A $30 trillion economy is within our reach but we can’t say when
Our economy will hit $30 trillion but probably by 2065 and not 2052 as Piyush Goyal predicted
Sometime in 2007, during the course of unofficial chitchat at the end of a conference, one of the biggest bulls in the Indian stock market predicted that the BSE Sensex would touch 50,000 points in six to seven years. The Sensex back then was in a range of 18,000-19,000 points. The index did cross 50,000 points, but only in February 2021.
Let’s consider another forecast. In 1930, economist John Maynard Keynes wrote a short essay titled, Economic Possibilities for Our Grandchildren, in which he forecast that “the standard of life in progressive countries one hundred years hence will be between four and eight times as high as it is today." Given the predicted progress, Keynes believed that by 2030 humans would finally be free to devote themselves to leisure.
Nonetheless, that is not how things have turned out, at least not entirely. As Krzysztof Pelc writes in Beyond Self-Interest: Why the Market Rewards Those Who Reject It: “We are now… about six times better off, economically speaking, than we were in Keynes’s time. Yet if anything, attitudes toward leisure have gone in the opposite direction." Those who dedicate themselves totally to the pursuit of leisure are now looked down upon by the society. Hence, Keynes’ long-term forecast of increasing economic prosperity leading to people spending more time on leisure has actually turned out wrong.
The two examples shared above show that forecasting anything about a complex system like a stock market or an economy is difficult business. They also highlight a very basic mistake that those in the game of forecasting tend to make, which is, “when presenting a forecast, give them a number or give them a date, but never both." This is one of the rules of forecasting that American economist Edgar R. Fielder had put forward.
And this is the precise mistake that Piyush Goyal, India’s minister for commerce and industry, among other portfolios, seems to have made in a recent forecast. He predicted that the size of the Indian economy would touch $30 trillion 30 years from now. So, Goyal has given us both a number and date.
The size of the Indian economy is currently around $3 trillion. If it grows by 8% per year in each of the next 30 years, it will cross $30 trillion in 2052. As per the World Bank, the gross domestic product (GDP) of the US in 2020 (in constant US 2015 dollar terms) stood at $19.3 trillion, having fallen from around $20 trillion in 2019. So what Goyal has basically forecast is that the Indian economy in 2052 will be 50% bigger than what the American economy was in 2019.
The trouble is that countries rarely grow at 8% per year for decades on end. In fact, even an annual growth of 6% for long periods of time is rare. Economists Lant Pritchett and Lawrence Summers make this point in a 2013 research paper in which they say that episodes of super-rapid growth of greater than 6% per year are “extremely short lived". China has been the only exception so far. In 1990, the Chinese GDP was $1.03 trillion. Thirty years later, it had grown to $14.6 trillion, implying a growth of 9.2% per year. As per World Bank data, India’s annual growth rate during the same period stood at an average 5.8%.
In fact, as per Pritchett and Summers, other than China, only Taiwan and South Korea have grown at a sustained pace of higher than 6% per year. For Taiwan, this lasted from 1962 to 1994 and for Korea from 1962 to 1991. The point being that even a growth of higher than 6% per year for one decade after another is a rarity. When it comes to a growth rate of 8% sustained for over three decades, it has never happened, except in the Chinese case.
Finally, India has rarely grown at a rate of 8% or higher. In fact, between the fiscal years 1951-52 and 2021-22, economic growth of 8% or higher has happened only on eight occasions. Interestingly, there has been only one occasion when the country’s economy has grown at 8% or higher for two consecutive years (that is 2015-16 and 2016-17). However, in each of the years from 2003-04 to 2007-08, the country grew at greater than 7.6% per year.
Hence, given the above facts, there is almost no chance of India growing by 8% annually for a period of three decades at a stretch. A growth rate of 5-6% per year seems like a more realistic level. At a growth rate of 5.5% per year, India will be a $30 trillion by 2065, which is some 43 years from now.
Given this, Goyal would have been better off forecasting just the $30 trillion number without putting a date to it, because one day the size of the Indian economy will surely cross that figure. In doing this, he would have taken inspiration from the mutual fund manager who in 2007 forecast that the BSE Sensex will touch 100,000 points in our lifetimes, without offering a date. Whenever this forecast comes true, and it eventually will, of course, perhaps this gentleman will be hailed as a visionary.
To conclude, by making a forecast of the Indian economy touching $30 trillion in size by 2065, I too am making the same forecasting mistake of giving both a number and a date. Nonetheless, as Ruchir Sharma writes in Breakout Nations: “The new rule is to forecast so far into the future that no one will know you got it wrong."
Vivek Kaul is the author of ‘Bad Money’.
