Economy Likely To Maintain Its Momentum Despite Presence Of Headwinds

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The World Bank has projected India’s GDP to grow at 7.3% during the fiscal year, while the Reserve Bank of India (RBI) pegs it at 7.4%. If India continues to grow at the current rate of about 7.5%, a back-of-the-envelope calculation shows that the GDP will reach US$ 5 trillion in 2027, or about in a decade. If the GDP growth rate is 10%, India will become a US$ 5 trillion economy in 2025. To achieve the feat by the year 2022, the country needs to grow at 14.2% annually. No country barring China has had high growth for a continuously long period. Japan, South Korea or miracle countries of South East Asia too have not achieved double-digit growth for over decades.

Achieving such high growth will require exceptional structural changes in all sectors of the economy, according to experts. India is expected to be a US$ 6 trillion economy – the third largest in the world – in the next 10 years, majorly helped by digitisation, according to global firm Morgan Stanley, which sees digitisation drive providing a boost of 50-75 basis points to GDP growth in the coming decade. “We estimate that digitisation will provide a boost of 50-75 basis points to GDP growth and forecast that India will grow to US$6 trillion economy and achieve an upper-middle income status by 2026-27,” it says.

The global firm expects India’s real and nominal GDP growth to compound annually by 7.1% and 11.2%, respectively over the coming decade. Apart from some short-term teething problems including implementation of goods and services tax (GST), there is scope for visible shifts in economic activity starting this year, which would eventually lead India to be the top five equity markets in the world with a market capitalisation of US$ 6.1 trillion and the third-largest listed financial services sector around the globe with a market cap of US$ 1.8 trillion by 2027, it says adding that India’s consumer sector is also likely to add about US$ 1.5 trillion over the next ten years. It projects annual gross foreign direct investment inflows amounting to US$ 120 billion by 2027, almost double the current 12-month trailing run rate of US$ 64 billion.

Amidst the global headwinds, India’s GDP  growth came a stellar 8.2% for the first quarter of this fiscal, prompting Prime Minister Narendra Modi to advance the government’s target date of doubling the Indian economy to US$ 5 trillion by 2022 from the earlier 2025. “The Indian economy will grow at over 8% rate with massive employment generation being seen in IT and retail sectors. Macro-economic fundamentals of the economy are strong,” said the PM after the GDP numbers were announced.

While the long-term trend is difficult to predict, India is showing a positive upward trend. The country’s GDP has grown an average 7.3% annually over the last decade. Comparatively, the world’s second-largest economy, China, reported a 6.7% growth for the quarter ended June 2018 and an average of 13% over the last decade, but the trend is declining. India’s US$ 2.6-trillion economy surpassed France’s in the year 2017 and became the world’s sixth largest, and will soon be fifth behind the UK.

Though macroeconomic fundamentals have strengthened over the past 3-4 years, the vulnerability of the economy has now become more pronounced after demonetisation and the roll-out of GST, experts said. Of late, the appreciating dollar, US-China trade war, Iran sanctions and rising crude oil prices have also hit the domestic economy. The fiscal deficit has come under severe strain, current account deficit is surging towards the dangerous level of 3% of the GDP.

The free fall of rupee, along with rising crude oil prices has skyrocketed domestic fuel prices fanning inflation, which will push up interest rates and hurt growth prospects. Though India has had good monsoon for three consecutive years, a glut in farm production has not helped farmers to get better prices. Also, with the US economy not growing beyond 4% in the best of times and China now in the process of cooling down its economy, the chances of India largely depending on foreign trade to boost growth further will be increasingly difficult.

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