By Nantoo Banerjee
With Indian Rupee (INR) dwindling almost daily against US Dollar (USD), it is good the Union Budget for 2025-26 has stopped repeating on making the Indian economy a $5-trillion GDP to become the world’s third largest by the end of this year or anytime too soon. The budget also provides no indication of how and when INR will stabilize vis-à-vis USD. INR is pegged with USD. There is no way it can come out of the arrangement with US President Donald Trump blowing hot and cold against ideas of undermining the role of USD in the international market threatening to impose massive import tariffs on countries harbouring such an idea.
The minimum expected GDP growth rate in FY26, as per the economic survey tabled in Parliament by the union finance minister, is only 6.3 percent. Minus the inflation rate, the real GDP growth could be as low as 5.7 percent. INR has depreciated about three percent in 2024. A strong dollar affects the value of imports, especially crude oil which accounts for nearly 25 percent of our gross import bill carrying a chain effect on user industries. The budget makes little effort to control the rising non-oil imports. Therefore, it makes little sense to brag about future GDP targets in dollar terms. The government has clearly failed to control the decline of INR against USD. This appears to be the biggest challenge before the economy and government.
Interestingly, the GDP of China, having a similar population size as India’s, in 2024 is expected to be worth US$18.28 trillion in nominal terms, recording a five percent increase from the 2023 level. China’s GDP growth rate is estimated to be 4.5 percent in 2025. A strong dollar has little impact on the actual economic activity within China, the world’s largest producer and exporter of goods. The domestic production is not directly impacted by the dollar’s valuation. The primary driver of China’s GDP is its own internal production and not the exchange rate against the dollar. On the contrary, India’s import dependent economy is substantially impacted by the Rupee-Dollar exchange rate.
On October 11, 2018, the union commerce and industry ministry issued a press release on the vision of a US$5-trillion Indian economy. It said: The Working Group tasked to develop a roadmap towards achieving a 5-trillion-dollar economy by 2025 has prepared its report and it is being circulated to the stakeholders for further suggestions. The group held extensive and broad-based consultations with stakeholders to better understand the aspirations and the potential. The sectoral sub-groups were also formed to take the task forward.
The group was happy to note that India is one of the fastest growing major economies and is currently ranked as the world’s sixth largest. Projections of growth, over the medium term, remain encouraging and optimistic for India. The underlying strengths are indicative of the potential of India to achieve a USD 5-trillion economy by 2025. The current structure of the economy and the emerging dynamics provide the nation grounds to target achieving one trillion dollars from agriculture and allied activities, one trillion from manufacturing and three trillion from services.
The government has several ongoing initiatives across sectors focused on growth. In agriculture, the government is aiming to reorient policy focus from being production-centric to becoming income-centric. The emphasis on incomes provides a broader scope towards achieving the needed expansion of the sector. The proposed Industrial Policy 2018 provides an overarching, sector-agnostic agenda for the enterprises of the future and envisions creating a globally competitive Indian industry that is modern, sustainable and inclusive. The Champion Services sector initiative is also under way to accelerate the expansion of select service sectors. The working group has accounted for these initiatives and encourages a fresh impetus to achieve the target of a five-trillion-dollar economy.
As early as on August 15, 2019, Prime Minister Narendra Modi, addressing the nation on the country’s 73rd Independence Day from the Red Fort, shared his vision of India becoming a $5-trillion economy in five years or by 2024. The prime minister said India had reached a $2-trillion economy after 70 years of independence, but within five years from 2014 to 2019, it reached a $3-trillion economy, adding $1 trillion in just five years. “If we succeeded in taking such a big jump in just 5 years, then we can become a $5-trillion economy in the next five years.” Last year, Finance minister Sitharaman said India would touch its goal of achieving a $5-trillion GDP in 2027-28, making a substantial departure from Prime Minister Modi’s earlier target of hitting the mark by 2024-25.
India’s Chief Economic Advisor V. Anantha Nageswaran was equally hyper on India’s potential to become a $5-trillion economy by FY 26, ignoring the practical roadblocks such as inadequate infrastructure, growing import dependence, falling Rupee, high unemployment, poor energy security and a large informal sector. In January 2023, Nageswaran said India has the potential to grow at 6.5-7 percent and will become a $5 trillion economy by 2025-26 and $7 trillion by 2030 depending on exchange rate fluctuation. He went further to say that “in case the Indian rupee actually appreciates against the US dollar in the next few years as it is quite possible,” then India will be in a position to achieve that GDP in dollar terms even higher than nine percent. “And some of our goals may be reachable within a shorter timeframe than we imagined right now. So, I think achieving a $7 trillion GDP by 2030 is quite feasible,” he said.
Unfortunately, the union budget seems to miss the moot point that is to push a massive all-round domestic production to restrict imports. It is difficult to understand why gold occupies the most important item of import after petroleum in generally impoverished India which has been struggling to pay for large trade deficits year after. Last year, India’s gold imports reached a record level of 802.8 tonnes. In November, gold imports hit a record high of $14.8 billion, more than doubled from $7.13 billion in October. The budget clearly lacks direction to substantially increase domestic production, invest large on physical infrastructure, create millions of sustainable jobs, use high tariff and non-tariff barriers to drastically cut imports and trade deficits and, finally, stabilise Rupee.
Given its vast population and poor per capita income, a $5-trillion economy would appear to be quite small. The Indian economy needs to grow at a much faster rate. The Trading Economics has predicted India’s GDP to be only around $3.781 trillion in 2025 while the earlier IMF prediction was $4.340 trillion this year. The country’s dream to grow its economy to $5 trillion and beyond depends on how it manages the exchange rate of its currency against the US dollar in the near future while retaining the current GDP growth agenda. (IPA Service)
The post India’s $5-trillion-economy dream by 2025 has gone awry appeared first on Daily Excelsior.