Since the Prime Minister mentioned a target of a $5 trillion economy by 2024, that number has been tossed around. $5 trillion has a nice, round aspirational ring to it. Obviously, $5 trillion isn’t meant to be in purchasing power parity (PPP) terms. With PPP, India’s GDP is already more than double the $5 trillion-mark. One means nominal GDP based on official exchange rates.

What’s the base on which we crystal gaze the future? $2.7 trillion in 2018. Most economists and forecasters are good at predicting the past and doing post-mortems. They rarely stick their necks out about the future, especially if it involves exchange rates. And yes, this does involve exchange rates. India’s GDP is in rupees. When that’s converted into dollars, there will have to be some exchange rate assumption. If the Indian economy does relatively well, the rupee should appreciate and that’s good for striking the target. But if the rupee depreciates, it becomes tougher. Is there any obvious reason for appreciation between 2018 and 2024? Probably not. The rupee/dollar rate will either be roughly where it is, or the rupee will depreciate. Since the $5 trillion target became known, many people have done number-crunching, including the just-released Economic Survey for 2018-19. All the ones I know assumed an unchanged rupee/dollar rate. In which case, between now and 2024, we need an annual average rate of GDP growth (in rupees) of something like 11.5%. Note that if we look at the rear-view mirror, in the past six years, say since 2012, the rupee has depreciated. If the rupee does depreciate—and except for forecasting convenience, there is no reason why it shouldn’t—11.5% won’t be enough. For instance, if the rupee depreciates annually by 2%, growth will have to be around 13.5%.

On the face of it, nominal GDP growth (in rupees) of 11.5% or 13.5% doesn’t sound impossible. We have had such growth rates in the past. There has been the odd year when nominal growth touched 19% and in one remarkable year (1973-74), it almost touched 22%. But there is a catch. These are nominal growth figures, real growth plus some measure of inflation (the GDP deflator). In that remarkable year, the inflation rate was around 18.4%. This isn’t desirable, nor does government policy encourage such disastrous inflation. Therefore, leading up to 2024, we shouldn’t expect annual inflation to be significantly more than around 4%. The RBI’s Monetary Policy Framework does have that inflation rate. The target then reduces to real growth of 7.5%, stretching to 9.5% if depreciation is factored in. (Economic Survey assumes 75 rupees to a dollar in March 2025 and required real growth of 8%.) The lower end of the band is eminently achievable. The upper end is a tough ask.

High real growth in an odd year is a flash in the pan. But note that we have achieved real growth of 9% plus in a succession of years, say the period from 2005-06 to 2010-11. Can this be replicated? There are different ways of slicing and dicing the question. These aren’t contradictory. Like Rashomon, they are alternative perspectives and complement each other. Let me mention three.

First, there is the macro-economist. For such a person, the key is the national income identity and therefore, growth derives from consumption expenditure, investments, government expenditure or net exports. The external environment is not as benign as it was between 2005-06 and 2010-11. Therefore, notwithstanding reforms to make exports (both goods and services) more competitive, net exports can’t be a major growth driver, not that fast. Indeed, government expenditure should become more efficient and there should be a discussion on several aspects of public expenditure (15th Finance Commission, State Finance Commission recommendations and devolution to local bodies, centrally sponsored schemes, state-level schemes). After the 15th Finance Commission recommendations kick in from 1 April 2020, some of these will fall into place. But, in the short-turn, many items of public expenditure (wages/salaries, pensions, interest payments) are given and can’t be tinkered with. There are also those (railways, highways, telecom, defence) where the Union government has to spend. Yes, there are revenue aspects (sales of assets of public sector enterprises, GST, direct taxes and exemptions—the report of the Task Force is awaited).

Shorn of the clutter, unless one is fiscally profligate (no one seriously advocates this), there isn’t much scope for public expenditure to be a growth driver. If anything, one doesn’t want public expenditure to crowd out private investments and pre-empt household financial savings. These are precisely the points made in the Economic Survey 2018-19. Other than attracting foreign investments, the macroeconomist’s take on jacking up growth from 7.5% to that aspirational 9.5% amounts to two bullet points. How do we get the investment rate back to 38% of GDP? This is primarily about private investments, but let’s not forget public investments completely. How do we get the household savings rate (especially financial savings) back to 24% of GDP?

Second, there is the micro-economist. For such a person, there will always be a production function lurking in the background, even if it is implicit. It’s all about factor inputs and productivity. Land markets must become more efficient—ownership legislation, land leasing, clean titles, cadastral surveys, consolidation, transparency in land conversion laws, stamp duties, building laws. (By extension, instead of land markets, one can make this markets for natural resources.) Labour markets must become more efficient—simplification and rationalization of labour laws, easier exit provisions, reduction of the inspector raj, better intermediation between supply and demand of labour, skill formation. (By extension, instead of labour markets, one can make this human development and bring in health and education.) Capital markets must become more efficient. In addition to what has already been said, this brings in financial sector reforms and easier exit for capital. (Exit policy is invariably equated with an exit policy for labour, rarely with an exit policy for capital.) In any micro-economist’s econometric work, whatever cannot be explained through factor inputs is total factor productivity increase. One way to get higher growth is to increase the investment rate. But yet another way—and these aren’t mutually exclusive methods—is to reduce the incremental capital/output ratio, a measure of productivity. Everything mentioned in this paragraph is like a reform agenda and few will disagree with the content.

If we accept that there is a structural problem with the economy, reflected in slower growth since the global financial crisis, the use of the word “structural" implies tinkering at the margin won’t work. Ipso facto, which of these reforms will kick in fast enough for delivery in 2024?

Third, there is the person who can be called a meta-economist, for want of a better word. Such as person recognizes the Seventh Schedule, the role of states in factor markets and that all-India growth is nothing but an aggregation of growth in 29 states and 7 Union Territories. There are time-lags in obtaining GSDP (gross state domestic product) numbers. With that caveat, how many states had an average real GSDP growth of more than 8% between 2012-13 and 2016-17? The answer is Mizoram, Gujarat, Tripura, MP, Delhi and Karnataka. There is always some volatility in annual GSDP growth rates. Even then, between 2012-13 and 2016-17, 17 States and 2 UT-s had real GSDP growth rate of more than 9.85% in at least one of the years. The external environment may not be as benign as it was between 2005-06 and 2010-11. However, there is slack within the system, reflective of endogenous sources of growth. For example, among major states, if growth picks up in Punjab, Kerala, J&K, Bihar, Chhattisgarh, Jharkhand and West Bengal, the meta-economist can afford to ignore the obsessions of the macro-economist or the micro-economist and confidently project 8.5%. But remember what I said: these are simply different ways of looking at the problem.

Where does this leave us? 7.5% or 8.5%? The 6.8% in 2018-19 is probably not the base-line. As the Economic Survey points out, India did average 7.5% over the last five years and there are signs that investment is recovering. Several reforms introduced by the government between 2014 and 2019 (transport, electricity, housing, financial inclusion) are broadly what can be called supply-side. They yield productivity and growth dividends a couple of years down the line. Therefore, we are probably going to witness a gradual inching up of growth to 8% and even 8.5%. More than that seems dicey. Whenever there is a band, the modal value is not at either end. We won’t be stuck at 7.5%. Nor will we touch 9.5%, not as long as we are caught in between all kinds of trade and other wars. The mid-point of 8.5% is the most likely scenario. Sustained, even such a growth rate dramatically alters the economy and society. What happens to $5 trillion by 2024? Unless the rupee depreciates sharply, we will get there. If the rupee depreciates, we may miss it by just a little.

Bibek Debroy is Chairman, Economic Advisory Council-Prime Minister

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