The $5 Trillion Mirage
The economy of India, a developing market economy as considered by many, is the 5th largest economy by nominal GDP and the 3rd largest by purchasing power parity (PPP). The IMF ranked India in 139th by GDP (nominal) and 118th by GDP (PPP). The protectionist economic policies adopted since independence and consecutively the acute payment crisis post-Cold War led to the adoption of various policies for economic liberalisation in 1991. The 21st century has witnessed an annual average GDP growth of 6% to 7%. The years of 2014-2018 saw the unfolding of India as the world’s fastest-growing major economy, surpassing China. India’s GDP is driven by domestic private consumption making it the world’s sixth-largest consumer market at nearly 60%. However, apart from this, the Indian economy is also stimulated by government spending, investment, and exports. India emerged as world 10th largest importer and 19th largest exporter in 2018. Statistically speaking, India ranked 63rd on ‘ease of doing business’ index and 68th on the Global Competitiveness Report. By 2019 India emerged as the world’s 2nd largest in terms of the labour force. A 2017 PricewaterhouseCoopers (PwC) report, India’s GDP at purchasing power parity could overtake that of the United States by 2050. India has young demography which results in a low dependency ratio, healthy savings and investments that have helped the economy to steadily grow over the years. Moreover, the incorporation of the Indian economy with the world economy has also aided this process.
The economic growth, however, slowed in response to ‘Demonetisation’ and ‘Goods and Services Tax (GST)’. Let us look at how these two measures actually impacted the economy in the beginning:
This move was announced on November 8, 2016, by the government in light of turning the economy into a “cashless economy”. This move was intended to put a dent on the practices by black money hoarders. Elimination of terror funding or fake money haunting the economy would, in turn, make it more transparent. However, pieces of evidence have shown that as time passed by, the idea behind demonetization might have failed miserably and did not achieve any significant change in the spheres of economic growth or transparency. “Let us ignore the temporary hardship, let us join this festival of integrity and credibility, let us enable coming generations to live their lives with dignity, let us fight corruption and black money,” said Modi in his speech regarding demonetisation. The government’s move caused the elimination of all Rs 500 and Rs 1,000 notes and made them invalid. These notes constituted 86.4% of total currency in circulation in the Indian markets. Disordered 3 months followed after demonetization triggering serious monetary issues for most of the Indian populace. Gabriel Chodorow-Reich of Harvard and Gita Gopinath of the International Monetary Fund (IMF) in their research paper, “Cash and the Economy: Evidence from India’s Demonetisation“, claimed that this move brought down the Indian economic growth. Along with this, another unintended outcome was 2-3% reduction in jobs in the quarter of note ban. Economic activity had already deteriorated by 2.2% in November and December 2016 revealed the research. “About 1.5 million jobs were lost during January-April 2017. The estimated total employment during the period was 405 million compared to 406.5 million during the preceding four months, September-December 2017,” a report by Centre for Monitoring Indian Economy (CMIE) stated. In 2018, former RBI governor, Raghuram Rajan said, “The two successive shocks of demonetisation and the GST had a serious impact on growth in India. Growth has fallen off interestingly at a time when growth in the global economy has been peaking up.”
Goods and Service Tax:
The government’s decision to implement Goods and Services Tax (GST) has attracted mixed reviews. The principle of “one nation, one tax, and one market” is aimed at unifying this large economy although acted as a catalyst towards the worsening situation of the economy. The inflation rate has increased from 1.79 % to 5.11 % since July 2017 and continued till January 2018. This was a result directly related to the changing demand and consumption level of the poor people in India. India’s economic growth that was 8.4% in 2015 dropped sharply to 5.7% in July 2017. This complex system of indirect tax is finally recovered from consumers of goods and services increasing in sale price. Thus, irrespective of the consumer’s financial standing pays the same amount of GST for one unit of any product or service he avails in the market and here in India. This has acted as something counter-productive to the economy. Furthermore, GST increased tax appropriated by the government, making it the second-highest tax rate in the world (28%). This has had a negative impact as 29.9% population of India lies under Below Poverty Line (BPL) and 20% of India’s population dominates 47.7% of the total wealth of the nation giving rise to high-income inequality. Also, the implementation of the scheme of GST escalated unemployment rate (3.39-6.06 %) during the period of July 2017 to February 2018 in India.
Nevertheless, Prime Minister Narendra Modi in 2019 declared that he would like India to become a $5 trillion economy by 2024. This vision has been claimed as “challenging, but achievable” by the finance minister, Nirmala Sitharam. Several scholars and researchers have claimed that for the Indian economy to grow into a $5 trillion one by 2024, it will need to grow at a rate of 12% per year. Former RBI governor, C. Rangarajan said, “$5 trillion is a good aspirational goal. But please understand that a $5 trillion economy in a matter of 5 to 6 years cannot be achieved unless the economy grows in a sustained way between 8 and 9 per cent. It has to be closer to 9 per cent because today the Indian economy is $2.7 trillion. So, $5 trillion means almost doubling the size of the economy. And that is possible only if the economy grows at 9 per cent per annum in a sustained way for 5 to 6 years.” He opined that to qualify a country as one having a developed economy, the per capita income needs to be around USD 12,000. This level of growth was pegged to be possible solely at a steady rate of 9% per annum.
The blow to the economy by Demonetisation and the implementation of GST was worsened by the crisis of COVID-19. The pandemic wreaking havoc around the globe in 2020 has successfully harmed the economy of India in an unprecedented way and thwarted its plan to become a $5 trillion economy by 2024. “My own estimate is that the 21-day countrywide lockdown which has been enforced, itself will result in shaving off at least 1 percentage point of GDP. And if you take earlier problems created by the coronavirus pandemic before the lockdown and the uncertainties of the future, then a 2 percentage points decline in growth rate (for 2020-21) is not unlikely at all,” said former finance minister Sinha. The economy took a hard hit as a result of the nation-wide lockdown to curb the pandemic. People are unable to work, supply chains have been gravely affected, and the labour has been forced to migrate back. The revised Gross Domestic Product (GDP) estimates for India downwards by 0.2-4.8% for the fiscal year 2020 and by 0.5-6% for the fiscal year 2021. Another major barrier to India’s economic growth is that it relies heavily on Chinese imports. Electronic imports to India account for 45%, automotive parts and fertilizers are pegged at 25%, active pharmaceutical ingredients range from 65-70%, and there is around 90% import of mobile phone from China to India. The discontinuation of these imports has given rise to several issues in the market which most probably will lead to an increase in the prices. Moreover, the recent clash between India and China will also have a serious impact on the economy. Furthermore, data reveals that 72% of the Indian companies are located in China (Shanghai, Beijing, provinces of Guangdong, Jiangsu, and Shandong). These provinces were the first to get the hit by a coronavirus. Thereby, leading to a complete stop at their activity. The effect of the pandemic has been felt by almost all business sectors. This hit will lead to a decrease in the GDP of 2021 and thus, we can bid goodbye to the dream of the emergence of the Indian economy as a $5 trillion giant. In addition to this, the MSME sector accounts for 30% of our country’s GDP which is at the moment at a vulnerable position due to the restrictions imposed. Statistics have shown that the dependence of Indian economy on three major contributors to GDP, namely, ‘private consumption’, ‘investment’, and ‘external trade’ will all be affected immensely and thus, will cause a great deal of damage to the economy. In the backdrop of all these issues, the growth of the Indian economy into $5 trillion seems to be something impossible. The target set by Prime Minister Modi to make India a $5 trillion economy by 2024-25 might be delayed by 2 years even if the economy grows at a steady rate of 7.5% a year on average post current financial year. This is rate is, however, based on the 4.5% inflation rate that the economic survey for 2019-20 explained to achieve the target. To push the economy towards the goal, an increase of investments are required. Hence, infrastructure development is considered to be a critical aspect for achieving a $5 trillion economy as it can kick start a cycle of investments. However, the prevailing situation impedes any such measure that might help the economic situation and aid in the further realization of the dream.
By Sagarika Mukhopadhyay