. One such milestone that India has set for herself is to reach the milestone of 5 trillion $ GDP(Nominal). But the question still remains, Is it really possible? And if yes, then how and when?

Before talking about the future it’s essential to take a look at the past. The Indian government took the socialistic planned economic development model. It rejected the principles of a free market economy which lead to a very unimpressive growth rate of 1.68% (CAGR). Due to multiple restrictions on international trade, the Soviet Union was India’s largest trading partner. After the collapse of the Soviet Union and an exponential rise in the international price of crude oil, India was forced to open up its economy to the entire world. From there onward, India managed to maintain a consistent growth rate from 5 to 7%.

The primary reason for this increase in growth post 90s was because of the dramatic increase in flow of goods from foreign countries and the growth of the IT sector. India is known as a consumer market economy where the economy is run mostly by consumption of imported goods by the people. India hasn’t benefited from FTAs as it is not an export-driven economy but an import-dependent one. Indian economy couldn’t take off in the same way as that of South Korea, Japan, Thailand, or China when it comes to the manufacturing sector. The only place where India is known for its exports are petroleum products, cotton, spices and its IT services. The service sector accounts for over 55% of the GDP of India. Even after liberalization, it was the service sector which received the most amount of FDI. The other main services in the service sector are healthcare and tourism.

The global economy was facing a slowdown for the past 3 to 4 years. IMF managing director Kristalina Georgieva blamed it on a reduction in domestic demand in many Developed countries and the trade war between US and china which began after Donald Trump took office in 2017. Naturally India also started facing the ripple effect of this slowdown. From around 8.5%, it slowed down to over 6% in the early 2019. Part of the blame for this could be attributed to the demonetization move that was taken on November 2016 and the introduction of the Goods and Services Tax (GST) law. It was the belief of the policy makers of this country that a unified tax regime would cut red tape and accelerate economic growth. However, as per the opinions of many Economic experts, the sudden change in the tax regime caused a lot of confusion among the traders and workers in the unorganized sector. This led to a slowdown in total output. As per former RBI governor Raghuram Rajan “Demonetization and GST broke the Indian economy’s back”. Demonetization also mostly affected the unorganized sector of the Indian economy as most of the business transactions took place through cash. The unorganized sector is the largest employer in the Indian economy, but since its share of the GDP is very less, it only caused a minor slowdown. Other problems like the problems in the Public sector bank and the increase in Non Performing Assets (NPAs) still exists.

The real problems started when the automobile sector which accounts for over 9% of the Indian GDP started facing a big crisis in the late 2019. The SIAM (Society of Indian Automobile Manufacturers) data for the month of September show that passenger vehicle sales plunged by 23.69 per cent. The commercial vehicle sales were down by 62.11 per cent in September. This means the slump in vehicular sale has continued in the eleventh straight month at a time when the country's auto sector is facing one of the worst slowdown in decades. According to SIAM data, passenger vehicle sales dropped to 2,23,317 units in September from 2,92,660 a year ago while passenger car sales dropped by 33.4 per cent to 1,31,281 units compared to the same period in 2018. This lead to a severe downfall in the production output of the manufacturing sector since the automobile sector accounts for over 49% of the manufacturing GDP.

The last nail in the coffin was the COVID 19 pandemic that destroyed the backbone of the entire world economy. India was not spared from its ripple effects unlike the 2008 global financial crisis.

The contraction affected the whole non-farm sector and construction sector is the worst hit. As expected, countrywide lockdown in the wake of pandemic hit the economy hard. The Aviation and the Tourism Sector suffered the worst due to the subsequent lockdowns that were imposed. Indian aviation sector faced the real deal due to pandemic as with travel and visa restriction in many countries, the fares crashed by 40 %on many air routes. Not only this, few top airlines suspended have suspended international flights. As per the reports, private domestic carriers suffered consolidated losses of up to $600 million (Rs 4,500 crore), National flag carrier lost Rs 3,700 crore during in just one quarter. This whole sums up to overall estimated losses to Rs 8,200 crore. Talking about tourism sector, it contributes to 10 %of India’s GDP. Suspension of visas from all countries to India had a substantial impact on the foreign tourist arrival in the country. There was a total of 35 % cancellation from travelers planning their trip to foreign destinations.

As already mentioned earlier that the tourism sector is one of the major pillars of the entire service sector in India along with the IT and Healthcare. Many economists have predicted that it would take more than 3 years for the global economy to come back on track. This severely hampers the Modi government’s ambitions of making India a 5 trillion $ economy by 2024.

As per the above mentioned survey by Ministry of Statistics and Programme implementation (MOSPI), the average growth rate of 8% that existed was not enough in itself. Growth rate of 11.5% is required to attain the target by 2024. With the projected growth rates of around 0 to 2%, it is now next to impossible to attain this target.

So, the main question remains, is the target of US $5 trillion economy a dream or a reality? Even though the Indian economy faced a GDP contraction of around 23% in the first 2 quarters of the fiscal year 2020, it seems that the ‘Technical recession’ has come to an end. As long as the Indian economy keeps on growing regardless of the dismal growth rate, it will hit the 5 trillion $ mark today or tomorrow. But it seems to be a dream in the near perceivable future. Especially since it is next to impossible to attain the required 11% growth rate when the domestic demand still remains to be stagnant.