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As India gears up for the general elections, the progress and the track record of the Narendra Modi -led NDA government over the past two terms is generating public debate. Of particular interest to the people at large are the promises made by the ruling dispensation including making India a $5-trillion economy by 2025 initially and now looking to achieve it by 2027.
In the coming decade, the Indian economy is primed to ascend to new heights, surging above the 6.5 per cent average GDP growth witnessed in the previous decade. India is poised to harvest substantial dividends from its recent investment-driven expansion, fostering sustainability within the growth trajectory. Growing income inequality, continued dependence on imports, sluggish growth in job creation, tepid growth in manufacturing share in GDP, besides lack of meaningful agricultural reforms are, however, some areas which need to be addressed in the coming years.
Third largest economy
Unlike past patterns, the current economic surge is predominantly investment-led rather than consumption-led. Over the last decade, India’s GDP has soared at a Compounded Annual Growth Rate (CAGR) of 7 per cent in USD terms, escalating to $3.6 trillion and propelling the nation to the fifth-largest economy from its previous eighth position.
Forecasts suggest that by 2027, India could clinch the title of the third-largest global economy, surpassing stalwarts like Japan and Germany. This projection is underpinned by India’s demographic dividend.
“In the absence of anything like Covid , we will be growing by 11-12 per cent nominal GDP growth which will mean we will be touching $5-trillion mark in next few years. A number like this will come about because of higher inflation also. A sustained growth of 11-12 per cent should lead to more jobs being created. Will new jobs get created and whether standard of living for all the citizens will go up once you reach the $5-trillion mark? That is the crux,” said Madan Sabnavis, Chief Economist, Bank of Baroda.
Reforms such as the introduction of GST, enactment of the Insolvency and Bankruptcy Code 2016, and Real Estate (Regulation and Development) Act 2016 have catalysed economic growth. Additionally, endeavours to cleanse bank balance sheets and reduce gross non-performing assets to a decade-low of 3 per cent of gross advances have fortified the financial sector.
The capex push
The surge in capital expenditure (capex) signifies a paradigm shift in economic dynamics. From an annual capex allocation of ₹2.5 lakh crore half a decade ago, the Centre has ramped up spending to ₹11 lakh crore annually for 2024-25. States have also bolstered their capex, albeit with varying degrees of enthusiasm, further fuelling the growth trajectory.
A new Research Note from foreign brokerage Jefferies said, the Government spending has done the heavy lifting over the last few years and is now ready to pass the baton to private corporates.
If it took India 30 years to add about $3 trillion to its GDP, it may take only next six years to add the next $3 trillion. Policymakers’ pivot in recent years towards supply side reforms to boost private investments from the earlier strategy of boosting consumption via transfers is expected to deliver the goods for the economy. While the private sector is still dragging its feet on capex, some private capital investments is being seen in sectors such as renewable energy and chemicals. Cleaner balance sheets and improved profitability of India inc. also places them in a good position to begin investing, once demand revives.
A hallmark of the NDA regime has been the surge in Foreign Direct Investment (FDI) flows. While a slight decline occurred in 2022-23, attributed to geopolitical shifts, India remains an attractive destination for foreign investors. These fund flows have helped finance the investment in physical infrastructure, to some extent.
Fiscal deficit
Greater transparency in annual budgeting exercise, pruning of unnecessary revenue expenditure and higher allocation to capex have been the hallmarks of the NDA’s last term. Over the last decade, the Government has also been blessed with benign crude oil prices thus helping the fisc. Another area that has helped is the reduction in subsidies as a percentage of GDP over the last decade.
“Our FRBM target has to be revised. I don’t know what is so sacrosanct about the 3 per cent fiscal deficit ratio. The fact that we have committed to FRBM definitely puts constraints in terms of government being able to spend more,” Sabnavis said.
The large fiscal deficit in the covid years has resulted in increasing the debt. While this has increased the interest expenditure, overall debt as a percentage of GDP is still much lower than most advanced economies.
Policy Momentum
As India embarks on this trajectory of accelerated growth, the convergence of investment-driven policies, burgeoning capex and robust FDI inflows bode well for its economic future. While challenges persist, the nation’s resilience, coupled with proactive policy measures, positions it for a decade of unprecedented prosperity and global prominence. Fasten your seat belts — the Indian economy is ready to fly into a new growth orbit.
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