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Covid-19 could see the govt missing the $5-trillion economy deadline

Illustration: Ajay Mohanty
The target set by Prime  Minister Narendra  Modi to make India a $5 trillion economy by 2024-25 may be delayed by two years even if the economy were to grow by 7.5 per cent a year on average after the current  financial year. 

This is based on the assumption of 4.5 per cent inflation rate that the economic survey for 2019-20 talked about, in order to achieve the GDP target. This also assumes an exchange rate of Rs 75 to the dollar, around which the rupee is currently hovering. 

The Economic Survey of 2018-19 says the economy needs to grow by eight per cent, assuming inflation rate at four per cent (the target given by the Monetary Policy Framework) to get to the $5 trillion mark by 2024-25. 

However, when growth slowed down to just 6.1 per cent in 2018-19, the survey for the next year (2019-20) said given India's record of growth with macroeconomic stability over the last five years (annual average growth rate of 7.5 per cent and annual average inflation of 4.5 per cent), the economy is poised for a rebound towards the $5 trillion goal by 2024-25.

India's economic growth crashed to a 69-quarter low of 3.1 per cent in Q4 of 2019-20. For the entire year, the growth rate was down to 4.2 per cent, an eleven-year low. 

Economic growth rate is taken at constant prices, which in the present series means 2011-12 prices. However, when we talk of economic size of $5 trillion, it means GDP at current prices. 

At current prices, GDP grew just 7.2 per cent during 2019-20 against 11 per cent in the previous year. In absolute terms, the size of the economy stood at Rs 203 trillion in FY'20 against Rs 189.7 trillion a year ago. 

The $5 trillion economy at the exchange rate of $75 would mean Rs 375 trillion in the rupee terms. 

Econmists feel the assumption of 7.5 per cent economic growth rate seems optimistic now, as there is also possibility that the rupee might depreciate further against the dollar. 

"In our view, the potential growth rate of the Indian economy had eased to around 6-6.5 per cent before the Covid crisis unfolded. While the contraction in the current year may be followed by a base effect-led rebound in FY'22, there is limited visibility of a broad-based pick up in investment activity," Aditi Nayar, principal economist at ICRA said. 

And there is possibility the rupee will depreciate two per cent every year, an economist said. 

However, for the purpose of this analysis, we have taken the economic growth rate at 7.5 per cent from FY22 onwards, with an inflation rate of 4.5 per cent a year and the rupee at 75 to the dollar. 

For the current financial year, there are various projections of economic growth, with most expecting the economy to shrink. However, some have pegged no growth in the economy. 

At one extreme, Breinstein, the US-based financial services firm, projected the economy to contract by 7 per cent. Agencies such as Goldman Sachs, Nomura, Fitch, Icra and Crisil have forecast five per cent contraction in the economy in the current financial year. 

Now if one takes 4.5 per cent inflation, it means 4.5 per cent GDP expansion at current prices, if the economy does not grow at all in the current financial year. At seven per cent fall in the economy would mean 2.5 per cent contraction in nominal GDP and five per cent contraction would mean 0.5 per cent decline in nominal terms.  

At the flat GDP in 2020-21 (at constant prices), and assuming 12 per cent growth rate for the remaining years at current prices, the economy would miss $5 trillion or Rs 375 trillion by a whisker in 2025-26. If the target was achieved by that year, it would have meant a delay of one year only from the scheduled goal. 

However, seven and five per cent contraction would mean the clear cut two year delay for the aim to meet. This means that the economy would be able to meet the target by 2026-27. 

The task of meeting the target may be aggravated by the depreciation of Indian rupee. If the exchange rate remains at the average level of Janaury--Rs 71.29 a dollar--meeting the goal would be easier. 

Then $5 trillion economy would mean bit over Rs 356 trillion. This task would be achieved by one year delay if  the economy remains flat or contracts by five per cent in the current financial year. However, if it contracts by seven per cent, it would still be a two-year delay to meet the prime minister's goal of making India a $5 trillion economy by 2024-25.


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