Will Coronavirus Turn Modi’s 5 Trillion Dollar Dream Into Fantasy?

India’s economy will need to grow at nearly 21 percent per year, for three years, to achieve $5 trillion target.

There’s a tiktok video doing the rounds (yes, I am a connoisseur of that under-appreciated artform) where a man is woken up by his wife and reminded that the lockdown is over, and he needs to get back to work. The husband wakes up, picks up a jhadoo and starts sweeping the floor, unable to remember what other work he ever did.

Hopefully, the extended lockdown won’t make Modi Sarkar forget that it has promised to deliver a USD 5 trillion economy by 2024. If one takes one dollar to be about Rs.75, that means India’s GDP will need to hit Rs 375 lakh crore in another four years. Where are we right now? The budget papers said we will end 2019-20 at about Rs.204 lakh crore. So, to touch a 5-trillion-dollar equivalent, our GDP will need to grow at nearly 16.5 percent per year.

• The budget papers said we will end 2019-20 at GDP about Rs.204 lakh crore.
  
• ‘5-trillion-dollars’ might sound like a ginormous number, but it does not tell us anything about real economic growth.
  
• Double-digit inflation with a weakening dollar combined, India’s real GDP could decline by 2.5 percent every year, but we would still hit a nominal GDP of USD 5 trillion.
  
• RBI expects inflation to drop to 2.4 percent in 2020-21.
  
• India’s economy will need to grow at nearly 21 percent per year, for three years, for us to achieve Modi ji’s promise of a 5-trillion-dollar economy by 2024.
  

5 Trillion Dollar Target Doesn’t Reflect Real Economic Growth

A word of caution here – the Modi government talked about nominal GDP, which is different from the real GDP-growth numbers that you usually hear about. Think of it in terms of a country that only produces shirts. Let’s assume, that in year one, it produced 100 shirts at Rs 100 each, giving it a total GDP of Rs 10,000. In the very next year, it produced 120 shirts of the same kind, but at Rs 150 each, raising its GDP to Rs 18,000. In real terms, the country’s output increased by just 20 shirts or 20 percent. In money or nominal terms, however, GDP rose by 80 percent.

So, ‘5-trillion-dollars’ might sound like a ginormous number, but it does not tell us anything about real economic growth.

In fact, theoretically, we could hit that number, even if we went through an economic recession for the next four years. It is highly unlikely, but not impossible.

We Can Hit the Target, But It Doesn’t Mean Anything

Imagine a scenario where the USA goes into a deep-recession because of the coronavirus, while China recovers. The US dollar loses value and the world begins to shift to the Yuan. Even though, India is also in a recession, in relative terms, the rupee strengthens against a weakening dollar. So, instead of Rs 75 for one USD, it fetches just 65 rupees in 2024. USD 5 trillion then becomes Rs 325 lakh crore, instead of the projected Rs.375 lakh crore.

Now, imagine that there’s a massive shortage of food and other products, because COVID-19 keeps returning every few months, and there have to repeated periodic lockdowns. Supply shortages push up prices of all goods and services, causing annual inflation to hit 15 percent for the next four years.

Combine this double-digit inflation with a weakening dollar, and India’s real GDP could decline by 2.5 percent every year, but we would still hit a nominal GDP of USD 5 trillion.

Such things do not happen in the real world. A recession in the USA doesn’t necessarily weaken the dollar. In fact, when the US economy sneezes the world catches a cold, causing global markets to decline. Dollars flow back to the home economy, making the USD even stronger than before. So, there is a big chance that USD 5 trillion will become even more unattainable in rupee-terms by 2024, than it is currently.

Inflation Situation Due to Unemployment

What about inflation? In the past few years, inflation in India has been largely driven by food-prices: when food inflation was low, overall retail inflation was low, and when the price of onions shot up this winter, the overall inflation rate went up as well. The Modi government has just announced a package of highly-subsidised food for 80-crore Indians. Although, this is only for the next three months, don’t be surprised if the scheme is extended for longer. Low prices in ration-shops will keep open-market prices low as well, keeping overall food inflation down.

The disruption in manufacturing, caused by the extended lockdown, will definitely affect the overall supply of goods.

Will that allow companies to increase prices? That can only happen if buyers have money in their hands.

Don’t forget that the latest unemployment numbers, published by CMIE, show that about 33 percent of people who had work at the end of February, are jobless right now. Thousands of white-collar workers, across industries, are either getting pay-cuts or are being sent on unpaid leave. So, even if they want to buy things after the lockdown is over, they might not have the money for it. That means, supply shortages are likely to be accompanied by an even bigger drop in demand. In fact, this is the reason, the RBI expects inflation to drop to 2.4 percent in 2020-21.

5 Trillion Dollar Dream Becomes a Fantasy

At that rate, we will need a real GDP growth of 14 percent this year, to stay on target for the 16.4 percent annual growth rate needed to take us to a 5-trillion-dollar economy by 2024. Is that even remotely likely? Not if you go by what analysts at various investment banks are saying. Nomura’s latest report predicts just a 0.8 percent GDP growth in the calendar year of 2020. Barclays has forecast GDP growth to be 0.8 percent in fiscal year 2020-21. Morgan Stanley predicted India’s GDP growth to be about 1.7 percent in 2020, but this was before the lockdown was extended.

So, chances are that India’s real GDP will, at best, grow by 1-2 percent. Add inflation to that, we will get a nominal GDP growth this year of about 4 percent. That means in rupee terms our nominal GDP will end up at about Rs 213 lakh crore in 2020-21. That will mean that, even if the rupee stays more or less stable against the dollar, we will need to add another Rs.162 lakh crore to our nominal GDP between 2021 and 2024, to reach the USD 5 trillion mark.

So, India’s economy will need to grow at nearly 21 percent per year, for three years, for us to achieve Modi ji’s promise of a 5-trillion-dollar economy by 2024. Till recently, it looked like a dream. Now, it is simply, fantasy.

(The author was Senior Managing Editor, NDTV India & NDTV Profit. He now runs the independent YouTube channel ‘Desi Democracy’. He tweets @AunindyoC. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)