$5 trillion economy – A poetry or a prose problem?

To achieve $5 trillion economy by 2024-25 is the next goal of India. There have been many arguments in favour of and against the topic. Is it an achievable goal or just a fantasy? Our finance minister, Nirmala Sitharaman has ascertained that to achieve this target is challenging but realisable.

Presently, we all know that the USD exchange rate is Rs. 70 (appx). According to the $5 trillion economy, the exchange rate at Rs. 70/USD converts to Rs. 35000000 crores of GDP at current prices. GDP at current prices is known as Nominal GDP distinguishing itself from real GDP in which inflation is adjusted with reference to a base year. We all know, at present India is a $2.7 trillion economy which means Rs. 19010164 crores of GDP at current prices. Now, calculating the per capita income by dividing the total GDP by the entire population which is at present 130 crore, we arrive at the figure of Rs. 142719 or Rs. 11,900 per month. This also converts to 2000 USD.

According to the World Bank data, India became the world’s sixth largest economy in 2017 by surpassing France. India also ranks 3rd in terms of Purchasing Power Parity. Despite all these figures, the nominal GDP of India is on 139th position due to the huge population.

I often become thoughtful and want to question what will take us to $5 trillion economy? I, as a student of PGDM, think that these 3 leads may help us achieve the $5 trillion economy.

  • The production of goods and services should reach 84% by the next 5 years. The output expansion has to be increased. To shoot up the output expansion, domestic savings has to be mobilised and fixed investment rates shall be fixed. In other words, annual growth rate should be 13%. Deducting the inflation out of it which is 4% presently, the GDP comes down to 9%. This has to be attained in order to have a $5 trillion economy. For this, the domestic savings has to be pulled up to 39% and the investment rate up to 41%. In the last 5 years, on an average, the domestic saving rate was 30.8% and investment rate was 32.5%.

  • The incremental capital output ratio must be decreased with the advancement in technology. It is the relationship between the level of investment made in the economy and the consequent increase in GDP.

  • Foreign capital inflow must increase to further boost the investment. Foreign capital would include FDIs, FPIs, ECBs and NRI deposits. The government of India has decided to issue sovereign bonds to increase the External Commercial Borrowings. The government has also proposed to merge NRI deposits through Foreign Portfolio Investments so that the NRIs could invest more in India.

In order to achieve the $5 trillion economy, a growth rate of 9% has to be achieved and sustained. This growth can be sustained by a virtuous cycle of savings, investment and exports catalysed and supported by a favourable demographic phase. Since a large part of the Indian population consists of working people, the demographic phase can be of utmost help to achieve this level of growth.

I also think, Private Investment will be the key driver of the growth that would drive demand, create capacity, increase labour productivity, introduce new technology and would make way for creative destruction and generate new jobs. Along with, exports must also form an integral part of the growth model because higher savings preclude domestic consumption as the driver of final demand.

Kanchan Sharma

Batch 2019-21

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