Monday, November 28th, 2022 14:00:23

The five trillion-dollar dream amid a grim global economic landscape

BY Sunil Gupta
Updated: October 29, 2022 6:08 pm

The political and economic fallouts of the coronavirus pandemic have now become clearly visible. A few weeks back, a fiscal policy maneuver in the advanced economy of Britain triggered a global rout in the bond and stock markets. The newly appointed prime minister of the country had favoured the idea of tax cuts in her ‘mini budget’, without any suggestions about how the government would sustain its spendings. Now, the contentious provisions of the mini budget have been rolled back and the finance minister who announced them has been removed.

No economy, developed or developing, remains untouched from the chaos that has gripped us after many economists declared that the world fought the pandemic well. One might talk about high inflation in India, but conditions are even worse in developed countries, including the biggest United States. In Europe, people on streets are protesting soaring energy prices; the purchasing power, no matter one holds the US dollar or euro, has plunged; and discretionary spending has been hit, leading a body blow to the worldwide industry.

Amid all this, is there a fair chance for the Indian economy to realise the five trillion-dollar dream over the coming years, particularly by 2025 as envisioned by the ruling party? The answer to this question can only be indicative and to arrive at a logical conclusion, multiple aspects related to politics, industry and socio-economic landscapes must be considered. The global economy was doing pretty well until last year, but the shocking turn of events this year show how complex it can be to read macroeconomic indicators and make predictions for the medium-to-long term.

India v. the world – policy measures

Is India doing well right now? One needs to look no further than the recent comments by a top IMF (International Monetary Fund) official. Kristalina Georgieva, the managing director of the multilateral institution, was all praise for the “structural reforms” that India has undertaken over the past few years. But all this later, first it is important to know where the country presently stands when compared with the rest of the world.

Until the first quarter of this calendar year, all top central banks were terming inflation ‘transitory’. In the wake of the pandemic, these banks had chosen to keep benchmark interest rates at near zero levels to not let their respective economies plunge into a deeper crisis of joblessness and negative growth. A few advanced countries also made cash transfers to households in a hope that lockdown-hit families genuinely required adequate support. Reports emerged last year that in countries like Canada, families were sitting on a record high cash pile. The measure of giving out cash support and keeping interest rates at near zero only prove counterproductive.

The situation soon became so bad that prices of essentials soared in these economies, but it was still some time for the people to realise, thanks to enough savings they had accumulated. Come 2022, and the fiscal and monetary policy misadventures of advanced economies have become a subject of criticism. From groceries to fuel, prices in the US, Canada, Australia, and most other countries are at multi-decade high levels. Suddenly, the Fed and other central banks have reversed their dovish stance to raise benchmark interest rates, which has led to a sharp fall in the global stock market.

India, on the other hand, held its nerve during and after the pandemic. The government steered clear of any impulsive and fiscally imprudent decision making, while ensuring that unprivileged households in the lockdown-hit country had access to food through the GaribKalyan Anna Yojana (PMGKAY). Instead of letting the country’s finances bleed by declaring any hasty cash support scheme, India opted for a sustainable path. Inflationary pressures are troubling the country, but these are fueled by external factors like the war in Ukraine and supply chain concerns. India’s retail inflation growth has nothing to do with internal policy measures.

India v. the world — GDP growth rate

National Statistical Office (NSO) has reported that India’s gross domestic product (GDP) expanded by 8.7 percent in FY 2021-22. This is, by any measure, no mean feat, simply because industrial output, demand and consumption were all hit hard by the pandemic. Not only has the Indian economy shown extreme resilience, but it has also exhibited the capacity to bounce back after a dull phase that hit it during the height of the Covid-19 crisis in FY 2020-21. Today, according to the data by the IMF, India, which is at USD 3.5 trillion, is the world’s fifth-largest economy. The UK, at USD 3.2 trillion, is now sixth.

India’s consistency is in stark contrast to the rest of the world. Data confirms that the Chinese economy is facing unprecedented headwinds, with industrial activity in an extremely subdued phase. The developed world is faring worse. Many advanced economies including the United States and Australia have lately recorded negative growth rate. The US economy has had two straight quarters of contraction, sparking talks of technical recession. But what is more worrisome is that there is little hope for these advanced economies to stage any comeback over the near-to-medium term. This is one reason why the global stock market, including the most dominant S&P 500 index, has manifested a downward trend this year.

India’s economy is not isolated and any global downturn in fact hurts the country. Even though the growth rate last year was phenomenal, there are issues of prices hovering higher and the India currency losing value against the USD. However, inflation can be managed over the medium term and if the country is able to sustain strong economic activity and job creation, prices would hurt less. In the developed world, there is a policy paralysis of sorts, simply because central banks have nothing in their arsenal but to raise interest rates even as the world economy is set to enter a recessionary phase.

Five trillion-dollar economy

As stated earlier, there is no need to look any further than the IMF’s report to understand if India is on a path to attain the goal. The country has expanded unexpectedly “even during difficult times”, thanks to “structural reforms”, Kristalina Georgieva has said. She has hailed initiatives like digitisation that underlie India’s growth story. Besides, IMF’s another office-bearer, Paolo Mauro, has stressed how direct cash transfers have worked as a “logistical marvel” for the country. Sadly, transfers to actual beneficiaries were heavily compromised until the present government decided to undertake a sweeping reform.

There is a reason why multilateral organisations and their officials are acknowledging reforms undertaken lately by India. What has changed is the pace at which the industry operates. Digitisation of processes, be it in getting approvals, procuring licenses, or reporting compliances, has helped inject efficiency in the economy, besides checking unnecessary and exploitative influence wielded by the bureaucracy. Red tape was a gigantic hurdle, which if not set right, would not have let India surpass the UK in terms of overall size of the economy for years to come. Things stand corrected now.

It is never possible for any economy to grow in a sustainable manner unless the industry experiments new things with full support of the government and financial institutions. Take for example how China could grow into a clean mobility powerhouse. The global industry is shifting toward new economic activities that include clean energy and technologies like artificial intelligence and so on. Ministries and departments of the central government have acknowledged this and initiatives like Production Linked Incentives (PLI) and easy and quick funding for innovative startups are acting as a great enabler.

We are there

It is not possible to cite a specific date on which India would hit the five trillion-dollar mark. We have reached USD 3.5 trillion, and the ongoing pace of reforms and policy measures undeniably suggests that the dream is within attainable limits. Presently, there are a few disruptions, including particularly the global economic slump, geopolitical tensions in Ukraine and also in Asia (China’s aggressive stance over Taiwan), and domestic disturbances by politicians that seek to revive their parties in the face of a sweeping rise of the ruling BJP under its charismatic prime minister.

That said, more than anything else, it is the inclusiveness of India’s growth story that would matter the most. Lack of transparency in governance, widespread corruption, and vested interests of regional and national political parties always meant that all benefits accrued only to the rich and influential until a few years back. Blinding chasing growth is not the option, and the focus must be on inclusive growth, with benefits accruing even to the last man in the queue. The IMF has hailed digitisation and transparency in governance, which corroborates that things have been set right by the ruling party.

The government is helping create a new wave of entrepreneurial spirit, through targeted schemes like self-employment loans and fast approvals, which lets everyone become a part of the new growth story. Amid all the discussions about a deeply troubling time for the global economy and continued geopolitical tensions, India is silently and sturdily marching closer to the five trillion-dollar dream.


By Sunil Gupta

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