'Still a poor country': Behind India's quest to be the world's third largest economy

Whether the growth miracle is due to bespoke economic policies or a matter of due course or just dumb luck, what's certain is that India's growth seems like a hamster on a wheel that can't stop.
Image used for representational purposes only.
Image used for representational purposes only. (File photo | AP)

It's unusual, but the two leading national parties are giving their full-throated attention to a very important aspect -- economy.

While each accuse the other's 10-year regime as the benighted decade citing the poor economic scorecard, they, however, agree on one thing: That the Indian economy is riding the seven-horse chariot, and is moving up the world rankings.

Currently ranked fifth, it's edging tantalizingly close to the third spot, a number spiritually associated as the energy chakra, or the third eye.

If Prime Minister Narendra Modi pledged that India will be the world's third largest nation before the end of his third term, former finance minister P Chidambaram quipped that doing so was simply an arithmetic inevitability and regardless of whichever party was in power, the country will march ahead. To which, Modi questioned why India was a beat behind the world rankings during UPA's tenure if growth was only a natural process?

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Whether the growth miracle is due to bespoke economic policies or a matter of due course or just dumb luck, what's certain is that India's growth seems like a hamster on a wheel that can't stop. It has been among the fastest growing emerging economies for some time now and a key growth engine contributing 16% to the global growth in 2023, according to the International Monetary Fund (IMF). Its growth rate of 7.2% in FY23 was also the second-highest among the G20 countries and almost twice the average for emerging market economies.

But what's perplexing is the whirligig of world ranking forecasts. The first, of course, is from the government's own drummers. While Modi outlined the third spot target before the end of his third term, or by 2029, his deputy and Finance Minister Nirmala Sitharaman seems to be in a hurry and jammed it as a milestone we could achieve much before.

According to Sitharaman, India will emerge as the world's third-largest economy within a year or so after Modi, according to her, potentially forms the government next month.

"The Modi government will be formed again for a third term. India's economy will reach the third place from the fifth place in the coming year or so, as per the Prime Minister's announcement," she reportedly said at an event in Ranchi.

The target is at odds with her own previous forecast made last November, when she hinted that India will likely surpass Japan and Germany to take over the third position in next three years, or by 2027. 

According to the IMF's World Economic Report released last month, India is currently ranked fifth with its 2023 output pegged at $3.6 trillion, while Germany and Japan were ranked third and fourth at $4.45 trillion and $4.21 trillion, respectively.

2024 is an interesting year, and even though India's national output will likely swell to $3.9 trillion, while Japan's may shrink to $4.1 trillion, India's ranking will likely stay put and won't move up the ladder. In fact, the multi-lateral agency believes that India will surpass Japan in 2025 to be the fourth largest with $4.4 trillion output, while Japan's economy will likely settle at fifth with $4.3 trillion.

But one cannot punch into scoring range simply by setting targets. The difference between targets and outcomes is, the latter involves tremendous work and good economic and fiscal policies.

As Chidambaram argued, that India will be the third largest is a given. The only question is, how soon can we reach there. If Sitharaman hopes it'll be as early as 2025, the IMF expects India to surpass Germany and take the third spot by 2027, while some economists predict it as something we can achieve only way past 2029.

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What could be favourable though is the growth pace. Last month, the IMF raised India's FY25 GDP growth forecast by 30 bps to 6.8% from its January forecast of 6.5%, citing bullish domestic demand conditions and a rising working-age population.

In fact, real GDP unexpectedly grew at 8.4% during the December quarter, beating consensus projections of 6.8%. As a result, the full-fiscal GDP growth forecasts were revised upwards from 7.3% to 7.6%. As chief economic advisor V Anantha Nageswaran observed earlier, there is a high possibility that growth will touch 8% in FY24. It'll be a bonus if this whizz-bangery continues this fiscal and next. 

One of the reasons to be hopeful of 7%-8% growth, according to Morgan Stanley, is the rise in the investment-to-GDP ratio. If it rose from 27% in FY03 to 39% in FY08, it peaked in FY11, only to followed by a decade of decline till FY21. The good news is, the investment-to-GDP ratio has now increased to 34% and is expected to rise further to 36% by FY27.

Besides, the strength of the domestic demand too has driven the economy to a 7% plus growth rate in the last three years. In FY25 too, real GDP growth will likely be closer to 7%, according to the Ministry of Finance. In fact, it believes, there's considerable scope for the growth rate to rise well above 7% by 2030, thanks to the financial sector and structural reforms. 

Under a reasonable set of assumptions with respect to the inflation differentials and the exchange rate, it pegged India to be the world's third-largest with a $5 trillion GDP in next three years and touch $7 trillion by 2030 and eventually, a developed economy by 2047.

Ten years ago, India was the 10th largest economy with $1.9 trillion GDP (current prices). Now, it's the 5th largest with $3.7 trillion, despite the pandemic and despite inheriting an economy with macro imbalances and a broken financial sector, the Department of Economic Affairs claimed in Indian Economy – A Review released ahead of the budget.

Regardless of when we reach the third spot, there's no reason for cheer, according to former RBI Governor D Subbarao. For, India will likely remain a poor country.

"My view, that is possible (India becoming the third-largest economy), but it's not a celebration. Why? We are a large economy because we are 1.4 billion people. And people are a factor of production. So we are a large economy because we have people. But we are still a poor country," he said on the sidelines of an event last week. 

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