India: A $25 trillion economy by 2047

Indian plans to reach US$ 25 to 35 trillion by 2047, at its 100th year of independence. There are both positive and negative views on this plan. We assess the possibility below. Broad arithmetic of this expectation is summarized in the Table below.

The GDP and growth (2022-23) are US$ 3.3 trillion and 10.9% at current prices. This rate of growth is sufficient to reach US$ 25 trillion in 2046-47. But INR depreciation against USD is to be factored. During 2011-12 to 2022-23, depreciation of rupee was at an annual average of 4.21%. Depreciation was particularly sharp during 2013-14, 2018-20 and 2022-23. 

If the depreciation of rupee is assumed at 2% per annum until 2046-47, the current rate of growth will reach GDP of US$ 25 trillion. At 4.2% depreciation the required GDP growth is 13.2%. For US$ 35 trillion GDP, the required rate of growth would be 12.4% and 14.8% respectively for rupee depreciating by 2% or 4.2%. At these levels of GDP, per capita income would exceed US$ 15,000.

Is it feasible for such a sustained growth to be in the next 24 years? If inflation is assumed to be around 4%, the real GDP growth must be between 6.5 to 9.5%, assuming depreciation of 2% and 4.2%, to achieve nominal 10.9 or 13.2%. Under all scenarios, the structure of the economy needs a change. The rate of gross capital formation (GCF) relative to GDP averaged 34 per cent during 2011-12 to 2022-23. Incremental capital output ratio averaged 5.7, (though moderated in 2022-24 averaging 4.6) largely because of better growth in agriculture, which has a lower ICOR. Further, despite contributing just around 18% of GDP, the agriculture sector absorbs 45% of the work force. 

Neither agriculture growth nor the labour employed in it can be sustained. Employment in manufacturing is under 12% of the workforce. It has a very high ICOR and very low employment elasticity. Technology status of Indian manufacturing except for IT and Auto components varies from basic to intermediate, including in pharmaceuticals and petroleum refining. Even in services, except for professional services, technology is basic or intermediate. The characteristics of basic and intermediate technology is that these are input intensive and can hardly innovate, absorb highly skilled manpower and their value added to output ratio is low.  

A redeeming fact is TFP contributed 45% of the total growth post covid from 15% during 1981-2017. This is thanks to public sector investment and deepening support for productivity improvements. With constraints on budgetary support and execution bandwidth, we also need to focus on labour intensive manufacturing and services to leave income in the hands of the bottom quintile. In doing so, the focus must be on the disadvantaged parts of our country. Manufacturing and services are interlinked as 40% of value addition in manufacturing is from services. Investment in manufacturing will improve services too. 

This strategy will surely address inequality in the country. 

The current state of technology and skilled manpower availability would not only take time but also require initially heavy investment. With an ICOR of close to 6.5 in the non-agriculture sector, a 7% growth would also require investment of more than 40% of GDP. It is a good 6% points increase from the current level. A related issue is the low labour force participation rate, which is around 40% of the population. Low labour force participation and that too in low technology areas, including agriculture and construction, does not leave enough income in the hands of households to provide savings to the economy. Government always dissaves. Resource gap should be filled by corporates. A new paradigm is then required in land and labour markets besides creating necessary conditions for private investment. We must also address the issue of oligopolistic structures, which resist competition and pre-empt resource flow to MSMEs. Institutions should ensure that competition in the economy is unhindered.

Household enterprises and MSMEs are important not only because they account for over 40% of GDP, but they are also the key labour absorbers. With a highly skewed distribution of assets, the bottom 40% having just 6% of total assets in rural areas and 3.3% in urban areas, a workable system of asset creation for the bottom 40% needs to be conceived. The household sector has led to the total factor productivity growth in recent years. They have seen a jump in the overall use of modern machinery and processes. Their share in overall use of machinery & equipments has increased from 23% in 2011-12 to close to 40% now. Flow of resources for asset creation for the household sector in a non-collateralized form with institutional mechanism for comprehensive monitoring of this process is needed. 

Currently one third of the population in the age group 15-29 are neither in education, training, or employment (NEET). If labour force participation were to reach 45% to get to 25-35 trillion USD, an additional 200 million need to be absorbed.  This requires embedding labour with appropriate skills and sectoral shifts in GVA. The target of US$ 25 or 35 trillion may appear arithmetically achievable, but nonetheless, quite strenuous. 

 

The writer is former secretary, Economic Affairs, Ministry of Finance