Context

In early June, at a NITI Aayog meeting, Prime Minister Narendra Modi set a clear and bold economic target — to grow India into a $5 trillion economy by 2024. It is now for ‘Team India’, as the meeting was bannered, to translate this target into a plan and policies and programmes.

How realistic is this dream?

• It is ?350,00,000 crore of gross domestic product (GDP) at current prices, at ?70 to a U.S. dollar exchange rate. India’s (provisional) GDP in 2018-19 at current prices is ?190,10,164 crore (or $2.7 trillion), which means the annual per capita income is ?1,42,719, or about ?11,900 per month.

• The target implies an output expansion by 84% in five years, or at 13% compound annual growth rate. Assuming an annual price rise of 4%, in line with the Reserve Bank of India’s inflation target, the required growth rate in real, or inflation-adjusted, terms is 9% per year.

• To get a perspective, India officially grew at 7.1% per year over the last five years, but the annual growth rate never touched 9%. 

Comparison with Asian Countries

China – China, with a historically unprecedented growth record in its best five years, during 2003-07, grew at 11.7%;.

South Korea – South Korea, between 1983 and 1987, grew at 11%.

How to grow at such a fast pace

No country grew at such a pace without mobilising domestic saving and raising fixed investment rates.

1.Savings and investment rates required

• In the last five years, on average, the domestic saving rate was 30.8% of gross national domestic income (GNDI), and the investment rate (gross capital formation to GDP ratio) was 32.5%.

• Assuming the underlying technical coefficients remain constant, a 9% annual growth rate calls for 39% of domestic saving rate and 41.2% of investment rate.

• Correspondingly, shares of private consumption need to shrink to about 50% of GDP from the current level of 59% of GDP at current prices, assuming foreign capital inflow remains at 1.7% of GDP.

• In other words, India will have to turn into an investment-led economy as it happened during the boom last decade (2003-08) before the financial crisis, or like China since the 1980s.

• Granting that rapid technical progress or changes in output composition could reduce the required incremental capital-output ratio (ICOR), it nevertheless will call for a nearly 8-9 percentage point boost to saving and investment rates.

The low domestic saving rate

History shows that no country has succeeded in accelerating its growth rate without raising the domestic saving rate to close to 40% of GDP.

FDI is not an alternative – Foreign capital can fill in some vital gaps but is not a substitute for domestic resources.

A decline in savings – The domestic saving rate has declined from 31.4% in 2013-14 to 29.6% in 2016-17; and gross capital formation rate from 33.8% to 30.6% during the same period.

NPA Crisis – The banking sector’s ability to boost credit growth is limited by non-performing assets (NPAs) and the governance crisis in the financial sector.

Baltic Dry Index indications –

• Export to GDP ratio has declined rapidly, with a looming global trade war on the horizon, as has been indicated by the Baltic Dry Index.

• The highly regarded leading indicator of global trade, currently trading at 1354 is forecasted to decline to less than 1,000 index points by the year-end (a decline from its historic high of 11,793 points in May 2008, just before the financial crisis set in).

Conclusion

Given the foregoing, the $5 trillion target appears daunting. It may yet be doable, provided policymakers begin with a realistic assessment, by willing to step up domestic saving and investment, and not by the wishful thinking of FDI-led growth accelerations in uncertain economic times.