Is India Still on Track to Becoming A $5 Trillion Economy? : Daily Current Affairs

Date: 21/12/2022

Relevance: GS-3: Indian Economy and issues relating to Planning, Mobilisation of Resources, Growth, Development and Employment.

Key Phrases: Purchasing Power Parity, LPG Reforms In 1991, Nominal GDP, Supply Chain Bottlenecks, Global Economic Slowdown, Energy Crisis In The EU

Why in News?

  • The International Monetary Fund (IMF) has reduced India’s GDP growth projection for fiscal 2023 to 6.8 percent, from its earlier forecast of 7.4 percent.

Key Highlights:

  • The Indian economy has emerged as the world’s fifth largest, with a GDP of $3.5 trillion in 2022 aspiring to achieve a $5 trillion milestone by 2024-25.
  • International agencies, like the World Bank and the OECD have also downgraded their growth projections as well.
  • Japanese brokerage firm Nomura says India’s economy could expand by around 7 percent in FY23 but is likely to decelerate to 5.2 percent in FY24 due to the spill-over effect of the global economic slowdown.

Do you know?

  • Historically, India was the largest economy in the world for most of the two millennia from the 1st until the 19th century.
  • Today in 2022, India is the world's fifth-largest economy by nominal GDP($3.53 trillion).
  • It is the third-largest by purchasing power parity (PPP) with an estimated value of $ 11.75 trillion.
  • India left protectionist economic policies and implemented Liberalization, Privatization, and Globalization (LPG) reforms in 1991 due to an acute balance of payments crisis.
  • Since the start of the 21st century, annual average GDP growth has been 6% to 7%.
  • From 2013 to 2018, India was the world's fastest-growing major economy, surpassing China.
  • As of July 2022, India is the third-largest unicorn base in the world with over 100 unicorns collectively valued at over $ 335 billion.

Roadblocks Ahead for Indian Economy:

  • The pandemic dealt a massive blow to the Indian and global economies alike. Even as the world emerged from this tragedy, several challenges still persist.
  • The supply chain bottlenecks have not completely eased and the handing out of cash to households by developed economies during the pandemic has led to soaring inflation. Both these situations have been worsened by the Russia-Ukraine war.
  • Aggressive interest rate hikes by the Federal Reserve threaten economic growth in the US and this can have a ripple effect on India.
  • The impact is compounded by the strengthening dollar, as India buys oil and other imports in this currency.
  • The energy crisis in the EU also acts as a dampener for growth.
  • China, which was once supposed to spearhead global economic growth, has continued to announce restrictions due to the government’s zero-Covid policy.

Factors Working In Favour Of India:

  • Diversified economy with strong relations: The Indian economy has grown steadily over the past 50 years. The economy is well-diversified, and has strong trade relations with other countries.
  • Adoption of new technologies: India has a big appetite for technology adoption. The manufacturing and financial sectors’ adoption rate has increased. This improved productivity, while reducing production costs and improving quality. These factors drove profitability and, therefore, increased investments in innovation.
  • Offshoring opportunity: Covid-19 caused a secular shift in the work culture to remote teams. This plays in favour of India, as businesses from developed nations find it more cost-effective to work with people living in India.
  • Young population: India has the world’s largest youth population, at around 356 million. At 64 percent, the high percentage of India’s working population not only contributes to growth in GDP and per capita income but also represents a large customer base for companies to target and thrive.
  • Renewable energy: Around 40 per cent of India’s installed electricity capacity already comes from non-fossil fuel sources. This switch to renewable energy lowers costs for individuals and businesses and reduces the country’s reliance on imports.

Way Forward:

  • With strong economic fundamentals, India is on track to become a $5 trillion economy.
  • The government should go to great lengths and address the major challenges that are between India and its ambitious dream of a $5 trillion economy.
  • It should level the playing field and must work to generate employment, curb inflation, and increase foreign investment by maintaining macroeconomic stability and stabilising the dollar-rupee exchange rate.
  • Internationalisation of the rupee can work in this direction and give it a new lease of life.
  • The usage of the rupee in cross-border transactions mitigates exchange risk for Indian Inc.

Do you know?

  • Nominal Gross Domestic Product:
    • The term nominal gross domestic product refers to the gross domestic product (GDP) evaluated at current market prices. GDP is the monetary value of all the goods and services produced in a country.
    • Nominal GDP differs from real GDP in that the first one doesn't include the changes in prices due to inflation.
    • Since nominal GDP doesn't remove the pace of rising prices when comparing one period to another, it can inflate the growth figure.
    • Growing nominal GDP from year to year may reflect a rise in prices as opposed to growth in the number of goods and services produced.
  • Purchasing power parity (PPP):
    • PPP is a popular metric used by macroeconomic analysts that compare different countries' currencies through a "basket of goods" approach.
    • Purchasing power parity (PPP) allows economists to compare economic productivity and standards of living between countries.
    • PPP is the measurement of prices in different countries that uses the prices of specific goods to compare the absolute purchasing power of the countries' currencies.
    • PPP is effectively the ratio of the price of a basket of goods at one location divided by the price of the basket of goods at a different location.
    • The Purchasing Power Parity indicator can be used to compare economies regarding their Gross Domestic Product, labour productivity and actual individual consumption, and in some cases to analyse price convergence and to compare the cost of living between places.

Conclusion:

  • Many experts believe that India is best positioned to overcome the recessionary headwinds projected for the global economy for 2023.
  • Although India’s growth projections have been lowered, the country is likely to remain the fastest-growing economy in 2023 and continue moving with confidence towards the $5 trillion target.

Source: Hindu BL

Mains Question:

Q. Is India still on track to achieve the milestone of a $5 trillion economy? Examine. (150 words).