6.5% growth with sub-5% inflation key to $5 trillion economy: Govt paper
The paper has outlined 16 key factors that will drive the economy towards the goal of surpassing the economic growth of Germany and the UK.
An annual economic growth of 6.5% with inflation less than 5% for the next five years holds the key for the central government’s ambitious target of making India a $5 trillion economy, according to a background paper circulated among a select group of lawmakers.
The paper has outlined 16 key factors that will drive the economy towards the goal of surpassing the economic growth of Germany and the UK. “India is likely to become a US$ 5 trillion economy by 2026-27 if it grows at an average annual rate of 6.5% with inflation below 5.0% and US inflation closer to 3%,” it said.
The paper circulated in November quoted forecasts by the International Monetary Fund (IMF) that India will become a $5 trillion economy in 2027-28. “For this, India in real terms will grow at an average annual growth of 6.5% in the next 5 years between 2023-24 and 2027-28. During this period the IMF has assumed an average annual inflation rate of 4.7% and the rate of depreciation of ₹ against the US dollar at 2.1%. The rate of depreciation reflects the gap between India’s and the US’s inflation rates. The larger the gap, the greater the rate of depreciation. The IMF has assumed the US’s average annual inflation rate at 2.3% during the next five years,” the background paper said.
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Making India a $ 5 trillion economy is one of the top priorities of Prime Minister Narendra Modi. In June last year, Modi said at a conference of state chief secretaries that “every state must recognise its strength, define its targets and develop a road map to achieve the same. This is essential for India to become a 5-trillion-dollar economy.”
The Indian economy was about $1.85 trillion when the National Democratic Alliance led by Modi came to power at the Centre in 2014. In 2022, it is a $3.25 trillion economy.
It would be “quite possible that US inflation rates will average more than 2.3% in the next five years” as it happened in the 60s and 70s, the background paper said. “That would, in fact, make India manage rupee strength rather than rupee weakness against the US dollar. In the event of a higher average US inflation, India will likely cross the USD 5.0 trillion level more comfortably in 2026-27 itself,” it added.
The government’s background paper also pointed out that the corporate sector is also ready to invest, having strengthened their balance sheets through deleveraging while taking on fewer liabilities during the pandemic. “Their capacity utilization has moved past 75% which is generally considered a benchmark for adding further to production capacity,” the paper said.
India’s economic growth will have the added support of digital public goods, inclusive governance and empowered beneficiaries nurtured during the past few years, it said.
“India has built an entirely new digital economy by leveraging the foundations of over a billion bank accounts, a billion mobile phones, and a billion digital identities (Aadhaar). One that is premised on empowering every individual and business to transact in a paperless and cashless manner. The focus on improved commerce and ease of doing business inspired the growth of new-age FinTech firms and start-ups. To overcome the challenges of access to micro credit for individuals and MSMEs (micro, small and medium enterprises), Government has recently unveiled the Account Aggregator (AA) network,” it said.
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The background paper also argued that the Goods and Services Tax, while enabling improvements in tax efficiency to strengthen revenue buoyancy, has now matured. It underlined how during pandemic on a single day—September 30 2020—about 11 million electronic way bills and invoices were generated on the GST portal without a glitch.
“The GST portal has further contributed to reducing transportation time and consequently economic costs. Monthly GST collections are now exceeding ₹1.4 lakh crore not only delivering critical resources to the government for development expenditure but also helping formalize the economy. Indian states are now deriving the benefits of robust sales tax revenue growth that they had not experienced earlier,” the paper said.